Shares Investment Malaysia Edition Issue 21

ISSUE 21

09/11/09 - 06/12/09

OTHER FEATURES

Mixed trends in regional markets No more "free lunches" for credit cards Telco & Construction to benefit from Budget ISSN 1793-7280

PP 14523/03/2010(023784) • MICA (P) 025/04/2009

Uncover the secrets to your wealth ™

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CONTENTS

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Issue 21

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09 Nov - 06 Dec 2009

Budget 2010 was a mixed bag of sweet treats and bitter medicine.

The government also revised its 2009 real GDP forecast to -3% (from -4% to -5% previously) and forecast the economy to grow by 2%-3% in 2010.

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PERSPECTIVE p12

FEATURES

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Mixed Trends In Regional Markets

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Long Opportunities With Futures

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Budget 2010

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A Hit On Consumers

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Construction Zone

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What are Shariah-Compliant Securities?

p18

Economics Mathematics

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Telco, Construction To Benefit From Budget

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Etika International: Storming The Tea Cups

p14 Information in this guide has been obtained from sources believed to be reliable. However, its accuracy or completeness is not guaranteed.

While every precaution is taken to ensure accuracy, the publisher accepts no liability for any error which may arise.

The articles are based on the opinions of the various authors and do not represent the opinions of this publication and/or the opinions of the organisation he/she represents.

In no event is SHARES INVESTMENT liable for all and/or any direct or indirect loss arising from any use or any reliance of any information provided.

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All materials printed in SHARES INVESTMENT are protected under the copyright act. All rights reserved. No part of this publication may be reproduced in any form or by any means without the written permission of the publisher.

Information in the publication should not be taken as offer/ advice to buy or sell securities.

We, our associated companies and / or their officers, directors and employees may own or have positions in securities mentioned in the publication, and may from time to time, add on to or dispose of such securities.

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REGULARS

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Foreign Indices Market Capitalisation Major Trades Most Active Shares

Editor-in-chief Editorial Director Senior Consultant Editor Regional Research Editor Research Editor Research Executives

Translators

Hitting 52-Week High Hitting 52-Week Low Top Gainers Top Losers Lowest P/E Highest Yield Highest Margins Highest ROE Profit & Loss Upcoming Results Announcements Entitlements (cd, xd, cb, xb…)

Executive Director (Business Development)

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Phan Tjun Sern Lew Poh Chan Dr Ho Kah Leong Sang Ah Kew Clement Kan Stephen Chin Aw Jie Sheng David Chung Donavan Lim Lai Wyai Kay Lee Szu Yung Soo Yin Ling Xavier Lim Catherine Mak Choo Ai Loon Yong Chia Win

Christopher Fun

Performance of Recent IPOs

Regional Business Development Manager

S. Krishnamoorthy

Discount to NAV

Sales & Marketing Manager

Clay Foo

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Investment Trust Warrants A-Z Inactive Shares, Warrants & Loanstocks

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Supported by

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• editorial desk •

F

inance Minister cum Prime Minister Dato’ Seri Najib Tun Razak probably had more than a few sleepless nights as he readied Budget 2010 with his team.

The global economy was only just recovering, the fiscal deficit was large, oil & gas revenues were declining and the rakyat was getting restless due to ongoing political intrigue in Perak and Selangor. Kudos to the PM for managing the public’s expectations: such were the fears of tough measures and tough times ahead that when the Budget was revealed, the pain was far less than feared and the goodies tasted all the sweeter!

The PM took the path of populist measures, balanced with an earnest attempt to slash the deficit. The rakyat was given a RM1,000 increase in personal tax relief to RM9,000; another RM1,000 tax relief for EPF contributions and life insurance premiums to RM7,000; and a one-percentage point cut in the maximum individual tax rate to 26%.

On the other hand, he reintroduced a milder form of real property gains tax (RPGT),

to the surprise of many, and slapped on a RM50 service charge for principal credit card ownership (and RM25 for supplementary). Credit card debt is unlikely to vanish overnight, but banks will be fighting hard to retain its cardholders. Will the days of owning decks of cards come to an end or will there be more goodies on offer?

The spectre of fear also lifted from the “sin” industry as gaming, alcoholic beverages and cigarettes were spared this round.

The markets are unlikely to be impacted drastically due to the lack of corporate incentives. Only the property and construction sectors appear to be most affected due to reductions in development spending and the RPGT. The silver lining can be found in a slew of infrastructure projects in East Malaysia and some mega projects in the peninsula.

All things considered, not too bad for a maiden Budget. Find out more in our Budgetflavoured issue this month.

Happy investing!

