Budget 2010 Report From HWangDBS

Budget 2010: Moving up the value chain
• Budget 2010: measures to transform into a high-income economy. Forecast for 2-3% GDP growth and lower than expected deficit of 5.6% in 2010.
• Possibly more stake disposals under Ministry of Finance/ Khazanah’s stable of listed companies.
• Imposed 5% property gains tax, liberalization of stockbroking industry, higher individual tax relief to help spur consumer spending.

Towards a knowledge-based economy, driven by innovation and high value-added activities. Measures to stimulate investment, promote R&D activities and jumpstart new growth sectors (green technology and creative industry) were proposed during the tabling of the 2010 Budget.
Lower deficit; sharp cut in operating expenditure. The Government revised its GDP estimate to -3% (from -4 to -5%) for 2009 and +2 to +3% for 2010. DBS expects -2.9% for 2009 and +4.5% for 2010. The deficit forecast was lower than expected at 7.4% for 2009 and 5.6% for 2010. For 2010, the reduction would be largely due to a projected 13.7% cut in operating expenditure (lower supplies & services, subsidies and “others”) and 4.5% reduction in development expenditure to RM50.6bn, which is lower than expected. The general message for the construction sector in Budget 2010 appears to lean on the government encouraging more private sector participation. IJM Corp (Buy), in our view, will be a key beneficiary given its foothold in the private sector and strong reputation in the public sector.

“Second wave of privatization” The government intends to “privatize” companies under the Ministry of Finance (MOF) and other viable government agencies. This could mean more stake disposals under MOF/Khazanah’s stable of listed companies. Given that components of the KLCI are free-float weighted, lower government stakes could lift the weighting of GLCs in the index. Higher free floats could also help to lift liquidity and valuations of these companies. Potential candidates include Malaysia Airports (Buy), PLUS Expressways (Buy; TP: RM3.80), Pharmaniaga (Not Rated) and UEM Land (NR).

Negative bias for developers, brokers. The government surprisingly imposed a 5% property disposal tax. We reduced target prices for SP Setia (Buy; TP: RM4.45), E&O (Buy; TP: RM1.40) and DNP (Buy; TP: RM2.25), and downgrade Sunrise and Sunway City to Hold, respectively (from Buy). The government also liberalized the commission-sharing arrangement in the stockbroking industry. TA Enterprise (Buy; TP: RM2.10) could see lower broking income
given the Group’s large retail base.

Parkson Holdings Target Price Raised To RM 6.30

Riding on the China boost

1. PHB’s TP is raised to RM6.30 after PRG’s TP raise to HK$13.51.
2. On better retail sales prospects in China, we have lifted PHB’s FY10-11F earnings by 0.8-4.3%.
3. Upgrade PHB to Buy with our TP implying a 22% upside potential.

Upgrading PHB to BUY. We have raised our RNAV-based TP for Parkson Holdings (PHB) to RM6.30 (from RM5.40) implying upside potential of 22%, prompting our upgrade to Buy (from Hold). The higher valuation is to capture the upward revision in its 51.6%-owned HK-listed subsidiary Parkson Retail Group (PRG) by DBSV HK to Hold (from Fully Valued) with new TP of HK$13.51 (from HK$11.31), which is derived from a target FY10 P/E of 27x (22x previously).

Earnings raised on better sales prospect. PRG’s FY10-11 net profit forecasts have also been raised by 2% and 6% respectively premised on stronger Same-Store-Sales (SSS) growth assumption of 10% (from 9%) for FY10F and 12% (from 10%) for FY11F. As highlighted in our 28 Sep report, PRG’s sales could surprise on the upside with China’s swift economy recovery. Following PRG’s earnings upgrades, we have revised PHB’s FY10-11F earnings by 0.8% and 4.3%, respectively. Meanwhile, PHB’s 1QFY10 results (due 16 Nov) should see little surprise as 1Q is normally a quiet quarter in the absence of major festivities in China. We estimate 1QFY10 net profit of c.RM70m (+17% y-o-y growth).

