Invesment Strategy 2012

8/3/2019 Invesment Strategy 2012

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EXECUTIVE SUMMARY

A NEUTRAL outlook. We have a Neutral outlook on the Malaysian market going into 2012 as the combination o

uncertain growth outlook in the US and Asia coupled with a possible recession in Europe cloud the prospects fo

strong earnings growth locally. While we see Malaysia likely to avoid slipping into a recession, the deficit reductio

exercises undertaken by Eurozone economies may well tip their slow growing economies into a recession. In an

case, for Malaysia, we see earnings growth slipping to between mid single digits and low double digits, a pale shado

of what it was in 2006, 2007 and 2010 when earnings growth came in between 20 to 30%. Newsflow on development

surrounding the handling of sovereign debt in Europe and the US will also likely lead to volatile markets worldwide. A

such, in the short term, we are faced with volatile markets which will likely give way to a dampened economic outloo

We advise investors stay cautious into mid 2012 and focus on Defensive sectors such as Consumer, TelcoHealthcare and Media. Our 2012 KLCI fair value is 1466 pts based on a PER of 13.5x or 1 standard deviation below

the historical average of 16.6x given the uncertain market conditions.

BUT opportunities to TRADE. That being the case, despite our overall Neutral stance, the volatility expected shou

give rise to plenty of Trading Opportunitites. We advise investors to Trade on Cyclical sectors such as Banks, Oil &

Gas and Construction as the market dips or rallies strongly. The trading strategy to adopt is:

x Buy when the KLCI falls towards the 1300 pts level as the broader market then offers a 10% upside to ou

2012 fair value. As we do not see Malaysia entering into a recession, we do not see an earnings contractio

and value should emerge closer to 1300 pts. A combination of still positive earnings growth, low foreig

shareholding and the Economic Transformation Programme should mean Banks (leading the economy

O&G and Construction (beneficiaries of the ETP) will present good entry points at that level of the market.

x Sell when the KLCI rises towards the 1500 pts level as the market will be overpriced then. We still se

fundamentals remaining weak. Although the 3Q2011 earnings season may have seen a slight improvemen

q-o-q, most of the improvement was focused on the Small caps where analysts have had time to pare dow

forecasts. On the flipside, Big caps continued to slide with the potential for more downgrades in the coming

quarters.

7 sectors to focus on. Given our generally defensive outlook, investors are advised to focus on the Consumer, Telco

Healthcare and Media sectors as mentioned above. At the same time, when trading opportunities present themselve

Banks, O&G and Construction should come into play. To note that we are only Overweight on 7 sectors, Neutral on

and Underweight on 2 sectors.

Top Buys reflect this overall strategy. In terms of our Top Buys, they reflect this overall strategy. 6 of our Top Buy

namely Axiata, PetGas, Telekom Malaysia, QL Resources, KPJ Healthcare and Media Chinese reflect our Defensiv

Strategy while 2 others are from our Alternative Defensive Buys namely AirAsia and TRC Synergy. While coming from

the cyclical sectors of Transport and Construction, we believe these 2 companies can leverage upon falling fuel price

and MRT contract certainty to warrant defensive investment in 2012. Finally, we choose Maybank and Dialog as ou

Top Trading Buys to round off our Top 10 for 2012.

TOP BUYS BIG CAPSStock Price Target Mkt Cap Volume PER (x) FY0 FY1 Rel. Performance % P/NTA Rat

RM RM RMm '000 FY1 FY2 ROE % DY % 1-mth 3-mth 12mth (x)

Maybank 8.25 9.60 61,693.5 8,695.2 12.5 12.1 14.7 7.6 -0.6 -4.9 -5.6 1.7 BU

Axiata 4.83 5.60 40,885.4 15,357.4 14.8 13.5 9.6 3.9 -2.6 -2.9 9.5 2.1

Petronas Gas 13.22 15.52 26,040.0 1,161.9 18.2 17.4 17.5 3.8 0.8 0.7 23.0 2.8 BU

TelekomMala sia

4.23 5.15 15,132.4 8,294.1 27.9 23.3 16.4 0.1 -0.8 5.9 40.4 2.2 BU

AirAsia 3.65 4.57 10,139.3 12,641.1 11.6 9.6 29.4 - -3.7 10.0 43.4 2.6BU

TOP BUYS MID / SMALL CAPSStock Price Target Mkt Cap Volume PER (x) FY0 FY1 Rel. Performance % P/NTA Rat

RM RM RMm '000 FY1 FY2 ROE % DY % 1-mth 3-mth 12mth (x)