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11/5/09 2:06:31 PM

Trend spotting text : Benny Lee

Benny Lee is a private trader and chief market strategist for the NextVIEW Group. The NextVIEW Group is a group of companies in the Asian region that provides a leading realtime investment tool for both professional and retail investors. NextVIEW is also a leading Investor Education training provider. For more information, log on to www.nextview.com.

MIXED TRENDS IN REGIONAL MARKETS FBM Kuala Lumpur Composite Index (FBMKLCI): Bearish strength increasing

The market started to move into a correction after Budget 2010 was tabled on Oct 23 as traders decided to take profit.

The FBMKLCI was supported at the technical 1,200-point level before ascending to make a new year-high at 1,270.44 points few days before Budget Day. The benchmark index then fell to 1,236.20 points before settling at 1,243.23 point on Oct 30. Market volume was

relatively lower in Oct. Monthto-month, the FBMKLCI increased 41.15 points or 3.4%.

The index climbed so far from the low in March this year.

The next resistance after 1,230 is 1,300 points. The index has so far reached 1,270 points. The FBMKLCI is still being supported by the shortterm 30-day moving average.

However, momentum indicators like RSI broke below its previous pivot low, indicating increasing bearish strength.

I expect the index to correct further to the crucial

1,200-point support level.

There is still a chance for the FBMKLCI to rally to 1,300 points if this crucial support is not broken. If this support level is broken, the next support would be 1,160 points.

FTSE Straits Times Index (FTSTI): Indicators remain in divergence

The FTSTI managed to test and break the strong 2,700-point resistance level but failed to stay above it in Oct. The benchmark index went as high as 2,739.55

Resistance Support Support

Resistance

Support

Weekly KLCI (left) and FTSTI (right) charts as at 30 Oct 2009 using NextVIEW Advisor

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Resistance Support

Resistance Support

Support

Support

Weekly HSI (left) and DJI (right) charts as at 30 Oct 2009 using NextVIEW Advisor

points and then pulled back to a low of 2,605.10 points before settling at 2,651.13 points.

The market has been in a correction with a slight upward bias for the past three months. It failed to rally despite stronger economic performances in the region and the US. The FTSTI was down 21.44 points or 0.8% from last month.

The market is still in a correction as long as the FTSTI stays between 2,500 and 2,700 points. Despite having a slight bullish direction, the momentum of this direction is weak. The momentum indicators continue to be in divergence against the direction of the index. The 2,700-point resistance level is where profits are likely to be realized and it has to be broken for the market to move higher.

If the FTSTI can break and stay above this level, the next resistance is at 3,000 points.

If the market fails to break this resistance level, the FTSTI may drift lower to the support level at 2,500 points.

Hong Kong Hang Seng Index (HSI): Good support

The Hong Kong market continued its bullish rally after testing and breaking the 21,400-point resistance level. The benchmark HSI then went as high as 22,620 points, the highest since Aug 2008 before pulling back to a low of 21,134 points last month.

The market immediately rebounded and closed at 21,752.87 points on Oct 30.

The optimism in the market is supported by a continuous growth in the China economy and the Chinese equity market has started to rebound after a strong downward correction in August. The Shanghai Composite Index rebounded from 2,642 points in Aug to 3,000 points.

The HSI is currently at the intermediate uptrend support level and a rebound is expected. The index has been supported well in the past few weeks with the momentum indicators showing slight convergence with the index.

The HSI may rally to the next technical resistance at 23,800 points but it must first break the immediate resistance at 22,620 points.

However, the index has to stay above the 21,400-point support level to maintain its bullish momentum. If this support level is broken, the HSI may find the next support at 19,800 points.

US Dow Jones Industrial Average (DJI): Above support level

The US equity market was bullish as increasing prices of commodities and the strengthening of the US dollar pushed the DJI to its highest level in one year. The DJI went as high as 10,100 points after breaking the 9,900-point immediate resistance level.

However, the market pulled back despite the Fed announcing that the 3rd quarter GDP was higher than expected. The price of crude oil has started to decline as well.

(Continues on Pg 8) 5

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Trend spotting

text : Benny Lee

LONG OPPORTUNITIES WITH FUTURES Kuala Lumpur Composite Index Futures (FKLI)

The equity market extended its bullish rally when the FBKLCI made a new year’s high 1,270.44 points and the FKLI went as high as 1,273.50. A correction followed soon after and the FKLI is currently at 1,244.50 points.

The market was again well supported by the 30-day average around 1,200 points early last month and I mentioned that there was a long opportunity at this level. Buying at this level provided a potential

profit of up to 70 points.

The FKLI is now near the 30-day moving average again and it may be time for a trading opportunity. The FKLI is still in a strong uptrend and has well supported by the 30-day moving average since April. The short- to long-term moving averages continue to increase.

