Market Strategy (4Q11 Outlook) - Recession Risk Not Priced-In Yet

PP13693/04/2012(029019)

4Q11 outlook: Recession risk not priced-in yet

Equity markets are expected to continue to be besieged by external uncertainties and

widespread risk aversion. Although FBMKLCI has corrected 14.3% from recent peak, it

has not fully priced-in a recession yet. We believe policy missteps are the greatest

risks to tip a slowdown in global economy into a recession. Maintain end-2011

FBMKLCI target at 1,450 (13x/ P/E) and introduce a conservative 1,440 target for end-

2012 based on 2x P/B amid rising risk of earnings downgrade.

Policy missteps pose greatest risk to global economies � Although macroeconomic conditions have deteriorated, our base assumption on

the economic outlook remains that of a slowdown, rather than a global double-dip

recession. That said, sentiments are frail right now and risk aversion is pervasive.

We believe key risks to our base case outlook are external shocks, which may come

from policy missteps in the handling of European sovereign debt crisis, and political

impasse in working out a bipartisan fiscal consolidation and jobs creation plans in

the US.

� Besides weaker economic outlook, the unwinding of USD carry trades amid rising

USD funding cost has also exacerbated emerging markets equity selldown.

Economic slowdown has been priced-in, but not recession � FBMKLCI’s current valuation of CY11 P/E of 13.4x, which is at parity to -1 standard

deviation below mean, has already priced-in economic slowdown. However, it is

currently still valued above trough valuations seen during recessions in 1998-1999

(8.4x) and 2008-2009 (9.7x).

� Our further analysis reveals that trough levels should be between 863 (1.2x P/B)

and 1,068 (9.7x P/E), indicating further downside potential of 22%-37%.

� However, should recession is averted, market should rebound to mean P/B

valuation of 2.0x at 1,438.

No near term catalysts in sight � Corporate earnings growth momentum has waned following 2 consecutive quarters

of results disappointment and we believe there is downside risk to CY12 earnings

growth of 12.3%.

� Budget 2012 is likely to be people-friendly but neutral to the market as the

government needs to strike a balance between fiscal consolidation and growth.

� Meanwhile, investors are likely to view impending general election as a source of

heightening political risk.

Stay defensive � We maintain our end-2011 FBMKLCI target of 1,450 (down-cycle 13x P/E). In view of

earnings downside risk, we adopt P/B valuation to derive end-2012 target of 1,440

by ascribing mid-cycle multiple of 2x.

� Current risk/reward profile is not compelling for broad base accumulation due to

potential external headwinds over the near term. As such, we advocate a defensive

stance in stock selections until macroeconomic conditions improve. Stock picks for

this theme include (1) Axis REIT, (2) CapitaMalls Malaysia, (3) Berjaya Sports Toto,

(4) Digi and (5) Alam Maritim. For investors with higher risk appetite and longer

investment horizon, beaten down blue chips with strong fundamentals such as

CIMB, Genting, IJM, AirAsia and QL Resources offer opportunity for accumulation

on further weakness.

4 October 2011

Market Strategy

FBMKLCI : 1367.52 End 2012 FBMKLCI target: 1,440

Sector call

Sector Call

Automotive Neutral

Aviation Neutral

Banking Neutral

Building materials Neutral

Construction Neutral

Consumer Overweight

Gaming Neutral

Glove Neutral

Media Neutral ▼

Oil & gas Overweight

Plantation Neutral

Power Neutral

Property Neutral

REIT Overweight

Technology Neutral

Telecommunication Overweight ▲

Toll Neutral

Top stock picks

Company

Bloomberg

Ticker TP (RM)

The “safe and sound” basket

Axis REIT AXRB MK 2.78

Berjaya S Toto BST MK 5.20

CapitaMalls CMMT MK 1.50

Digi DIGI MK 35.05

Alam Maritim AMRB MK 1.11

The “buy on further weakness” basket

CIMB CIMB MK 7.88

Genting GENT MK 9.83

IJM Corp IJM MK 7.02

AirAsia AIRA MK 4.78

QL Resources QLG MK 3.70

Analyst

Bernard Ching

[email protected]

+603 2089 2988

Market Strategy | 4Q11 outlook: Recession risk not priced-in yet | 4 October 2011 2

MARKET HEADING SOUTH

Stunned by external shocks

Global equity markets have taken a beating since early August following the downgrade of US

long-term credit rating by Standard & Poor’s from AAA to AA+, heightened risk of sovereign debt

default in Europe and disappointing macro economic data particularly on jobs creation and

growth outlook.

Figure 1 : Purchasing managers index (PMI) Figure 2 : US unemployment rate and change in non-farm payroll

30

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%Net cha nge in non-fa rm payrol l Unemployment rate

Source: Bloomberg Source: Bloomberg

An economic slowdown in the developed markets will inevitably results in lower export demand

in the emerging markets. Coupled with inflationary pressure and risk of asset bubbles, emerging

markets have been on a downtrend of late. Malaysia was no exception as the benchmark

FBMKLCI posted a YTD loss of 8.7% up to 30 Sep 2011 although it outperformed regional markets

(except for Indonesia and Philippines). This was expected as Malaysia is known for its defensive

qualities during market downturn due to the presence of domestic institutional funds which are

flushed with liquidity.

Our base case assumption on the economic outlook remains that of a slowdown, rather than a

global double-dip recession. That said, sentiments are frail right now and risk aversion is

pervasive. We believe key risks to our base case outlook are external shocks, which may come

from policy missteps in the handling of European sovereign debt crisis, and political impasse in

working out a bipartisan fiscal consolidation and jobs creation plans in the US.