Dialog Group 2.44 3.66 4,881.5 8790.0 25.5 21.5 28.7 1.4 -2.9 -5.3 66.3 6.7 BU

QL Resources 2.95 3.62 2,454.4 584.7 17.5 14.9 16.5 1.5 3.1 -2.1 4.7 2.9 BU

KPJ Healthcare 4.20 5.21 2,443.4 908.0 19.3 15.9 20.7 3.4 0 -6.1 17.1 2.8 BU

Media Chinese 1.10 1.47 1,856.0 694.9 10.0 9.3 14.4 6.0 8.8 -1.4 30.8 1.8 BU

TRC Synergy 0.62 0.76 287.7 886.4 13.9 9.1 5.5% 2.1% (3.7) 4.4 9.5 0.9 T. B

Share price as at 18 November 2011


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Chris Eng+603 9207 [email protected]

MARKET OUTLOOK

The Research Team+603 9207 [email protected]

2011 Review A Year of Two Halves

The good half. While the first half of the year was marked by volatility, especially in 1Q, thing

generally did not look as bleak as in the second half. During that half-year period, there was muc

optimism that the global economy would grow faster than in 2009. All this while though, th

European debt crisis was at the top of everyones mind. During this period, Malaysias FBM KLC

and some other Asian market benchmarks such as the Jakarta Composite Index (JCI) and th

Philippines Composite Index (PCOMP), touched all-time highs fuelled by optimism of improvin

growth global prospects.

Inflation, Arab Spring led to a shaky start. The KLCI got off to a rally at the start of the year bu

fears of rising inflation in East Asia quickly sapped the strength of the run-up. Chinas 4Q201

economic growth of 10.3% raised fears that its runaway economic growth would be followed by

hard landing. Aggravating these fears was the move by the Chinese government in February t

move up its benchmark interest rates. Soon after, the attention shifted to the Middle East, where w

saw the Tunisian government being toppled first, followed by the fall of the Egyptian governmen

Revolts spread to Libya, Yemen, Syria, Algeria and Bahrain, raising concerns over the overa

stability of the Middle East. Even as trouble started to brew in that region, Japan was hit by a tripl

disaster in the form of the Tohoku earthquake, tsunami and subsequent nuclear leakage at th

Fukushima power plant. This rattled the KLCI all the way until the end of March, after which th

local bourse took off with a bang in April as local factors began to have more bearing on thbenchmark index. However, selling intensified ahead of the Sarawak state elections, where th

Opposition parties made some headway. After this blip, the KLCI started to pick up strength in Ma

as banks raised interest rates while RHB Capital shares shot up on talk that CIMB and Mayban

were vying to take over the group. Despite the uncertainties in Europe, the first half general

ended on a positive note, with the KLCI charting new highs closer to the 1,580-pt level.

Figure 1: Key events and KLCI movements in 1H2011

1,420.00

1,440.00

1,460.00

1,480.00

1,500.00

1,520.00

1,540.00

1,560.00

1,580.00

1,600.00

3-Jan 10-Jan 17-Jan 24-Jan 31-Jan 7-Feb 14-Feb 21-Feb 28-Feb 7-Mar 14-Mar 21-Mar 28-Mar 4-Apr 11-Apr 18-Apr 25-Apr 2-May 9-May 16-May 23-May 30-May 6-Jun 13-Jun 20-Jun 27-Jun

4 - 5 Jan. Optimism atyear start from strong

economic numbers inSingapore and the US

21 - 25 Jan. China'seconomy grew

10.3% in 2010raising fears of

inflation

2 Feb. Gamuda -MMC awarded PDP

role in MRT

10 Feb. Chinaraised interest

rates by 25 basispts

14 Feb. EgyptianPresident Hosni Mubarak

resigned, easing fears onMiddle East unrest

22 -24 Feb. Continued fearsin theMiddle East as Libyan and Bahrain

credit ratings were cut and LibyanPresident said that he would not

resign

4 Mar. DJIA rallied as oil pricesdeclined and labour market

improved in the US. First mentionof multi-billion investment in

Pengerang

11 Mar. 9.0 magnitudeearhtquake in Sendai,

Japan followed by tsunamiand nuclear leakage

18 Mar. Japan appearscloser to resolving its nuclear

issue. UN Security Councilapproves No-Fly zone over

Libya

30 Mar - 1 Apr.Buying ahead of

Invest Malaysia KL

11 - 12 Apr. Selling ahead ofthe Sarawak State Election.

IMF cuts US and Japan growthforecasts

11 May. Malaysian banksraise their benchmark

lending rates by 30 basis ptsafter BNM raises the OPR by

25 bps the previous week

31 May. Government raisesElectricity and Gas prices,

boosting TNB's profits. CIMB andMaybank both get BNM approval

to negotiate with RHB on merger

13 June. Greecebranded with lowest

credit rating by S&P

28- 29 June. Signsthat the European debt

crisis can be resolved.Strong debut by MSM

Source: Various


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The Bad Half.Although other markets continued to soar into the month of July, the KLCI suffered

setback due to a purely local development - the Bersih 2.0 rally - which sought to push for politic

reforms. The backlash from the events surrounding the rally set off a series of downgrades by

number of research houses, leading to the KLCI lagging its regional peers in July. Nonetheless, th

hammer hit the local bourse particularly hard in August and September as the index plunged t

levels last seen in July 2010. As at the time of writing, market conditions remained shaky an

uncertainties still clouded developments in the US and Europe.

