Today's Market Preview - 30 July 2010

Our Malaysian bourse may continue its slow-and-steady climb today despite an overnight drop on Wall Street (which saw major U.S. equity barometers slipping between 0.3% and 0.6% at the closing bell).

Essentially, the benchmark FBM KLCI – after getting a 3.2-point lift from just one counter (Axiata) yesterday – could ride on the rising momentum that had driven up the bellwether by a combined 12.7-point or 0.9% in the past four days. Sharing our marginal positive bias view are the futures participants, as the Aug month futures contract for the FBM KLCI rose to 1,364.50 (representing a 6.1-point premium) yesterday.

In terms of scheduled news flows, only the monthly banking statistics for Jun is on tap later in the evening.

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Malaysia Banks - NIM outperformance in 2Q10

NIM outperformance in 2Q10

1. Expect 2Q10 earnings to grow 6% q-o-q driven by net interest income on higher NIM
2. Industry loans grew 5% YTD May 10; 2H stronger with approvals up 13% y-o-y
3. Maybank (Buy, RM9.10) offers superior growth with a twist of Indonesia earnings infusion while RHB Cap (Buy, TP RM7.30) stands out as a value play

Stronger 2Q10 driven by topline growth. We expect 2Q net profit to grow 6% q-o-q, driven by net interest income as NIM should pick up pace following the previous two OPR hikes in Mar and May 10. With another 25bps OPR hike in July, further uptick in NIM for the rest of 2010 is possible, assuming minimal competition for deposits. We think the direction of NIM hinges on the respective banks’ asset and liability management and their pricing strategies amid competition. We understand that lending spreads for key sectors such as mortgages and hire-purchase loans were maintained following price rationalization earlier this year, which would lend support in holding up loan yields.

Strong loan growth momentum continues. Up to May, industry total loans grew by 5%. On a y-o-y basis, loans grew 12% across segments, while applications and approvals grew 14% y-o-y and 13% y-o-y, respectively, indicating robust loan pipeline in 2H10. We expect the loan growth momentum to continue (FY10 forecast is 11%), supported by the improving domestic economic prospects. So far, OPR has been raised three times by 75 bps to 2.75%. Our economist is expecting another 25 bps hike by year end. The stance taken by BNM on OPR hikes imply that the Malaysian economy is on the growth trajectory. This bodes well with increasing demand for fund raising (loans and debt issuances) which is positive for banks.

Top picks - Maybank and RHB Cap. Our high conviction picks are Maybank (Buy, TP RM9.10) and RHB Cap (Buy, TP RM7.30). For Maybank, we expect loan growth of 12-15% for FY10-12F (above industry average of 12%), supported by its domestic franchise, especially in hire-purchase and mortgages, and its Indonesia prospects. RHB Cap is the cheapest stock in our Malaysia large cap universe at only 9x FY11 PE, and 1.2x FY11 BV vs sector average of 14x
FY11 PE and 1.9x FY11 BV, while its ROE profile is respectable at 14-15%.

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HWANGDBS Vickers Research Sdn Bhd (128540 U)

Weekly Market Preview 19July 2010

From the Chartroom
This week’s performance could signal whether our Malaysian stock market is ready for a positive breakout or will remain inside a consolidation pattern. Riding on increased buying interest especially in the first half of last week, the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) added 12.3-point or 0.9% from two Fridays ago to finish at 1,336.65. Climbing through the week too were the FBM 70 Index (up 1.8%) and the FBM ACE Index (+0.1%) with daily average volume and value rising to 680.0m shares (from 561.6m units) and RM1.1b (from RM908.8m), respectively.

As revealed by Bursa Malaysia last Friday, there is still fairly little foreign money parked in Malaysian equities at the moment. Based on the stock exchange’s record, foreign ownership as a percentage of overall market capitalization stood at 20.6% in Jun 10. It, nonetheless, represents a tiny increase from 20.5% in Mar 10 (and versus 20.4% in Dec 09). This somewhat reconciles with our earlier remark (highlighted in our From The Chartroom write-up dated 5 Jul) that foreign investors bought more Malaysian shares than they sold – translating to a slight net amount of RM0.8b – between Apr and Jun this year, after accounting for 26% of total trading value during the second quarter.

The low foreign presence means that our domestic bourse will probably be more resilient than its overseas peers, just like the scenario in recent months. With macroeconomic data on the external front giving out mixed signals thus far, investors may have to look for investment trends from the ongoing U.S. corporate reporting season. It is also the case in Malaysia, as earnings announcements for the Apr – Jun 10 quarter stream in this week from the likes of Public Bank (Monday afternoon), Digi (Tuesday afternoon) and BAT (Thursday evening). Last week, the FBM KLCI momentarily tested the upper area of our consolidation zone that is marked by the
1,280 and 1,340 lines on the chart. After touching a high of 1,341.96, an absence of follow-through buying activity subsequently caused the benchmark index to back slide.