Figure 3 : YTD performance of equity indices Figure 4 : YTD performance of regional equity markets

75

80

85

90

95

100

105

110

Jan

-11

Fe

b-1

1

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r-1

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r-1

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y-1

1

Jun

-11

Jul-

11

Au

g-1

1

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p-1

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Re-indexed FBMKLCI FBM Smal l Ca p FBM Syariah

-4.2% -4.8%

-8.7%

-11.3%

-13.7%-14.9% -15.5% -16.0% -16.1%

-19.5% -19.8%

-23.6%

Ind

on

esi

a

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ilip

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lays

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ail

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ng


Structural issues and poor

economic outlook in developed

economies led to global market

selldown

Slowdown in economies will

have spillover effect on emerging

economies

FBMKLCI lost 8.7% in 9M11

Recession, though not a reality

yet, may be triggered by policy

missteps in Europe and/or US

-6.6%

-8.7%

-17.7%


Figure 5 : Consumer sentiment Figure 6 : Market risk aversion

0

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EU

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Ma la ys ia MIER (LHS) US Conference Boa rd (LHS)

EU Consumer Survey (RHS)

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VIX (LHS) MSCI World Index (RHS)


Figure 7 : YTD FBMKLCI index movers

Stocks

Share price @

30 Sep

YTD price

change

Index

points

Stocks

Share price @

30 Sep

YTD price

change

Index

points

RM RM RM RM

CIMB 6.97 -1.53 -26.419 Malaysian Airline* 1.43 -0.66 -2.084

Tenaga Nasional 5.17 -1.526 -19.151 Kuala Lumpur Kepong 21.10 -1.00 -1.654

Genting Group 9.10 -2.08 -17.913 PLUS Expressway 4.31 -0.21 -1.302

IOI Corporation 4.65 -1.16 -17.693 PPB Group 16.62 -0.64 -1.188

MISC 5.87 -2.49 -13.865 MMC Corporation 2.58 -0.20 -0.758

Public Bank 12.20 -0.82 -8.929 UMW Holdings 6.85 -0.17 -0.455

Malayan Banking 8.00 -0.50 -8.810 BAT Malaysia 44.68 -0.32 -0.137

AMMB Holdings 5.79 -1.24 -8.750 Maxis 5.32 +0.02 +0.168

YTL Power 1.70 -0.74 -6.634 Genting Malaysia 3.51 +0.12 +1.118

Gamuda 2.88 -0.93 -5.896 Hong Leong Financial Group 10.90 +2.01 +2.024

YTL Corporation 1.33 -0.352 -5.205 Hong Leong Bank 10.18 +1.346 +2.651

Sime Darby 8.44 -0.36 -4.940 Petronas Dagangan 15.96 +4.26 +4.006

MMHE* 5.50 -3.16 -4.693 Petronas Gas 12.98 +1.88 +4.695

Petronas Chemical 5.56 +0.04 -3.101 Telekom Malaysia 4.09 +0.58 +4.874

Axiata Group 4.60 -0.15 -2.838 Digi.Com 30.42 +5.82 +10.644

RHB Capital 7.00 -1.72 -2.336

FBMKLCI 1,387.13 -131.78 -131.78

* MMHE replaced Malaysian Airlines on 20 June

Source: Bloomberg

Capital flight and carry trades unwinding exacerbating emerging markets rout

Besides dismal global economic outlook, capital flows also contributed to the market rout. Loose

monetary policies in the developed markets for extended period in the aftermath of the global

financial crisis has resulted in large capital flows into the emerging markets due to higher yielding

assets, rising currencies and stronger economic growth. USD has become the funding currency

for carry trades during this post-global financial crisis era due to its near zero interest rate and

liquidity boost by the US government through two rounds of quantitative easing.

While such capital flows into emerging markets have boosted emerging markets return over the

last 2-3 years, emerging markets are now suffering from the reversal of such capital flows due to

concerns about the health of global economy, and rising inflation in the emerging markets. The

unwinding of carry trades were also partly due to expectation of higher interest rate on the

funding currency following the recent downgrade of US long-term credit rating by Standard &

Poor’s.

The reversal of such capital flows has resulted in the 10-year US treasury yield falling to record

low levels as well as sharp USD currency appreciation. The latter will have certain impact on

corporate earnings, although we believe this to be transitory rather than a long-term trend.

Loose monetary policies in the

developed economies post global

financial crisis led to carry

trades…

…which benefited the emerging

markets but the unwinding of

carry trades now on rising

funding costs and risk aversion

exacerbated sell down in

emerging markets


Figure 8 : 10-year US treasury yield Figure 9 : US Dollar index and USD/MYR exchange rate

US 10-yr Trea sury Yield

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2007 2008 2009 2010 2011

yield % US 10-yr Trea sury Yield

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90

2008 2009 2010 2011

2.8

2.9

3

3.1

3.2

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3.7

3.8

US Dol lar index (LHS) USDMYR (RHS)


MARKET OUTLOOK

Market has priced-in slowdown but not factoring a full-blown recession yet

Looking at past market behaviour, the equity market has generally “correctly” predicted a

recession well before official economic data confirms it. This has been proven during the 1998-

1999, and 2008-2009 recessions as equity market corrected well in advance in anticipation of

deteriorating economic conditions. The next question is whether the recent selldown will

precede an economic recession and this risk has already been priced-in.