European concerns drive the market down. The bear market in 2H2011 was primarily driven b

resurfacing concerns over the European sovereign debt crisis. While concerns over the finances

Ireland and Portugal seemed to have eased temporarily, Greece took over the spotlight when became clear that the nation was teetering on the brink of insolvency. With its bondholders cajole

into accepting a 50% haircut and a new unity government formed under new PM Luca

Papademos, Greece may have avoided bankruptcy this year but the future risks remain very high

The focus then shifted in quick succession to Italy, France and Spain, claiming the incumben

governments of both Italy and Spain. At the time of writing, there did not appear to be a clea

resolution of this issue as yet, and as we discuss in the following sections, there appears to be ve

real risk of Europe falling into recession. On the other side of the pond, political issues fuelled fear

in the US markets. As US lawmakers only managed to hammer out a very last minute agreement t

raise the debt ceiling in August, Standard & Poors downgraded the US long-term credit ratin

citing political risks. Since then, the US had somewhat stayed out of the limelight until recently

when the congress super-committee failed to reach an agreement on how to achieve USD1.2trn i

US budget cost savings. Over in Asia, the headlines had been less dramatic, other than that Asia

nations efforts to combat inflation were now more fairly balanced, with a slight bias toward

spurring faltering economic growth. That said, the global markets and the KLCI continued to b

plagued by uncertainties towards the end of 2H2011, a scenario that we foresee would persist we

into 2012.

Figure 2: Key events and KLCI movements in 2H2011

1,200.00

1,250.00

1,300.00

1,350.00

1,400.00

1,450.00

1,500.00

1,550.00

1,600.00

1,650.00

01/07/2011 12/07/2011 21/07/2011 01/08/2011 10/08/2011 19/08/2011 02/09/2011 13/09/2011 23/09/2011 04/10/2011 13/10/2011 24/10/2011 03/11/2011 15/11/2011

6 Jul. Govt announcesStrategic Reform Initiatives as

next step of the ETP

12 -18 July. Bersih rally. Fearsthat the European debt crisis

will escalate. Rumours ofshareholding cap on

Indonesian banks sparksCIMB sell-off

5 - 9 Aug. Downgradeof US long term credit

by S&P to AA+ leadingto major global sell off

15 Aug. Decline in USjobless claims and

subsequent marketrebound

26 Aug. Sellling aheadof long Hari Raya break

2 Sep. Rebound afterlong Raya break after

12 Sep. Top GermanOffical in ECB resigns in

protest to bond buying

19 Sep. Italy's creditrating cut by S&P. Sime

Darby sold down onrumours that it will

have to do a GO onE&O

12 Sep. Top GermanOffical in ECB resigns in

protest to bond buying

22 - 26 Sep. US FedReserve cautions on

outlook. Also does the"Twist' by selling short

term debts and buyinglong term debts. Investors

worldwide unconvinced

that this will help 29 Sep. Greek PM wonparliamentary backing

for a tax to reducedeficit

3 Oct. German financeminister opposes

moves to increase thescale of the European

rescue fund

6 Oct. US Fed chairmanindicated that he will push

forward with furtherexpansion of monetary

stimulus if needed

11 - 12 Oct. French andGerman leaders pledged a plan

to support European banks.China's state investment fund

begins buying shares in thecountry's top 4 banks

27 - 28 Oct. Europeanleaderscajole bondholders

into accepting a 50%haircut on their Greek

bonds. Also plan toleverage up the European

rescue find to EUR1trn.

1 Nov. Italian bond yieldsrise above 6%. Greece PM

decides to call for areferendum on the bailout

package received. Latercancelled

10 - 14 Nov. Market swingsdue to uncertainty on

whether Greece and Italywill be able to form new

Govts which eventually theydo

17 - 21 Nov. Italian bondyields rise above 7%. US

congress supercommitteefails to agree on USD1.2trn

of cost savings

Source: Various


4/16

Key themes in Malaysia. In 2011, particularly 2H11, the KLCI was driven largely by global factor

not for a lack of local market-moving headlines, but because these were overshadowed by the risk

posed by global developments. In the broader context of the Malaysian market, we identify fiv

themes that were prevalent in 2011, namely:

x The ETP. Announcements and projects continued to be rolled out under the Economi

Transformation Programme (ETP), which was unveiled in October 2010. Thus far, 9

projects have been launched under the ETP, aimed at attracting planned investment

totalling RM177bn in the coming years and providing jobs for over 389,000 people. Th

key projects announced under the ETP include the MMC-Gamuda joint venture (JV

taking on the role of the Project Development Partner (PDP) for the KL MyRapid Trans