Price correlation pattern favours PHB now. The difference between PHB’s total market cap and its share of PRG’s market cap has widened to 32% currently, versus a 1-year average of
29% (see Figure 2). Given their historical relative share price performance pattern, we believe PHB could catch up by outperforming PRG going forward, thus narrowing the valuation gap. International portfolio managers may also want to diversify their currency risks as the Ringgit is expected to strengthen against the HKD (which is pegged to US$), rising 3.9% by end-10 based on our estimates.

Steel Sector Report By HWangDBS

Stronger steel demand ahead

• Steel demand is currently being supported by restocking activities. And in FY10-11, steel producers will benefit from pump-priming activities kicking off and USD weakening.
• Expect 3Q09 earnings to improve q-o-q.
• Upgrade Southern Steel (TP RM2.40) and Kinsteel (TP RM1.30) to Buy.

Demand recovering. Steel demand has improved recently due to re-stocking activities. Utilization at most steel mills has risen since Jun09 - Kinsteel's upstream utilization jumped to 100% from 50%, while Southern Steel’s overall utilization has risen from a low of 50%. Mega projects arising from government pump priming should deliver meaningful new demand in FY10-11F. In addition, the sector should benefit from a weaker USD vs RM. 60-70% of domestic scrap requirement (mainly denominated in USD) and all iron ore are imported.

Re-stocking activities supporting steel prices. Steel bars and rods are trading at RM2,200- M2,300/MT, while international prices of iron ore and scrap averaged USD103/MT and USD250/MT, respectively. Iron ore prices have been relatively stable for the past ten months, which is good for steel producers as it reduces price volatility.





















Operating parameters improved. We expect 3Q09 to show positive operating earnings compared to losses in 1H09, driven by margin improvement as a result of

1. recovering steel prices, and
2. higher capacity utilization.

Inventory holding period has also improved to 3 months from 4-6 months at the start of the year. Following that, both Southern Steel and Kinsteel have stronger cashflow positions.

Upgrade to Buy. We upgrade Southern Steel (TP: RM2.40) and Kinsteel (TP: RM1.30) to Buy from Hold. Our target prices are based on 1.3x NTA, consistent with +1SD of the respective historical means. We expect government pump-priming to help drive profitability over FY10-11F. At our target prices for Southern and Kinsteel imply they should be trading at 12.1x and 13.7x CY10F earnings.

Public Bank Report By HWangDBS

Proven resilience

• 3Q09 net profit was in line at RM639m, bringing 9M09 earnings to RM1.8bn.
• NIM inched up 5bps driven by loan and deposit growth, coupled with robust asset quality.
• Loan approvals were strong, led by housing loans
• Maintain Buy and RM12.20 TP.

Resilient earnings. 3Q09 net profit was RM639m (+5% q-o-q, +4% y-o-y), driven by higher interest income. Noninterest income was marginally higher, led by higher unit trust management fees and fees from the sale of unit trusts, but mitigated by unrealised revaluation loss for trading derivatives. Cost-to-income ratio remained stable at 34%. NIM inched up 5bps led by strong growth of loans (+3% q-o-q) and deposits (+5% q-o-q), with healthy asset quality. YTD loan growth is 11%, within our 14% assumption for FY09. Deposit growth was largely from overseas operations, and loan-to-deposit ratio remained healthy at 72%. Asset quality remained resilient with gross and net NPL ratios at 0.9% and 0.8% (lowest in the industry), and flat absolute gross NPLs. Specific provision charge-off rate was 0.29%. Capital ratios (bank level)
remain robust with Tier-1 CAR at 11.0% and RWCAR at 12.1%. Overseas contribution was only 6% this quarter. No dividends were declared for 3Q09, as expected.

Strong momentum ahead. Loan approvals remain strong, led by housing and corporate loan approvals. We expect Public Bank’s capital ratios to be enhanced with the adoption of FRS 139, Basel II Internal Rating Based Approach, and by the remaining 80m treasury shares currently sitting in its books.

Maintain Buy. We believe Public Bank remains a core holding for its superior asset quality, ROEs, and dividends. Its ROE profile is expected to improve with less capital intense non-interest income activities and cost savings from FRS 139 implementation. Maintain Buy, with RM12.20 target price based on the Gordon Growth Model, implying 3.8x FY10 BV.