Figure 10 : Market corrections precedes recession

`

0

200

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KLC

I

-15%

-10%

-5%

0%

5%

10%

15%

20%

Y-o

-Y R

ea

l GD

P G

row

th

KLCI Y-o-Y GDP Growth

Source: ECM Libra, Bloomberg

Since hitting all-time high of 1,594.74 on 8 July, FBMKLCI has corrected by 14.3%. Assuming

consensus earnings are not significantly downgraded in the months ahead, the market seems to

have priced-in potential economic slowdown but not a full-blown recession yet. Current market

P/E of 13.4x is at parity with 1 standard deviation below historical average P/E since 2010. This is

also the level at which the market has bottomed out during past periods of slowdown in 2000-

2001, and 2003-2004. However, it is currently still valued above trough valuations seen during

past full-blown recessions in 1998-1999 (8.4x) and 2008-2009 (9.7x).

Equity market has correctly

“predicted” recessions in the

past

Despite declining 14.3% from all-

time high, FBMKLCI has only

price-in a slowdown at 13.4x

P/E…

…as recession trough valuations

are still so way to go at 8.4x –

9.7x P/E

Recession


Figure 11 : FBMKLCI P/E (1990 – 2011)

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x


Despite recent selldown, relative valuations of Malaysian equities are not compelling at this point

yet as the Malaysian market has lagged behind in the recent global equity market rout. FBMKLCI

CY11 P/E of 13.4x and P/B of 2.0x are still richer than the average of 12.0x and 1.7x for Asian

equities respectively.

Figure 12 : Regional market CY11 P/E (consensus) Figure 13 : Regional market P/B (consensus)

14.0 13.9 13.913.4

13.2 13.0

12.3

10.9 10.710.3

9.49.1

Jap

an

Ind

on

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a

Ind

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Ma

lays

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Ta

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Ph

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2.9

2.4

2.0 2.0

1.7 1.7 1.5 1.51.3 1.2 1.2 1.1

Ind

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Ko

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Jap

an

Source: Bloomberg, ECM Libra Source: Bloomberg

Figure 14 : FBMKLCI P/E trend Figure 15 : FBMKLCI P/B trend

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Malaysian equities are still more

expensive than regional peers

+1SD @ 17.7x

Average @

15.4x

-1SD @ 13.1x

-1SD @ 1.7x

Average @ 2.0x

+1 SD @ 2.3x

Average @ 12.0x Average @ 1.7x

8.4x P/E

1998-1999

Asian financial crisis

9.7x P/E

2008-2009

Global financial crisis

13.1x P/E signifies market

valuations during past non-

recession slowdowns


To gauge the downside risk of Malaysian equity market should a full-blown recession becomes a

reality, we look at the P/E and P/B valuations during the global financial crisis. The FBMKLCI P/E

and P/B bottomed out at 9.7x and 1.2x respectively. Without adjusting existing earnings

estimates, the end-2012 mid-cycle valuations of FBMKLCI are 1,652 based on 15x P/E and 1,438

based on 2x P/B. The former suggests that there is a 21% upside potential while the latter implies

5% upside potential. On the other hand, end-2012 trough valuations would be 1,068 based on

9.7x P/E and 863 based on 1.2x P/B. Our calculations suggest that there is a potential further

downside risk of between 22% and 37% in the event of a double-dip recession which is the worst

case scenario.

Figure 16 : Valuation scenarios for FBMKLCI

Mid-cycle

valuation

Down-cycle

valuation

Trough

valuation

P/E 15x 13x 9.7x

End 2012 FBMKLCI 1,652 1,431 1,068

P/B 2.0x 1.7x 1.2x

End 2012 FBMKLCI 1,438 1,222 863

Source: ECM Libra

Corporate earnings growth theme has run its course

Malaysia’s corporate earnings growth momentum story is showing some cracks following two

consecutive quarters of disappointing earnings. Since Dec 10, CY11 earnings growth of the

FBMKLCI has been cut from 13.1% to 10.3% now. The earnings cut was even more drastic within

ECM universe of coverage which resulted in the contraction of CY11 earnings growth projection

from 14.8% in Dec 10 to 8.4% now.

Although CY12 earnings growth of FBMKLCI has expanded over the same period from 8.9% in

Dec 10 to 12.3% now (8.4% to 15.1% for ECM universe of coverage), we believe the risk of

underperformance is greater now. We analysed the 12.3% earnings growth of FBMKLCI in CY12

and noted that 42% of the growth will be contributed by the banking sector and 25% by the

power sector. We believe earnings growth expectation from these two sectors is fraught with

uncertainty at this point in time. The high loans growth seen in the banking sector over the past 2

years is showing signs of tapering off amid recent rounds of overnight policy rate hikes and

lending restrictions such as loan-to-value ratio cap and statutory reserve requirement hikes. As

for the expected earnings growth in the power sector, it is almost entirely made up by

expectation of earnings recovery by Tenaga when gas supply normalises. Should these two

sectors failed to delivered, CY12 earnings growth could potentially be cut by more than half.

Figure 17 : 2QCY11 results vs ECM estimates Figure 18 : 2QCY11 results vs consensus estimates

19%24%

27%33%

24%29%

18%

25%

18%14%

28%

43% 44% 46%

53% 51%

70%

57% 58%

71%

53%

33%29%

21% 22% 20%

12%18%

24%

16%

0%

10%

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40%

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60%

70%

80%

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

Above Inl ine Below

16%

30%34% 32%

18%

28%

19%24%

17%14%

33%

27% 27%

40%

54%

47%

56%

50% 49%53%

51%

43%39%

28% 28%24% 25% 26%

35% 33%

0%

10%

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30%

40%

50%

60%

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

Above Inl ine Bel ow

Source: ECM Libra Source: ECM Libra

Further downside risk of 22%-

37% should recession becomes a

reality

CY11 corporate earnings have

disappointed for two consecutive

quarters resulting in earnings cut

from 14.8% in Dec to 8.4% in Sep

CY12 earnings growth of 12.3%

may be downgraded on

potentially weaker banking and

power sectors’ earnings


Figure 19 : ECM universe forward earnings growth Figure 20 : FBMKLCI forward earnings growth