(MRT) project and MRCB-Ekovest doing the same for the River of Life project. ACMarket-listed companies also took the opportunity to jump onto the ETP bandwagon b

announcing ETP-related projects.

x Upcoming general election. Although the PM has refuted speculation that the Gener

Election will be held in 2011, there were plenty of signs that the polls would be held soon

likely in 1H2012. These include the continuing provision of subsidies in Budget 201

although there was a hike in gas prices and electricity rates in mid-2011. Other indication

are the postponement of the 6% telco service tax pass-through to consumers and a

election-friendly budget that incorporated a pay hike for civil servants, cash payouts fo

lower income households and school children as well as the abolishment of school fees

The PM also proposed greater civil liberties for Malaysians, including proposals to abolis

the Internal Security Act (ISA).

x Government still very involved in the private sector. The Government did take step

towards fulfilling its promise of reducing its participation in the private sector such as bdivesting its stake in Pos Malaysia to DRB-Hicom. However, its other corporate move

contradicted this, making it look like the Government was taking a one step forward, tw

steps back. These moves included Sime Darbys acquisition of a 30% stake in E&O an

PNBs General Offer for SP Setia shares, which drew criticism from certain quarters. Th

share swap proposal between shareholders of AirAsia and Malaysian Airline System

(MAS) also did not appear to be in sync with the Governments promise reducing i

involvement in the private sector.

x Privatisations and Listings. The number of privatizations from the Malaysian stocmarket still ran high in 2011. After the high-profile privatizations in 2010 that include

MEASAT, Tanjong, Astro, Sunrise and EONCap, the privatization exercises in 201

tended more towards the smaller caps. The companies that were privatized or thos

which received takeover offers included: (i) Maybank taking over Kim Eng, (ii) MT

Capital, (iii) Latexx Partners, although this was eventually abandoned, (iv) Berjaya Reta

(v) Mamee-Double Decker, (vi) RHB Capital merging with OSK Holdings, (vii) the merge

of Kencana Petroleum and SapuraCrest, (viii) CI Holdings selling Permanis to Asah

(ix) Eng Teknologi, (x) The sale of ExxonMobil units to San Miguel, (xi) EPIC, (xii) Sindora

(xiii) Ranhill, (xiv) DXN, (xv) Fututech, (xvi) Leader Universal, and (xvii) Hirotako

Nonetheless, there were also prominent listings in the form of MSM, Bumi Armada an

Pavillion REIT.x O&G news flow. With the O&G sector being the largest among the 12 National Ke

Economic Areas (NKEAs), it was understandable that news flow for this sector wa

substantial. These noteworthy developments were the award of a marginal oilfiel

development contract to a consortium involving Petrofac, Kencana and SapuraCrest, a

well as a small field development contract to a consortium comprising Dialog, ROC O

and Petronas Carigali. Petronas also unveiled its USD20bn RAPID project in Pengeran

Johor, comprising refineries and petrochemical plants. Some parties could not resis

jumping on the bandwagon by announcing some somewhat questionable projects, suc

as Gulf Asian Petroleums refinery and storage facility, Sabio O&Gs marginal oilfiel

development and PanelPoints 8,000km Trans-Asian pipeline. Nonetheless, withou

Petronas endorsement, none of these projects seemed to have taken off at this moment.

2 line-ups of Top Buys. We unveiled our Top 10 Buys for 2H2011 in early June. These include

names such as Maybank, CIMB, Axiata, UEM Land and AirAsia, as well as Kencana Petroleum

QL Resources, KPJ Healthcare, Media Chinese and KimLun Corporation. However, when w

downgraded our call on the KLCI to NEUTRAL on 8 Aug 2011, we also unveiled a new set o

Defensive Top Buys. It is these Top Buys that we benchmark against the KLCI for 2H2011, seein

six of our defensive 10 Buys outperforming the index, namely Telekom Malaysia, Petronas Gas

Guinness, Supermax, QL Resources and TRC Synergy.


5/16

Figure 3: Performance of OSK Researchs Top 10 Buy calls for 2H2011

70

75

80

85

90

95

100

105

110

KLCI

Axiata

PetGas

TM

Guiness

AirAsia

KPJ

QL Resources

Media Chinese

Supermax

TRC

Source: Bloomberg


6/16

2012 Outlook: Be Nimble in the Way of the Market

Volatile, to say the least. Moving into 1H12, we see global equity markets continuing to be ver

volatile, with Malaysia unlikely to escape this volatility. Swings of 1% in the KLCI will be common

Nonetheless, we do not see a looming recession for Malaysia nor the market returning t

recession-level valuations. Instead, value is likely to emerge in the KLCI at some point. In thi

reports remaining sections, we will identify a market strategy that is nimble enough for investors t

reap profit from the volatility.