The momentum technical indications are somehow weaker than the previous month. Therefore, the momentum of the uptrend in October has weakened. The

RSI and Momentum indicators are lower than their pivot lows. The MACD once again showed a bearish reversal, but at a higher level. The Stochastic indicator shows that the price is slightly oversold.

The FKLI support level is currently at 1,230 points, defined by the 30-day moving average and the uptrend line since April this year and the previous pivot resistance on 23 Sept. The resistance is at this year’s high of 1,270 points.

At 1,244.50 points and be-

Daily FKLI chart as at 30 October 2009 using NextVIEW Advisor

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30-day Moving Average

Low risk trading opportunity

Daily FCPO chart as at 30 October 2009 using NextVIEW Advisor

ing slightly oversold, a long opportunity exists if the FKLI is in a range between 1,240 and 1,245 points. A stop loss can be placed below 1,230 points. The FKLI is expected to rebound to 1,260 points.

The long position can be reversed if the FKLI breaks below 1,230 points with a target of 1,200 points.

Market volatility is important to determine a stop loss.

The more volatile the market is, the bigger stop loss (which also means higher risk) that should be placed. Market volatility remains slightly the same as the previous month: the 14-period Average True Range (ATR) currently reads 11.3 points as compared to 11.5 points in the previous month.

With this volatility, traders

should not put a stop loss lower than 11.3 points and for position trading, a 1.5 times the ATR is more appropriate.

The 1.5x the ATR is therefore 17 points.

Crude Palm Oil Futures (FCPO)

The price of FCPO continues to trade in a sideways range between RM2,070 and RM 2,240 per metric ton.

Traders can continue to trade at these ranges by buying near the lower range and selling at the higher range.

This opportunity presented itself last month when the price of FCPO went as low as RM2,013 and as high as RM2,250. The price of FCPO is currently at RM2,208.

The market did not rally despite re-planting exercises

by producers which would affect the supply of palm oil in the market. Technically, the market is supported well and a rally is expected to reach RM2,400 in the longer term (between three to six months).

The short-term trend has turned slight bullish and is currently supported by the 30-day moving average. The price is currently between the averages of 30 to 90 days and therefore still considered a sideways trend.

However, with stronger bullish momentum, the upside potential is higher. Momentum indicators like RSI, Momentum and MACD have been rising in the past few weeks. The bullish rally is expected to take place if the RM2,240 resistance can be 7

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broken again and the price stays above it.

In the meantime, a buy trading opportunity exists now at current level as it is just above the support level of the 30-day moving average. Lower risk opportunities are between RM2,150 and RM2,180 as the 30-day moving average is currently at RM2,140.

So, it is probably better to wait for the price of FCPO to move to this range before making a trading decision.

For the short term, a profit target is set at the resistance level of RM2,240 and for longer position trading, expect the price to rally to RM2,400.

Stop loss should be placed no lower than the daily trading volatility and this can be determined by the Average True Range (ATR) indicator which measures the average daily range. The 14-period ATR currently reads RM51 and therefore a stop loss should not be lower than RM51.

From the low-risk trading range, a stop loss should be placed at RM2,100. For position trading, a 1.5 times the ATR is more appropriate and it is 75 points. Traders should always place stop loss to protect their capital if their trading decision goes wrong.

To learn more about FCPO trading, you can attend a oneday FCPO trading workshop in Sandakan on 5 Dec 2009 which I will be conducting. For more details, please call Peter at +6019-477 5215.

is no indication of a bullish reversal in the DJI chart but there should be some support at current level. If the market does rebound, it shall test the 10,100-point resistance level again. The crucial support level is now at 9,650 points, derived from the uptrend line and also the 60-day moving

average.

If the market falls below this support level, a further correction is expected and the next stronger support is 9,100 points. There is a valid longer term objective for the DJI at 11,600 points based on an inverted head and shoulders pattern.

(From Pg 5) The DJI closed at 9712.73 points on Oct 30. The DJI was almost unchanged month-tomonth and has climbed 47% from the low in March.

The DJI is currently above the uptrend support level.

Momentum indicators are mixed but indicate that the bulls are still in control. There

31-1231-12-92 92 31-12-93 31-1231-12-94 93 INTERIM

EPS EPS 73.345 – – 984.661 984.661.144 73.345 984.661 .144 1:5 114.797 – 1,110.6 1,110.615.187 114.797 1,110.6 .187 1:2 200.591 200.591 .259 15 1,765.835 15 .259 – – 156.831 156.831 – 1,765.8 1,765.8 *.2*.2

$12.00 $11.00 $10.00 $9.00 $8.00 $7.00

FOR YOUR INFO

Value Investing Value investors are the stock market’s bargain hunters. They often lean toward beaten-down companies whose shares appear cheap when

compared to current earnings or corporate assets. Value investors typically buy stocks with high dividend yields, or ones that trade at a low price-to-earnings ratio or low price-to-book-value.