13.113.5

11.011.7

10.3

9.4

10.3

8.8

10.4 10.5

12.312.011.7

11.2

12.6

9.89.69.7

10.1

8.9

5

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c-1

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y-1

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Jul-

11

Au

g-1

1

Se

p-1

1

% CY11 CY12

14.8 14.9

13.4

12.111.4

10.39.8

8.7 8.88.48.4

9.5 9.6

10.5

14.3 14.1

14.914.6

15.1

10.3

8

9

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16

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c-1

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-11

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g-1

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Se

p-1

1

% CY11 CY12

Source: ECM Libra Source: ECM Libra

Figure 21 : CY12 FBMKLCI earnings growth breakdown by sector

Banking

42%

Power

25%

Telco

7%

Others

25%

Plantation

1%

Source: ECM Libra

People-friendly Budget 2012 not likely to spur market sentiments

Malaysia’s federal government is expected to unveil Budget 2012 on 7 October, very likely the

last budget before the next general election. We expect this budget to be people-friendly but

neutral to the market as the government needs to balance the need for fiscal consolidation and

to promote domestic growth amid external slowdown.

In this regard, we expect the government to boost the disposal household income of the lower

income group. Bonus and allowance for civil servants, higher personal tax deductions, and

allocations for low to medium cost housing schemes are some of the measures that may be

announced. On the other hand, we do not expect an across the board tax cut, be it personal or

corporate, given the narrow source of tax revenue now. Plans for the implementation of the

much delayed goods and service tax (GST) may be mooted again but we expect the

implementation will not be immediate in order to minimize the impact on the lower income

group as well as allowing the business community more time for migration to the new tax

regime.

We also do not expect positive surprise in government’s development expenditure for 2012 as

we believe the government will re-hash what has already been widely been announced as part of

the government’s economic transformation plan (ETP).

Government will need to balance

between fiscal consolidation and

economic growth

No surprises expected for

development expenditure


Figure 22 : Fiscal balance

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-20

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RM bn

-15

-10

-5

0

% of GDP

Fiscal balance % of GDP

Source: Ministry of Finance

Impending general election…a catalyst or source of uncertainty?

The ruling government is expected to call for a general election which is not due until 2013.

Nonetheless, the consensus expectation is that a general election could be called as early as

November after the announcement of Budget 2012 on 7 October. There is consensus

expectation that general election will be a re-rating catalyst for the market but we are unable to

support this hypothesis based on past observations. Given heightened uncertainty in the

Malaysian political scene now, we believe the equity market may likely to selldown ahead of the

next general election as we draw comparison to the general election in 2008 which saw the

market declined by 17.6% 3 months before the election and a further 9.4% within 6 months after

the election.

Maintain end-2011 FBMKLCI target of 1,450

We expect the market to be volatile in the near term given the many external policy hurdles in

the months ahead. As such, we maintain our end-2011 FBMKLCI target of 1,450 which is

premised on CY12 earnings growth of 12.3% and downcycle P/E valuation of 13x. We are also

introducing our end-2012 target, which we are adopting a P/B valuation approach in view of

uncertain earnings outlook. Without factoring recession and external shocks, we ascribe a

conservative mid-cycle 2x P/B valuation to derive our conservative target of 1,440. This implies

minimal earnings growth which is plausible if there are earnings downgrade in the banking and

power sectors as mentioned afore. Without any external shocks, this scenario suggests little

downside risk for the equity market. That said, we advise investors to remain liquid in the near

term until uncertainty on external policies recede.