Yet, there is still hope for the bellwether – after climbing in six of the past seven weeks for a cumulative jump of 67.5-point or 5.3% - to stage a breakout on the upside. This will be probable assuming it could hold on to much of its gains as the market absorbs the prevailing profit-taking pressures. By showing resilience, investors – who may then perceive a limited downside scenario – will turn buyers of shares sooner rather than later. And an extension of the uptrend is likely if and when the FBM KLCI clears the 1,340 resistance barrier, as it makes its way towards the next resistance target of 1,375. Alternatively, should the index pullback persist, it would then suggest the 6½-week market consolidation process is expected to drag on for the time being, with the first and second support levels to be found at 1,305 and 1,280, respectively.

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HWANGDBS Vickers Research Sdn Bhd (128540 U)

Market Strategy - Cut in subsidies

The government announced that it would cut subsidies for sugar, petrol, diesel and liquefied petroleum gas (LPG). This would result in higher prices: sugar (+25 sen/kg or 15%), LPG (+10 sen/kg or 5.7%), RON95 (+5 sen/litre or 2.8%), RON97 (+5 sen/litre or 2.4%), diesel (+5 sen/litre or 2.9%). According to The Star, the subsidy cuts would amount to RM750m savings for the government this year. This works out to 0.5% of the estimated federal government operating expenditure (or 3.6% of initial estimates of subsidies for 2010).

Although small at this time relative to the total government expenditure at this point, this could signal a gradual reduction in subsidies. It could indicate that a tariff hike for Tenaga (Buy; RM10.80 TP) could be forthcoming. The subsidy cuts would also allow funds to be channelled to projects that help improve public transportation such as the MRT. The price increases could result in a lift in inflation and dent consumer sentiment but the extent should not be significant at this point. We expect some minor disruption in traffic volume growth for PLUS in 2H with the marginal increase in fuel and diesel prices. PLUS has already chalked up an impressive YTD
traffic volume growth to May 2010 of 9.8% y-o-y for its core highways of North-South Expressway; New Klang Valley Expressway; Federal Highway Route 2 and Seremban- Port Dickson Highway. Management is guiding for traffic volume growth of 3-4% for 2010 while our forecast is more conservative at 2%.

We are already expected a slower 2H on the back of this fuel price hike and the higher base effect in 2009. Reiterate Buy with an unchanged target price of RM4.00. For Gamuda (Buy, TP RM4.35), we see the gradual cut in subsidies as a potential signal that the government is serious
in implementing the RM36bn MRT project. Recall, that the MMC-Gamuda JV has said it will commit RM3bn in funding together with a RM1.8bn performance bond to see initial works of this MRT take off. But balance of the funding has to be from the government which will likely be from the eventual cut of subsidies.

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HWANGDBS Vickers Research Sdn Bhd (128540 U)

Tenaga Nasional - Proxy for stronger GDP growth

Proxy for stronger GDP growth
• 3QFY10 result was within expectation
• Demand growth and locked-in coal cost support stronger earnings
• Maintain Buy for attractive valuation and potential upside from tariff hike

Stronger 3Q on power demand growth. TNB’s 3Q revenue improved 10.3% y-o-y following 5.3% power demand growth supported by improvements at petrochemical and steel sectors. However, EBIT was flat due to a 12% rise in operating expenses as a result of higher offtake from coal fired plant, higher IPP payment (+6%), and RM63m provision in 3Q for general expenses. TNB recorded RM569m forex translation gain in 3Q as a result of a stronger ringgit against the US$ and Yen (+5%). Excluding the forex impact, 9M10 core net profit of RM2.1b is within our expectation, but at the lower end of market estimates.

Tariff hike is imminent, but timing uncertain. A tariff hike is imminent for TNB given higher coal costs and potential cuts in gas subsidy, but the timing is uncertain. Gas price to the power sector is currently subsidized at RM10.70/mmbtu (37% below current price of RM17/mmbtu); the government is looking at cutting this. We expect 2% net tariff hike to cater for higher capacity payment, an increase in gas cost to be fully passed-on, but coal cost will rise by 10% for FY11F due to limited supply. We estimate every 1ppt increase in gas cost will erode FY11F EPS by 1.6%, while a 1ppt increase in tariff will raise EPS by 9.1%.

Attractive valuation. Maintain Buy for TNB with a target price of RM10.80/share based on last 3-year average forward PE of 14x. TNB is trading at attractive 11x FY11F PE and 1.2x P/BV against its 10-year historical averages of 20x and 1.5x, and peers’ averages of 14x and 1.4x. Foreign shareholding in TNB has improved from 9.4% in Dec 09 to 10.7% in Jun 10.