Figure 4: OSK Researchs expectations of the KLCIs trend in 1H2012

1,250.00

1,300.00

1,350.00

1,400.00

1,450.00

1,500.00

1,550.00

1,600.00

1,650.00

3-Jan-11 25-Apr-11 10-Aug-11 1-Dec-11 15-Mar-12 28-Jun-12

Source: OSK Research

Answer to extreme volatility lies in Europe. The main reason we see continuing volatility in th

Malaysian market is the uncertain outlook for Europe. While our house view is for the US an

Malaysia to avoid a recession, things look a lot worse in Europe. In the short term, the sovereig

debt crisis will continue to plague the Eurozone region while in the medium term, the more pressin

issue is the likelihood of a recession. With countries including Greece, Portugal, Spain and Ital

imposing austerity measures to bring their debt levels under control, it is likely that economi

growth will falter given the already low economic growth rates over the past few years. As such

these countries are finding themselves caught between a rock and a hard place if they stimulatthe economy to avoid recession, they would risk facing higher debt levels and rising bond yields a

investors flee, but if they tighten their budgets to cut debts, they run the risk of their economies

previously supported by pump-priming slowing sharply. Negative news such as these are likely t

weigh on markets for some time.

Figure 5: European countries struggle to contain their debts (Budget Deficit to GDP

%)

-20

-15

-10

-5

0

5

Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010

Germany

France

Spain

Greece

Italy

Source: Bloomberg


7/16

Figure 6: But belt tightening may swing their already low growth rates into

recession (GDP y-o-y growth %)

-10

-8

-6

-4

-2

0

2

4

6

8

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Nov-09

Mar-10

Jul-10

Nov-10

Mar-11

Jul-11

Germany

France

Spain

Greece

Italy

Source: Bloomberg

What should the KLCI be valued at? 1,466 pts. While the KLCI has traditionally commande

an average 16.6x PER, it has ranged between 13x19x PER during non-recessionary periods ove

the past 11 years. It was only during the 2008/2009 recession that the KLCIs PER dropped belo

10x. Given that: (i) we do not foresee a recession for Malaysia in 2012, but with many glob

market uncertainties arising from Europes worsening debt crisis, and (ii) the fact that there is stsome earnings growth uncertainty in Malaysia, we believe that it is wise to be conservative an

value the market at 1 standard deviation below mean, which gives us a PER of 13.5x. Applying th

PER to 2012 KLCI earnings gives us a Fair Value (FV) of 1,466 pts for the index. Even if earning

growth were to dip in the coming months, this conservative valuation allows us to maintain th

1,466-pt FV, with an earnings contraction of up to 8.9%, whereby 1,466 pts would be equivalent t

a PER of 16.6x, or the historical average. At 1,466 pts, the KLCI would also be trading at a Price t

Book Value (P/BV) of 1.97x, above the historical average of 1.83x since 2000 but close to 2.0

since 2006. We believe the 1,466-pt FV adequately incorporates any anticipated market volatili

over the next six months and at the same time capture a potentially robust economic recovery

late-2012.

Figure 7: KLCI PER has averaged 16.6x since 2000

0

5

10

15

20

25

30

35

Feb-00

Aug-00

Feb-01

Aug-01

Feb-02

Aug-02

Feb-03

Aug-03

Feb-04

Aug-04

Feb-05

Aug-05

Feb-06

Aug-06

Feb-07

Aug-07

Feb-08

Aug-08

Feb-09

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

PER

Average

-1 std dev

+1 std dev

Source: Bloomberg, OSK Research


8/16

Figure 8: KLCIs PER generally between 13x19x except during recessionary

periods

0

500

1000

1500

2000

2500

Actual Index

p/e of 22.00

p/e of 19.00

p/e of 16.00

p/e of 13.00

p/e of 10.00

Source: OSK Research , Bloomberg

Figure 9: KLCIs P/BV averaged about 2x since 2006 but 1.83x since 2000

0

0.5

1

1.5

2

2.5

3

PBV

Average

+1 std dev

-1 std dev

Source: Various

What our Headline Numbers show A slowdown. From the headline numbers estimate

directly by our Equities Research team, we see a general slowdown in earnings growth, CPO

prices and loans growth for 2012 compared with 2011. This is understandable owing to the mor

challenging global macro environment for next year. To put things in context, we look at the KLC

earnings growth. For 2012, our forecast of a y-o-y growth of 10.8% is less than half the growt

experienced in 2006, 2007 and 2010. As such, while we do not see a recession next year, th

slowdown in the earnings growth rate should have an impact across-the-board. In addition, w

believe that our earnings forecasts still remain somewhat bullish at this point in time, and there ma

be room for earnings downgrades in the coming quarters.