Figure 23 : Important dates to monitor on external policy uncertainties

Dates Events

Oct 3-4 EU: Finance Minister meeting in Luxembourg

Oct 3-31 US: Senate to vote on Obama's USD447bn jobs creation plan

Oct 14-15 G20: Finance Ministers to meet in Paris

Oct 17-18 EU: EU Council meeting in Brussels

Oct 25 EU: China-EU Summit

Nov 3 G20: Annual summit in Cannes

Nov 23 US: Deadline for super committee to present USD1.2trn budget cut proposal

Dec 23 US: Deadline for Congress to vote on budget cut proposal

Source: ECM Libra

Impending general election may

trigger risk aversion among

investors due to heightened

political uncertainty

Introduce end-2012 FBMKLCI

target of 1,440 based on

conservative 2x mid-cycle P/B

valuation


Figure 24 : Fundamentals of ECM universe by sector

Sector 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012

% % % x x x x % % % %

Automotive 1.2 47.8 7.2 10.3 9.6 1.8 1.6 17.6 17.3 5.1 5.4

Aviation 1.9 -141.6 528.1 -42.5 9.9 1.9 1.6 -6.4 14.0 0.0 0.0

Banking 28.9 13.3 14.5 12.9 11.3 2.1 1.9 17.3 17.7 4.3 4.8

Building Materials 1.2 16.5 13.7 11.2 9.9 1.5 1.4 12.1 13.4 5.0 5.0

Construction 1.9 19.2 12.3 14.4 12.9 1.4 1.4 9.9 10.6 3.4 3.4

Consumer 3.3 7.9 8.4 16.5 15.3 15.1 14.2 28.7 27.9 4.2 4.4

Gaming 9.1 14.1 9.5 11.8 10.8 2.7 2.3 22.7 21.5 1.8 2.0

Glove 0.4 -30.7 39.4 18.1 13.0 2.2 2.0 12.3 15.9 2.6 3.1

Media 1.0 4.1 5.4 11.3 10.8 1.9 1.7 16.3 16.2 5.1 5.1

Oil & Gas 8.1 20.7 13.7 17.8 15.7 2.8 2.5 15.6 15.3 2.5 2.8

Plantation 17.4 19.3 -1.7 14.0 14.2 2.3 2.2 16.4 14.9 3.8 3.8

Power 6.1 -22.8 54.2 17.2 11.2 1.1 1.0 7.7 10.4 2.9 4.2

Property 1.2 32.3 25.2 16.3 13.0 1.9 1.8 10.5 11.9 3.3 4.1

REIT 0.4 30.5 9.4 14.9 13.6 1.2 1.2 8.5 9.4 6.7 6.9

Technology 0.0 5.0 11.8 6.8 6.1 1.0 0.9 14.5 14.4 2.9 3.3

Telecommunication 17.7 4.2 6.4 17.1 16.1 8.3 8.4 41.9 45.7 5.4 5.3

Toll 0.3 33.9 12.9 14.2 12.6 3.9 3.5 27.3 27.7 4.7 4.9

ECM Universe 100.0 8.4 15.1 14.6 12.7 3.7 3.5 20.8 21.8 3.9 4.1

FBMKLCI 10.3 12.3 14.0 12.5

Net Div YieldAdj EPS Growth

Weighting

P/E P/BV ROE

Source: ECM Libra Share price date: 30 September 2011

STRATEGY

Despite recent selldown, we believe current risk/reward profile does not warrant a broad base

accumulation yet due to potential external headwinds over the near term. Although foreign

ownership of Malaysian equities (21.6% at August 2011) is not at excessive levels when

compared to past peak (27.5% at April 2007), net equity outflows amounting to RM3.8bn in

August 2011 by foreign institutional investors still had a signification impact on the market.

The good news is the current level of foreign shareholding is not far off from the trough level of

20.4% seen in December 2009. However, the bad news is foreign ownership of Malaysian

government securities (MGS) and BNM bills are at all time high of RM98.7bn and RM61.1bn

respectively as at August 2011, which represent an increase of 78% and 424% respectively since

March 2010 when BNM commenced its interest rate normalisation cycle.

Of late, we have seen some selling of these Malaysian sovereign debts by foreign investors, and

we expect this trend to continue due to the unwinding of carry trades (funded by cheap USD)

amid expectation that BNM will halt interest rate hike in the foreseeable future. Such outflow,

which will be larger than equity flow, will weaken the Ringgit and therefore will have further

dampening effect on Malaysian equity.

We believe stocks with high foreign shareholding level will be most at risk. Among stocks under

coverage, the top 5 with highest foreign shareholding are AirAsia (52%), Genting (42%), IJM Corp

(41%), CIMB (36.4%) and Genting Malaysia (36%).

External uncertainties and

continued foreign equity

outflows do not warrant broad

base accumulation yet

Continued selling of Malaysian

sovereign debts will put pressure

on the Ringgit and equity

AirAsia, Genting, IJM Corp, CIMB

and Genting Malaysia have

highest foreign shareholding

among stocks under coverage


Figure 25 : Foreign institutional investors’ net equity flows Figure 26 : Foreign ownership of Malaysian equities

0.6

(0.6)(0.5)(1.0)(0.7)

1.10.3

(1.3)

1.82.3

3.0

4.4

1.8

0.9

2.6

0.1

(3.4)

(0.1)

1.21.6

3.2

0.7

(3.8)-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Oct

-09

No

v-0

9

De

c-0

9

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

RM bn

25

.0

27

.5

27

.0

26

.6

26

.5

25

.7

24

.1

21

.7

20

.9

20

.7

20

.7

20

.9

20

.4

20

.4

20

.6

20

.8

21

.8

21

.9

22

.0

21

.7 22

.1

21

.6

20

21

22

23

24

25

26

27

28

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

De

c-0

9

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

De

c-1

1

Jan

-11

Ap

r-1

1

Jul-

11

Au

g-1

1

%

Source: Bursa Malaysia Source: Bursa Malaysia

Figure 27 : Foreign ownership of MGS and BNM bills Figure 28 : Top 15 foreign shareholding of stocks under coverage

0

20

40

60

80

100

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

RM bn

3.5

3.6

3.7

3.8

3.94.0

4.1

4.2

4.3

4.4

4.5

%MGS BNM bills MGS 10-Year Yield

52.5

42.0 41.036.4 36.0

30.0 29.0 28.7 27.1 26.5 26.0 25.3 25.0 24.5 24.2

Air

Asi

a

Ge

nti

ng

IJM

Co

rp

CIM

B

Ge

nti

ng

M

Ga

mu

da

Pa

rkso

n

Ma

xis

Me

dia

Pri

ma

AM

MB

BA

T

MC

IL

IOI

Pu

bli

c B

an

k

AX

IAT

A

Source: Bank Negara Malaysia, Bloomberg Source: ECM Libra

Although stocks under coverage have declined between 3% and 62% from peak levels in 2011,

we would like to highlight there may still be further downside risk in the event of a recession

and/or external shocks. Our rudimentary analysis of past trough valuations of each stock under

coverage reveals that with the exception of KNM, Pelikan, Star, Tenaga and Digi which are

already trading at trough valuations, all stocks under coverage have further downside risk of up

to 89%. That said, certain fundamentally strong blue chips are trading at fairly attractive levels

now and investors with higher risk appetite and longer investment horizon (>1 year) should start

accumulating these counters on further weakness. Our top 5 stock picks for this theme include

(1) CIMB, (2) Genting, (3) IJM Corp, (4) AirAsia and (5) QL Resources.