Analyst
June Ng +603 2711 2222
june@hwangdbsvickers.com.my

From
HWANGDBS Vickers Research Sdn Bhd (128540 U)

KNM Group - Signs of better times?

New orders picking up

• Order book at year-high of RM2.4b; eyeing several sizable contracts in SEA and Europe
• To take advantage of tax incentives by bringing more production home
• Maintain Hold; re-rating hinges on contract flows in 2H10

Signs of better times? KNM has secured RM1.0b worth of jobs thus far, double what it secured in 1H09. Its current order book is at the year-high of RM2.4b compared to RM1.8b in the beginning of the year. Its average selling price (ASP) has also improved moderately to close to RM20,000/MT from a low of RM18,500 in 2009 (record high of RM22,500 in 2008). We understand KNM is eyeing several sizable contracts (>RM100m) in South East Asia and Europe. We expect accelerating oil & gas activities for the rest of this year to drive future demand for process equipment.

Extending market reach, benefit from tax incentive. KNM may add two more plants to extend its global market presence. But the investments would be small at c.RM40m with a potential JV local partner. KNM expanded its Saudi Arabia capacity recently, bringing total group capacity to 157,300MT/year (+6.8%). Meanwhile, works are currently underway to upgrade its Kuantan plant to undertake manufacturing of BORSIG’s boilers for the global market. There is also a plan to package BORSIG’s membrane equipments in Malaysia to take advantage of the RM1.4b tax incentive and improve overall cost efficiency.

Maintain Hold and RM0.55 TP. We are maintaining our earnings assumptions at this juncture, as utilisation rate remains low at 60% and margins are still expected to be sluggish in 2Q10. Re-rating catalyst for the stock would depend on job orders in 2H10. We reiterate our Hold rating for KNM with a target price of RM0.55, pegged to 9.0x FY11F PE. The counter is currently trading at 8.4x FY11F PE against the sector’s 8.8x and the region’s 15.0x.

Sector Focus - Property Fighting For A Home

Fighting For A Home

• Recent launches sold via balloting due to overwhelming response
• Robust demand even at new benchmark prices
• Developers’ margins to pick up with higher selling prices & incentive roll-backs
• Recovery in sales & margins yet to be reflected in share prices.Maintain positive view on Malaysian property sector. Top pick: SP Setia.
  

Sales going strong at record prices. Huge turnouts seen at property launches over the last three weekends:

1. Desa Parkcity’s Casaman. All 147units were snapped up within five hours despite record pricing of RM1.7m–RM2.1m/unit for 2/3- storey link houses. More than 650 registrants were present for the balloting exercise, each armed with a bank draft for RM50-100k.
2. Boustead’s Surian condos at Mutiara Damansara (311 units at RM600psf). 80% sales were achieved after last weekend’s balloting (all non-Bumi units taken up). This was despite the high 50% Bumi quota (vs 30% typically) and large built-up areas of 1679-2443sf, priced at RM926k-1.3m/unit (most of the 850- 1400sf were sold prior to the ballot).
3. Sime’s Reika link houses at USJ Heights (107 units; RM982k/unit; land size: 24’ x 80’). Achieved 75% take up last weekend, at 19-22% higher ASP vs launch of Kayangan Puteri in Nov09 (RM808-838k).
4. Desa Parkcity’s Westside One condos (338 units; RM600psf). Approximately 90% of non-Bumi units were booked over just one weekend (built-up area : 969-2066sf).

In Penang, E&O’s Quayside Resort condos (RM685psf, 298 units) reached 65% sales (soft-launched in Oct09) – setting the stage for the launch of its second tower in Singapore soon at ~RM750psf. Later this month, SP Setia will also be conducting a balloting exercise for its Setia EcoPark Phase 8C semi-detached (24 units; RM1.8m/unit vs RM1.2m for Phase 8B launched in end-Oct09).

Positive outlook still not reflected in share prices. Malaysian property sector is trading at 0.74x P/BV (0.56x P/RNAV), still below 0.77x historical mean despite recovery in sales and margins. Malaysian property sector is trailing way behind regional peers in terms of share price recovery post-financial crisis. We remain positive on Malaysian property sector; top pick: SP Setia (sector leader, largest residential developer by sales). We also like E&O, DNP, and Sunrise for their prime landbank, strong brandname and attractive valuation. As for SunCity, its upcoming RM3bn REIT should help unlock value and strengthen its balance sheet.

Analyst
Yee Mei Hui +603 2711 1332
meihui@hwangdbsvickers.com.my
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HWANGDBS Vickers Research Sdn Bhd (128540 U)