Plantation Sector Report From HWangDBS

Strategy and stock picks
With upgraded outlook in CPO prices, we believe recent correction in palm oil prices and likewise consolidation in plantation share prices have provided enough upside potential to warrant raising positions now. Our key message is to remain selective, as we expect volatility in an otherwise
upward trend in price and consumption next year.

Why now is a good buying opportunity
There are several reasons why raising positions now are
warranted:

1. Lower expected edible oil inventories (both palm and soybean oils) next year are a precursor to higher prices
2. Rising crude oil prices in a global economic recovery would lift most commodity prices. Rubber has the highest correlation
3. Low borrowing costs have prompted planters to raise funds recently. This might spur new planting and milling capacity expansion next year, and hence, accelerate value creation
4. Stronger regional currencies would reduce borrowing costs and FX losses for companies with USD borrowings
5. Lower freight costs as a direct result of oversupply in shipping capacity should enhance exporters’ profitability

CPO prices upgraded
We expect palm oil prices to rebound in 4Q09, when production is seasonally lower. We expect palm oil prices to continue to rise next year despite a jump in South American soybean harvest. Soybean oil stocks are expected to decline yo-y by September CY10F , as crushing of soybeans are expected remain flat on still declining US livestock population. Taking cue from lower soybean oil inventory This year’s drought had cut soybean inventory and raised prices – despite a slowdown in demand. Even with anticipated jumps in US and South American soybean harvests in the current season, weak meat consumption is expected to cap any increase in US soybean crushing, which would cause a further reduction in soybean oil stock. Both Oil World and
USDA’s recent forecasts point to a y-o-y decline in global soybean and palm oil stocks by September CY10F. Upside to CPO prices seen We expect palm oil prices to rebound in 4QCY09 to between RM2,400 and RM2,500/MT. Low carryover stock, earlier supply-side setbacks, and resilient edible oil demand, had prompted us to cut our ending inventory assumptions for both palm and soybean oil. This may not affect this year’s assumed average of RM2,300/MT (YTD price is RM2,253), but our longer term price expectations are raised by 8.5%- 11.5% as a result.
The following factors are preconditions that support our view:

1. Strong Chinese appetite. The drought earlier this year has increased dependency on US soybean crop, which will be harvested between September and November (some delay expected). According to USDA, as at 10 September, export commitments for US new crop had jumped by 92% y-o-y to 630m bu., mostly to China.
2. Soybean oil inventory is not rising. Both USDA and Oil World now expect global soybean oil inventory to decline y-o-y by end of September CY10F. Much of the anticipated jump in South American and US soybean harvests this season will used to replenish depleted stocks, instead of being crushed for soybean meal.Demand for soybean meal has dropped this year and is expected to remain weak next year, as US livestock population is still declining due to negative feeding margin since May 2007, easing beef demand, and a drop in US pork exports since the H1N1 virus outbreak in April.
3. Palm oil inventory will fall next year. Lower-than expected palm oil production in 3QCY09 (cut in fertilizer application in 2H08 could be partly to blame) means possible lower carryover stock by the end of this year. We expect next year’s production to grow by 1.9m MT or 4.3% y-o-y, assuming Indonesian production target of 22.2m MT is unaffected by El Nino. In this scenario, we expect global palm oil inventory to decline by 0.6m MT to 6.7m MT by end of next year. Both Oil World and USDA also expect global palm oil inventory to decline yo-y by 0.5m MT and 0.1m MT by September 2010F, respectively.
4. Economic recovery. CY10F and CY11F crude oil prices imputed in our CPO price projections have now been raised to US$57 and US$75/bbl, respectively, on the back of anticipated economic recovery and weakening USD. We also raised our long-term crude oil price assumption to US$90/bbl from US$80/bbl previously.
5. Biodiesel back in the picture. After dropping by 43% this year, biodiesel consumption is expected to rise by 13% next year (USDA Oil Crops Outlook). Under the Renewable Fuel Standard (RFS2) published in May 2009, the EPA would set the mandatory blend by 30 November each year based on gasoline and diesel volume projections from the Energy Information Administration's (EIA) Short-Term Energy Outlook. As gasoline demand recovers, so too will demand for biodiesel.