Figure 10: Current and previous forecasts on headline numbers from Equity Research Team

Headline Numbers Current Previous Current PreviousGDP growth (%) 5 5 5.2 5.2

Yr end Ringgit level to US$ 3.15 3.15 3 3

Average Oil Price (US$/bbl) 85 - 95 85 - 95 90-100 80 - 90Average CPO Price (RM/tonne) 3200 3200 3000 2700KLCI earnings growth (%) 13.6 14.6 10.8 11.4KLCI fair value/year end target 1533 1533 1466 1466

Loans Growth (%) 11.5 11.5 8.5 8.5

2011 2012



9/16


10/16

Investment Strategy 2012

2. Consumer Another safe haven business. Food & Beverage companies should

benefit from stable to falling raw material prices, which will lift margins, while Retail

companies should not see a significant drop in revenue, unless the countrys

unemployment rate rises. We observed this phenomenon in Malaysia in 2008/2009

and more recently in 3Q11 in the US, where retail sales remained strong despite

weaker consumer sentiment.

3. Healthcare Within the Malaysian context, the demand for private healthcare services

remains strong. Even on a global scale, demand for healthcare is sustained even

during economic downturns. There are two ways to participate in this sector - either

through domestic healthcare providers such as KPJ Healthcare and Faber, or through

rubber glove companies such as Supermax, which caters to the global healthcare

industry.

Among our defensive stock calls, the Top 10 Defensive Buys are namely:

1) Axiata (FV: RM5.60) The only listed Malaysian telco company that also offers a

regional footprint in Indonesia, Singapore, India, Bangladesh, Sri Lanka and Cambodia.

Still the cheapest Malaysian telco company at 13x PER.

2) Petronas Gas (FV: RM15.52) Natural gas processor, importer and transmitter in

Peninsular Malaysia with 80% of profits guaranteed by its mother company, Petronas.

Growth catalyst in the form of new LNG import terminal in Melaka.

3) Telekom Malaysia (FV: RM5.15) Incumbent fixed-line telecoms provider in Malaysia

Making waves via its new high-speed Internet offering Unifi that is acquiring new

subscribers at a rate of 1,000 per day. Highest yields at 1012%.

4) Guinness Anchor (FV: RM13.58) Broadest brewery offering translates into defensive

earnings in the event of an economic slowdown. Decent yields, coupled with the 2012

growth potential coming from the UEFA 2012 football tournament.

5) AirAsia (FV: RM4.57) Largest Low Cost Carrier (LCC) in Asia; continues to

outperform its regional airline peers. Potential IPO of regional associates and benefits

from a partnership with MAS will be the catalysts for 2012.

6) KPJ Healthcare (FV: RM5.21) Largest private hospital provider in Malaysia, which is

growing its hospital chain by another five hospitals from the current 21 over the next

three years. Growth areas are medical tourism and retirement care.

7) QL Resources (FV: RM3.62) Largest manufacturer of surimi in ASEAN and second

largest producer of eggs in Malaysia. It is replicating its business in Indonesia and

Vietnam over the next 12 months.

8) Media Chinese International (FV: RM1.51) Largest publisher of Chinese language

newspapers in Malaysia. To benefit from falling newsprint prices in 2012.9) Supermax (FV: RM5.50) Second largest rubber glove maker in the world, which wil

benefit from a fall in latex prices, while demand remains resilient.

10) TRC Synergy (FV: RM0.76) Leading Bumiputera contractor. Shortlisted for various

packages in the KL MRT project and should be assured of some contracts over the next

12 months.

Figure 13: DEFENSIVE sectors to consider amid market volatility

MEDIA

OTHERS

- Drop in newsprint prices

good for print media

players

Utilities

Infrastructure

CONSUMER

- Similar to the US, sentiment

dipped in 2009 but not spending

- Drop in raw material prices willhelp F&B margins

TELECOMS

HEALTHCARE- Healthcare demand is

recession resilient- Drop in latex prices good for

glove makers

- Safe Havens

- Resilient Earnings

- Good Div Yields

between 5 7%

Transport



11/16


Figure 14: DEFENSIVE stocks to consider

MEDIA

OTHERS

Media Chinese

Petronas Gas

TRC Synergy

CONSUMER

QL Resources

Guiness Anchor

TELECOMS

Axiata

HEALTHCARE

KPJ Healthcare

Supermax

Telekom MalaysiaAirAsia


While the overall stance is one of DEFENSIVENESS given the expected market volatility, it is

important for investors to stay nimble and be aware of opportunities to BUY when the KLCI falls

towards 1,300 pts and SELL when the index rises towards the 1,500-pt level.

Why should investors SELL? Fundamentals still weak. Based on the financial results

announced up to the time of writing, 3QFY11 earnings continued to be poor. Among the Big

Caps, 27% of the companies had their earnings downgraded vs 22% which were upgraded. In

the Small Caps space, companies fared even worse, with 47% downgraded compared to 14%

upgraded. As such, the Upgrade to Downgrade ratio, while recovering a little to 0.47x versus

0.38x in 2Q2011, is still very weak, and the recent KLCI weakness reflects this. We foresee that

earnings will continue to be weak over at least the next two quarters as we expect Europes

problems to cause ripples and make an impact globally world, and analysts to take some time to

downgrade their earnings forecasts accordingly. As such, in view of the potential for more

earnings downgrades in the upcoming months, investors should be cautious and take profit as

and when markets rally strongly.