KNM, Pelikan, Star, Tenaga and

Digi are already trading at

trough valuations…

… but other stocks under

coverage have up to 89%

potential downside

Our “buy on further weakness’

blue chips are CIMB, Genting,

IJM Corp, AirAsia and QL

Resources


Figure 29 : Trough valuation of stocks under coverage

YTD Potential

Sector / Company Share price P/B CY11 Date Price Change 1998 - 1999 2000 - 2001 2008 - 2009 Average Downside

RM x RM x x x x

Automotive

UMW Holdings 6.85 1.8 13-Jan-11 7.72 -11.3% 0.2 0.8 1.4 0.8 -55%

Aviation

AirAsia 3.03 1.8 2-Aug-11 4.14 -26.8% n/a n/a 0.9 0.9 -50%

MAS 1.33 1.9 7-Jan-11 2.22 -40.1% 0.3 1.8 1.0 1.0 -46%

Banking

Maybank 8.00 1.8 7-Apr-11 9.20 -13.0% 0.7 1.9 1.0 1.2 -33%

CIMB Group 6.97 2.0 28-Jun-11 8.98 -22.4% 0.2 1.1 1.1 0.8 -60%

Public Bank 12.20 2.9 7-Jan-11 13.54 -9.9% 0.6 1.3 2.2 1.4 -53%

Hong Leong Bank 10.18 1.8 6-Jul-11 13.21 -23.0% 0.4 1.5 1.3 1.0 -41%

AMMB 5.79 1.6 5-Jan-11 7.15 -19.0% 0.5 1.4 0.5 0.8 -50%

Building Materials

Lafarge 6.56 1.7 4-Jan-11 7.99 -17.9% 0.1 1.0 0.6 0.6 -68%

YTL Cement 4.35 0.9 26-May-11 5.52 -21.2% 0.3 0.5 0.6 0.5 -47%

Construction

IJM Corp 5.00 1.3 17-Jan-11 6.77 -26.1% 0.2 0.8 0.5 0.5 -63%

Gamuda 2.88 1.6 7-Jan-11 4.25 -32.2% 0.5 2.0 0.8 1.1 -29%

Consumer

BAT * 44.68 5.4% 2-Mar-11 48.86 -8.6% 7.5% 6.1% 6.7% 6.7% -20%

Parkson 5.68 3.1 1-Jul-11 6.09 -6.7% 0.3 0.5 1.2 0.6 -79%

QL Resources 2.64 2.7 16-May-11 3.49 -24.4% n/a 1.5 1.8 1.6 -39%

Pelikan 0.81 0.4 7-Jan-11 1.37 -40.9% 0.5 0.4 0.4 0.4 0%

Gaming

Genting 9.10 1.9 13-Jan-11 11.98 -24.0% 1.0 1.0 0.8 0.9 -50%

Genting Malaysia 3.51 1.6 8-Jul-11 3.86 -9.1% 1.0 2.0 1.1 1.3 -17%

Berjaya Toto * 4.25 4.9% 17-Jun-11 4.53 -6.2% 6.7% 4.6% 6.2% 5.8% -15%

Glove

Top Glove 4.11 2.2 10-Aug-11 5.88 -30.1% n/a n/a 1.3 1.3 -41%

Media

Media Prima 2.20 1.9 1-Aug-11 3.00 -26.7% n/a n/a 0.9 0.9 -51%

Star * 3.15 5.1% 8-Mar-11 3.60 -12.5% 4.0% 3.8% 7.0% 4.9% 4%

Media Chinese 1.00 1.4 20-May-11 1.33 -24.8% n/a n/a 0.8 0.8 -42%

Oil & Gas

Petronas Gas 12.98 2.9 15-Sep-11 14.68 -11.6% 1.9 1.9 2.3 2.0 -31%

Bumi Armada 3.36 2.7 22-Jul-11 4.17 -19.4% n/a n/a n/a n/a n/a

MMHE 5.50 2.8 6-Jul-11 8.67 -36.6% n/a n/a n/a n/a n/a

Sapura Crest 3.68 3.7 13-Jul-11 4.51 -18.4% 0.2 0.3 0.8 0.4 -89%

Wah Seong 1.97 1.5 30-Jun-11 2.45 -19.6% n/a 1.5 0.8 1.2 -21%

KNM Group 1.20 0.7 13-Jan-11 3.19 -62.4% n/a n/a 0.7 0.7 -2%

Dayang Enterprise 1.51 1.5 9-Feb-11 2.35 -35.7% n/a n/a 0.8 0.8 -47%

Alam Maritim 0.72 1.0 2-Feb-11 1.20 -40.0% n/a n/a 0.6 0.6 -33%

Perdana Petroleum 0.60 0.5 13-Jan-11 1.25 -52.0% n/a 1.2 0.7 1.0 101%

Plantation

Sime Darby 8.44 2.1 4-Jan-11 9.46 -10.8% 0.6 1.5 1.4 1.2 -45%

IOI Corporation 4.65 2.5 4-Jan-11 6.05 -23.1% 0.6 0.7 1.8 1.0 -58%

KL Kepong 21.10 3.1 19-Jan-11 22.86 -7.7% 0.9 0.9 1.4 1.1 -65%

Genting Plantation 7.00 1.6 4-Jan-11 9.03 -22.5% 0.7 0.5 0.9 0.7 -55%

Boustead Holdings 5.04 1.1 9-Jun-11 6.43 -21.6% 0.3 0.3 0.6 0.4 -65%

IJM Plantation 2.49 1.4 5-Jan-11 3.20 -22.2% n/a n/a 1.1 1.1 -23%

Power

Tenaga 5.17 1.0 31-May-11 7.11 -27.3% 0.5 1.5 1.0 1.0 6%

YTL Power * 1.70 5.5% 3-Jan-11 2.48 -31.5% 7.6% 4.1% 8.1% 6.6% -16%

Property

SP Setia 3.89 2.1 13-Jan-11 4.62 -15.8% 0.3 0.9 1.2 0.8 -60%

YNH Property 1.69 0.8 18-Feb-11 2.20 -23.2% n/a n/a 0.5 0.5 -43%

Glomac 1.46 0.7 8-Apr-11 1.97 -25.9% n/a n/a 0.2 0.2 -66%

REIT

CMMT * 1.31 6.1% 15-Sep-11 1.35 -3.0% n/a n/a n/a n/a n/a

Axis REIT * 2.35 8.1% 2-Aug-11 2.63 -10.6% n/a n/a 15.0% 15.0% -46%

Technology

Notion Vtec 1.75 1.0 13-Apr-11 2.31 -24.2% n/a n/a 0.7 0.7 -29%

Telecommunication

Maxis * 5.32 7.5% 4-Mar-11 5.53 -3.8% n/a n/a n/a n/a n/a

AXIATA 4.60 2.0 27-Jul-11 5.14 -10.5% n/a n/a 0.8 0.8 -60%

Digi * 30.42 6.8% 9-Sep-11 32.00 -4.9% n/a n/a 6.0% 6.0% 13%

TM * 4.09 4.8% 7-Sep-11 4.39 -6.8% 8.2% 3.6% 7.0% 6.3% -24%

Toll

LITRAK * 3.60 4.7% 28-Jun-11 3.90 -7.7% n/a 2.4% 15.6% 9.0% -48%

Trough P/B valuationsAs at 30 Sep 2011 peak

* Trough valuations for dividend stocks are determined using dividend yield.