We note that the recent drop in soybean prices in USD terms is even more pronounced in Brazilian real due to the weak USD. It also implies that Brazilian farmers may not have incentive to plant more soybean crop, unless they get sufficient return. Hence, the prospect of a jump in Brazilian soybean planting could have downside risks if soybean prices continue to decline.

Public Bank Target Price At RM12.20

Second to none

• Beneficiary from adoption of FRS 139 due to excessive regulatory general provision reserves
• Well positioned to benefit from recovery in consumer loan growth coupled with excellent asset quality and high ROEs.
• Higher valuation justified. Buy (TP raised to RM12.20) for resilient earnings, ROEs and dividends.

Beneficiary of FRS 139 adoption. Public Bank would be a key beneficiary from the adoption of FRS139 as it would save credit costs for general provisions (GP) going forward. As it is now, GP reserves amount to RM1.8bn, of which at least half can be written back as it can be considered excess provisions given Public Bank’s asset quality position. The write-back would be made into retained earnings, which would mean some upside to Tier-1 capital. What remains uncertain is whether the amount written back can be distributed to shareholders.

Excellent proxy for consumer recovery. Public Bank still stands out as an excellent proxy of a quality bank. Loan growth still outpaces industry average while asset quality is still the best among peers. A surprise could come from a new non-interest income stream emerging from its tie-up with ING, which was sealed in 1Q08. Currently, it is still negligible, but over the next 5 years, it is estimated to comprise at least 10% of total fee income, giving it some latitude to diversify its reliance on unit trust sales and management fees. We have raised earnings by 1-6% to account for higher loan growth and non-interest income.

Higher valuation justified. While valuations have surpassed +1SD of its historical 5 year mean, we believe Public Bank still remains a core holding for its superior qualities, chiefly asset quality, ROEs and dividends. ROE profile is expected to improve with less capital intensified
non-interest income activities and cost savings from FRS 139 implementation. There is a possibility of higher dividends from capital savings when Public Bank paid share dividends last year. Buy with TP raised to RM12.20 based on the Gordon Growth Model equivalent to 3.8x FY10 BV.

HWangDBS Raising IJM Corp Target Price To RM8.70

Revival from private sector a bonus
-Highest probability of replenishing orderbook
-Revival from private sector, stronghold of IJM
-BUY, raising PT to RM8.70 (ex-bonus RM6.00), based on SOP

Highest odds for new orders. Of the 3 larger contractors, we are most confident of IJM replenishing its order book given its modus operandi of bidding for a large pool of contracts with a fair mix of local, foreign, public and private sector jobs. Its recent RM327m contract win in India brings YTD contract wins to RM1.3bn. This makes it less reliant on the mega projects where timing is more uncertain. IJM’s orderbook of RM4.3bn (ex-Besraya) is evenly distributed locally and overseas. Locally, IJM has more than 50 on-going jobs.

RM2bn new order win forecast a done deal. Since providing this forecast, IJM has already clinched RM0.8bn in new orders, leaving just another RM1.2bn until FY10. We understand most of the contracts being negotiated are relatively secure and are going through the required formalities before coming to fruition. We suspect these contracts are for a RM700m hospital in Putrajaya, balance RM600m balance works for Al-Reem Island and RM649m Besraya contract. There is room for surprises as the guidance excludes potential wins from the 3 mega projects.

Revival from private sector. IJM is seeing some revival from private sector jobs from both the commercial and residential side. IJM is the strongest beneficiary from this as it has built a reputation in building Grade A office buildings while it was also the main contractor for luxurious KLCC condos such as Binjai, Troika, Park Seven and more recently, the Grand Hyatt Hotel.
Our top pick, raising PT to RM8.70. IJM remains our preferred proxy for the sector for its cheaper valuations, diversified expertise and resilient earnings.

We raise PT to RM8.70 based on SOP value. 45% of our SOP value (construction and manufacturing) is exposed to the pump
priming story. We advise investors to subscribe for its renounceable warrants issue as the warrants are currently in the money.