Figure 15: 3Q2011 earnings show continued weakness

Upgrade

22%

Maintain

51%

Downgrade27%

Big Caps

Upgrade14%

Maintain39%

Downgrade47%

Small Caps



12/16


Figure 16: The KLCI and UpgradeDowngrade Ratio are converging again

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

1600.00

1800.00

0.00

0.50

1.00

1.50

2.00

2.50

Jan-06

Ratio of Upgrades to Downgrades KLCI

Finally the KLCI trendsinline with the ratio


Why should investors SELL? Historical precedents indicate that weakness should linger

for some time. While we do not see Malaysia entering a recession, it is interesting to note how

the KLCI performed during previous recessions and compare the current market retracement tothe earlier periods of 1998, 2000 and 2008. From the chart below, we can see that the current

retracement has rebounded earlier and stronger than the previous retracements. Assuming only

a 28% retracement this time around or half of the previous retracement in 2008, we could still

see the KLCI falling to around the 1,150-pt level. Nonetheless, we see deep value emerge in the

market should the KLCI fall to 1,300 pts (which represents more than 10% upside to our 1,466-pt

FV), which is the topic of the next section, Why should investors BUY when the market dips?.

Figure 17: The KLCI has fallen far less than in previous recessions

0

20

40

60

80

100

120

Day1

Day13

Day25

Day37

Day49

Day61

Day73

Day85

Day97

Day109

Day121

Day133

Day145

Day157

Day169

Day181

Day193

Day205

Day217

Day229

Day241

Day253

Day265

Day277

Day289

Day301

Day313

Day325

Day337

Day349

Day361

Day373

Day385

Day397

Day409

Day421

Day433

Day445

Day457

Day469

Day481

Day493

Day505

Day517

Day529

Day541

Day553

1998

2000

2008

2011


Why should investors BUY? No recession foreseen. The KLCIs correlation to y-o-y quarter

GDP growth is actually quite close, as seen in the following Figure. As such, given that we do no

anticipate a recession, we should see the eventual recovery of the Malaysian economy in late-201

drive the KLCI upwards. As such, it is better to position now if the market falls towards the 1,300-

level. Note that our 1,466-pt KLCI FV for 2012 is conservative enough, such that even with an 8.9%

earnings contraction in 2012, the 1,466-pt level would imply a 16.6x PER, which is the index

historical average since 2000. Since our 2012 FV already builds in a sufficient buffer, a wea

market would justify bottom-fishing by investors given the recovery expected in late-2012.

.


13/16


Figure 18: Correlation of KLCI and y-o-y GDP growth

-100

-50

0

50

100

150

200

KLCI normalised

GDP growth normalised


Why should investors BUY? Foreign investors could boost upside if ETP is done righ

The interesting thing to note about the Malaysian stock market between 2008 till now is that whi

the KLCI almost doubled in value from around 830 pts to 1,590 pts, the level of foreig

shareholding has in no way moved up to the highs set in early-2007 when foreign shareholding i

the Malaysian market stood at 27.5%. Instead, foreign shareholding in Malaysia only hit a recen

high of 22.1% in July. If the Economic Transformation Programme (ETP) is done right, it woul

create a more vibrant economy, which would then lure foreign investors to our market. Given th

significant potential upside in terms of foreign shareholding, we believe our market could see stron

upside as well if this increase occurs over the next few years.

Figure 19: Malaysias foreign shareholding has not recovered to 2007 highs

20.00%

21.00%

22.00%

23.00%

24.00%

25.00%

26.00%

27.00%

28.00%

1Q2007

2Q2007

3Q2007

4Q2007

1Q2008

2Q2008

Jul-08

Sep-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

Sep-09

Oct-09

Dec-09

Jan-10

Apr-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Mar-11

Apr-11

Jul-11

Aug-11

Source: Bursa, OSK Research

Figure 20: The ETP continues to soldier on

0

20

40

60

80

100

120

140

160

180

200

ETP update1

ETP update2

ETP update3

ETP update4

ETP update5

ETP update6

ETP update8

ETP update9

Cumulative Project Investments (RMm) Cumulative no. of projects

Source: Bursa, OSK Research


14/16


So What should investors TRADE? Banks, Oil & Gas and Construction sectors. Given th

volatility of the market, and noting that opportunities to both Buy on Weakness and Sell on Strengt

will likely emerge, what then should investors trade when the opportunity arises? We believe th

best vehicles in such a situation would be the highly cyclical sectors of Banking, O&G an

Construction. For Banks, the financial sector tends to lead the broader economy, and as and whe

the European sovereign debt crisis blows over, there should be a general recovery in banking stoc

prices. For O&G and Construction, given the ETP emphasis on the O&G sector (the largest of th

NKEAs) and on Greater KL (with the prospects of more construction projects), we view these tw

cyclical sectors more positively compared with other cyclical sectors such as property o

technology. As for what can be bought or sold in the corresponding sectors, we advocate:

1. Banks

a. To SELL. CIMB and AMMB, especially CIMB as valuations are still notcompelling although the group has underperformed the broader market. The

stock may be trading at its 6-year historical average mean valuation of 1.84x,

after having de-rated by 24.6% over the past four months but we note that it

traded at a trough valuation of 1.12x P/BV in the recent 2008/09 financial crisis.