But for investors who have balanced and/or adverse risk appetite, we advocate a defensive

stance in stock selections until macroeconomic conditions improve. We prefer stocks in the REIT,

telco, oil & gas and consumer sectors which have some or all of the following attributes: (1) high

yield, low beta, (2) supported by resilient domestic consumption/capex, and (3) low foreign

shareholding. Our top 5 stock picks for this theme include (1) Axis REIT, (2) CapitaMalls Malaysia

Trust, (3) Berjaya Sports Toto, (4) Digi and (5) Alam Maritim.

Axis REIT is our preferred high-yield defensive pick with CY11 and CY12 net dividend yield of

8.1% and 8.7% respectively. Despite its defensive quality with beta of just 0.5, its acquisition

track record culminated in average annual total return of more than 20% since its listing in 2005,

which has significantly outperformed the benchmark FBMKLCI. Another plus point is its

distribution visibility as Axis commits to distribute 99% of its earnings on a quarterly basis.

Berjaya Sports Toto’s dominance in the NFO industry and its defensive nature means free cash

flow generation will remain strong going forward. We estimate CY11 and CY12 net dividend yield

of 5.6% and 5.9% respectively. Earnings prospects going forward will be boosted by the new 4D

Jackpot game introduced in early June.

CapitaMalls Malaysia Trust is our preferred retail REIT which will benefit from resilient retail sub-

segment and boosted by a strong franchise in CapitaLand. Since listing in 2010, it has

demonstrated its commitment to enhance unit holders’ return through yield accretive

acquisitions and asset enhancement initiatives. CY11 and CY12 net dividend yields are estimated

at 6.1%.

DiGi is our preferred exposure to the telecommunication sector due to resilient earnings even

during economic slowdown as well as potential for a second round of capital management

initiative, even after announcing a capital repayment of 65.5 sen recently.

Alam Maritim is a laggard among oil & gas stocks. Demand for vessels is at an inflection point as

development and production activities pick up pace. Rates are also expected to rise. Alam is our

preferred pick for vessel demand recovery play as valuation is compelling vis-à-vis other vessel

players.

Figure 30 : Top stock picks

TP Price Mkt Cap P/E (x) P/BV (x) ROE (%) Net Div Yield (%)

Stocks Ticker RM RM RM m CY11 CY12 CY11 CY12 CY11 CY12 CY11 CY12

The “safe and sound” basket

Axis REIT AXRB MK 2.78 2.35 883.4 12.4 11.5 1.2 1.2 9.8 10.5 8.1 8.7

Berjaya S Toto BST MK 5.21 4.25 5,741.9 14.6 13.7 11.4 9.9 81.7 77.3 5.6 5.9

CapitaMalls CMMT MK 1.50 1.31 1,962.0 15.5 14.9 1.2 1.2 8.0 8.8 6.1 6.1

Alam Maritim AMRB MK 1.11 0.72 566.8 8.9 6.0 1.0 0.8 11.1 14.4 1.0 2.1

Digi DIGI MK 35.05 30.42 23,651.6 21.7 19.7 28.2 28.2 129.9 143.3 6.8 5.1

The “buy on further weakness” basket

CIMB CIMB MK 7.88 6.97 51,806.4 13.3 11.6 2.0 1.9 16.0 16.8 4.1 4.7

Genting GENT MK 9.83 9.10 33,805.7 10.6 9.6 1.9 1.6 18.9 17.8 1.3 1.4

IJM Corp IJM MK 7.02 5.00 6,877.1 14.7 12.1 1.3 1.2 8.3 10.0 3.0 3.0

AirAsia AIRA MK 4.78 3.03 8,416.9 9.6 7.6 1.8 1.6 16.6 17.3 - -

QL Resources QLG MK 3.70 2.64 2,196.5 15.7 12.2 2.7 2.3 17.0 18.7 1.8 2.1

Source: ECM Libra Share price date: 30 Sep 2011

Our “safe & sound” defensive

picks are Axis REIT, CMMT,

BToto, Digi and Alam Maritim


Sector call

Figure 31 : Sectors weighting

Neutral Overweight

Automotive Consumer

Aviation Oil & gas

Banking REIT

Building materials Telecommunication ▲

Construction

Gaming

Glove

Media ▼

Plantation

Power

Property

Technology

Toll

Source: ECM Libra

� REIT is the defensive high-yield asset class of choice

The REIT sector is a right fit in our look for resilient high dividend yield play. However, we

caution investors to be selective and avoid pure office REIT which, in our view, is exposed to

risk of office space oversupply. Our preference is for industrial and retail REITs, which are

more resilient, in our view.