Although we do not expect valuations to de-rate to such levels, we believe that a

-1 standard deviation from mean P/BVs (ie: 1.56x P/BV) would present a more

attractive buying opportunity, which would imply share prices of below RM6.10.

Managements strategy to intentionally slow down growth given its heightened

risk aversion will likely result in further downside risks to immediate to medium-

term earnings delivery. Likewise, AMMBs management has also guided for a

deliberate deceleration of growth in the near- to medium-term given the globa

macro uncertainties. Its upcoming 2HFY12 is likely to be sequentially weaker

owing to the intentional slowdown in growth, coupled with the fact that the

1HFY12 earnings base was artificially augmented by exceptional trading gains

b. To BUY. RHB Capital - Assuming that there is no major deterioration in book

value, a close look at the individual banks P/BVs and their respective FY11/12

ROE forecasts indicates that RHB Capital is the most undervalued in terms of its

current 1.32x FY12 P/BV relative to its sustainable ROEs of 14.4%. The stock

has declined by more than 27% from its YTD 2011 peak after the M&A news with

CIMB and Maybank fizzled out and any further weakness in tandem with the

overall market would present an excellent opportunity to accumulate the stock at

a basement bargain. Hong Leong Bank: We also like HLBank for the longer-term

growth synergies emanating from its recent merger with EON Capital where the

potential to drive sustainable ROEs above the 17% level as set by

management could see its re-rating to 2.1x P/BV vs its current 1.58x. Webelieve that managements guidance of RM400m in total cost and revenue

synergies may have been understated on the side of revenue.

Figure 21: Banks ROE vs P/BV indicate the cheap and the expensive banks

y = 13.77x - 0.4688

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0%

PBV

(x)

ROE

Public Bank

CIMB

Maybank

RHB CapAFG

HLBankAMMB

Source: Company Data, OSK Research


15/16


2. Oil & Gas

a. To SELL. Based on the following chart, Dialog and Kencana Petroleum should

be the top sells among our O&G stocks, with both having the highest beta and

high FY12 PE valuations. However, these are actually our Top Buys in the

sector, with Dialog drawing a recurring income from its tank terminals, which

justifies its high DCF-based valuation, and Kencana possessing potential upside

from the contribution from its Berantai gas field and merger with SapuraCrest.

Instead, O&G stocks which we would recommend a sell on if the market goes up

include MMHE (PER 20x)and Bumi Armada (PER 19x). These two stocks are

not included in the chart because the information on their beta is not available as

both have been listed for less than one year.b. To BUY. Both Coastal and Perdana Petroleum fall into this category. Besides

having attractive valuations (low PE) and high beta, both stocks also offer M&A

opportunities. We believe Coastal has a strategic asset in its Sandakan yard, and

Sabah has the most deepwater activities going forward. Hence, we believe it

would be a matter of time before Petronas or other oil majors tie up with Coastal

to turn its shipyard into a fabrication yard. As for Perdana, we continue to see the

company as a potential candidate for M&A activities, especially with its strong

fleet of high horsepower AHTS vessels which are suitable for deepwater

development, as well as its recent Sarawakian placements.

Figure 22: O&G PER vs beta indicating O&G stocks are cheap and volatile

Alam

Coastal

Dayang

Dialog

Kencana

P. Energy

KNM

Perdana

Tjg Offshore

Wah Seong

0

5

10

15

20

25

0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7

PER

Beta

Source: Company Data, OSK Research

3. Construction

a. To SELL. Hock Seng Lee With still no clarity on the succession plan of

Sarawaks Chief Minister, we think the states jobs flow may be unexciting. For

example, the rural road networks amounting to RM7bn promised earlier this year

have yet to be dished out. We think there is shortfall risk to HSLs RM400m

replenishment target this year. The recently announced 3Q results were also

disappointing.

b. To BUY. GamudaWe remain positive that the Sungai BulohKajang (SBK) lineof the MRT will be awarded next year with the tunnelling works likely in April-

May. In our view, Gamuda (via the JV with MMC) is the only prequalified local

contractor and is definitely the front-runner. Definitely a stock to BUY on

weakness given the high possibility of orderbook inflow via the MRT tunnelling

works. The amount attributed to Gamuda is estimated at RM4bn (based on its

50% stake), which would more than double its orderbook. Gamuda is now

trading at 1312x on FY1213 (July) earnings vs its historical mean of 22x.


16/16

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