� Oil & gas still underpinned by domestic capex

We believe that the sector will remain vibrant going into 2012. Capital expenditure is so far

showing no signs of waning given that Petronas has made firm plans to increase local oil &

gas production.

Upcoming offshore contracts will be for Enhanced Oil Recovery (EOR) which will cover

Chemical EOR (CEOR) and also Improved Oil Recovery (IOR) methods. Petronas has plans to

bring on stream at least six platform-based water or gas injection and CEOR projects. Fields

of note include Tapis, Guntong, Angsi, Baram Delta, and St Joseph. Average Malaysian

extraction is still low at 26% and this is to be raised to >40% with the said developments. Key

beneficiaries would be as follows:- Bumi Armada (Chemical EOR vessel supply), Sapura-

Kencana (pipe replacement works, fabrication and installation), MMHE (Tapis

redevelopment) vessel players like Petra Perdana and Alam Maritim, Uzma (IOR) and also

equipment suppliers like Tanjung Offshore and Deleum. RM15bn North Malay Basin project

will also benefit sector across the board. The development is said to require a 200km

pipeline needed and it involves 9 fields of which platforms or floating production solutions

will need to be built. Besides offshore development, onshore development will also not be

lacking going forward. Most expenditure is focused in Johor (Pengerang, RAPID, and Gulf

Asia Petroleum) and key beneficiaries are Dialog, KNM, and also Petronas Chemicals

(capacity expansion) and Petronas Gas (regasification project).

Recent market weakness has brought valuations down considerably and bigger caps like

Petronas Gas and even Bumi Armada are looking increasingly attractive. We also continue to

like small cap laggards like Alam Maritim which have been clocking up impressive

orderbooks. Besides that, we are also positive on the Sapura-Kencana merged entity when it

comes on board next year.


� Upgrade telecommunication to overweight on sustainable domestic consumption

We are upgrading the telecommunications sector to Overweight. Telcos exhibit defensive

qualities and generally outperform the market during uncertain times. Even during economic

downturns, telcos earnings have shown resiliency as spending on telecommunications are

generally viewed as a necessity rather than a luxury, which means that demand for

telecommunication services is rather inelastic. With its stable earnings and high dividend

yields, we expect telcos to outperform in a down market. There are potential for upside

surprises in capital management initiatives too. For instance, DiGi indicated that it is working

on a second round of capital management initiative, even after announcing a capital

repayment of 65.5 sen recently, while TM is expected to distribute at least 14 sen of special

dividends from the recent sale of its Axiata shares.

� Downgrade media to neutral on waning adex growth

Total gross advertising expenditure (adex) for 8M11 rose 11.7% y-o-y (7M11: +4.1% y-o-y)

led by the print media and TV segment, each with a decent growth of 14.6% and 8.2%

respectively. The stellar growth was on the back of resilient consumer spending amid festive

seasons. While we are sanguine with the strong YTD adex performance and outlook for the

remainder of 2011, we do not discount the possibility that the adex momentum in 2012

could taper off in view of the dimmed global economic outlook and a higher base effect in

2011.


DISCLOSURE & DISCLAIMER

Stock rating definitions

Strong buy - High conviction buy with expected 12-month total return (including dividends) of 30% or more

Buy - Expected 12-month total return of 15% or more

Hold - Expected 12-month total return between -15% and 15%

Sell - Expected 12-month total return of -15% or less

Trading buy - Expected 6-month total return of 15% or more arising from positive newsflow. However, upside may not be

sustainable.

Sector rating definitions

Overweight - Industry expected to outperform the market over the next 12 months

Neutral - Industry expected to perform in-line with the market over the next 12 months

Underweight - Industry expected to underperform the market over the next 12 months

Disclaimer

This report is for information purposes only and general in nature. The information contained in this report is based on data and

obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as

such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information

or opinions in this report. Accordingly, neither we nor any of our related companies and associates nor persons related to us

accept any liability whatsoever for any direct, indirect or consequential losses (including loss of profits) or damages that may

arise from the use of or reliance on the information or opinions in this publication. Any information, opinions or

recommendations contained herein are subject to change at any time without prior notice.

It is not possible to have regard to the specific investment objectives, the financial situation and the particular needs of each

person who may receive or read this report. As such, investors should seek financial, legal and other advice regarding the

appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.

Under no circumstances should this report be considered as an offer to sell or a solicitation of an offer to buy any securities

referred to herein. This company and its related companies, their associates, directors, connected parties and/or employees

may, from time to time, own, have positions or be materially interested in any securities mentioned herein or any securities

related thereto, and may further deal with such securities and provide advisory, investment or other services for any company

or entity mentioned in this report. In reviewing this report, investors should be aware that any or all of the foregoing, among

other things, may give rise to real or potential conflict of interests.

Published & printed by:

ECM Libra Capital Sdn Bhd (579116-A)

2nd Floor, West Wing, Bangunan ECM Libra

No. 8 Jalan Damansara Endah

Damansara Heights

50490 Kuala Lumpur

Tel: (603) 2089 1888

Fax: (603) 2096 1868

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