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Perspective text : Stephen Chin

BUDGET 2010

B

udget 2010 was a mixed bag of sweet treats and bitter medicine.

As expected by analysts and economists, the Budget was aimed at reducing its fiscal deficit ahead of a likely dip in revenues. The government also revised its 2009 real GDP forecast to -3% (from -4% to -5% previously) and forecast the economy to grow by 2%-3% in 2010.

The government plans to reduce its deficit to RM40.5b (5.6% of GDP) in 2010 from the estimated RM51.1b (7.4% of GDP) this year. It expects revenues next year to fall 8.4% to RM148.4b from 2009’s estimated RM162.1b.

To achieve this, operating expenditure is slashed by 13.7% to RM138.3b from 2009’s estimated RM160.2b including cuts in Defence and subsidies. Economists were surprised by an additional cut of 4.5% or RM2.4b in development expenditure.

Nonetheless, this is expected to be partially offset by private finance initiatives (PFI) taking over high-impact infrastructure projects, said May-

bank Investment Bank. These include the development and construction of the Bukit Kayu Hitam Integrated Immigration, Customs and Quarantine Complex, six UiTM campuses and the MATRADE Centre.

The government is also broadening its tax base to boost revenues. Among these measures are the imposition of a RM50 service tax on credit and charge cards; imposing a 5% real property gains tax; privatization of Ministry of Finance-held companies and other viable government agencies; renting out and monetising government assets; and, imposition of RM10,000 per approved permit (AP) on open AP holders.

“Sin” taxes – alcohol, tobacco and gaming – did not feature in the Budget but the Goods and Services Tax (GST) was mentioned, to prepare Malaysians of its inevitability: the government is in the final stages of completing its study on the implementation of the GST and its social impact. The GST will replace the existing sales and service taxes (SST), with exemptions given to low-income groups.

No timeframes were given on its implementation.

To encourage domestic and foreign direct investments in targeted industries and sectors, the government is offering Incentives and allocations.

Maybank IB said the government needs to sustain development expenditure momentum due to the prevailing downside risk to the global economy, especially the US. It is concerned that current fiscal and monetary stimulus packages introduced by those economies would come to an end soon, after driving their respective countries’ rebound.

As for reducing operating expenses, Maybank IB said a key risk lies with the government’s efforts to lower fuel subsidies now that crude oil prices are resurging. “It may test the government’s ‘political will’,” it explained.

SECTORS AFFECTED BY BUDGET 2010

Automotive sector • The government will charge RM10,000 for 9

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every Approved Permit (AP) to Open AP holders, effective 1 Jan 2010.

A portion of this will be channelled to the Bumiputera development fund in the automotive sector. Maybank IB said the move tends to benefit the government more than the industry. “The amount is low and AP holders can easily pass the additional costs to end-buyers. We believe this is an interim solution prior to the revised National Automotive Policy due in Nov,” said Maybank IB. Fuel subsidy scheme to be restructured in early 2010. Maybank IB conjectures that eligibility for the subsidy is likely to be based on engine capacity. This could benefit Proton, UMW, MBM and Tan Chong as consumers could opt for smaller engine capacity cars to tap into the subsidy.

Banking sector • Tax exemption on Islamic banking profits derived from overseas operations, due to expire in Dec 2009 is extended to Dec 2015. The scope is also widened to include overseas operations of insurance and takaful companies. Maybank IB said this is positive for Malaysian banks that have been aggressively acquiring foreign banks, such as CIMB’s Bank Thai, Maybank’s BII in In-

• •

donesia and RHB Capital with its plans to buy Bank Mestika in Indonesia.

“However, we expect the earnings impact to remain small,” it said.

Existing incentives for Islamic finance are extended to 2015.

Service tax on credit and charge cards, withdrawn in 2001, are reinstated.

Each principal card will be charged RM50 p.a. and supplementary cards will attract a RM25 p.a. tax effective 1 Jan 2010.

This is likely to reduce the number of cards in issue but the transaction value per card should rise, Maybank IB said.

Banks would have to compete harder on offerings to retain cardholders. If the banks choose to absorb the tax, it may affect margins. “Maybank has the largest number of credit cards in issue, but Citibank is believed to lead in receivables,” it added. All banks stand to lose, either in cardholders or margins.

Latecomer AEON Credit Services may be impacted in its efforts to grow cardholder base but this may be cushioned by the customer loyalty program it shares with its sister company AEON in the retail segment.

OSK Research said the service tax should have minimal effect on banks as it would reduce credit cost. “In any case, outstanding credit card loans

•

comprise only a small percentage of total bank loans,” it added.

The 5% RPGT may impact loans to the property sector, particularly home mortgages which has been driving system loans growth this year.

As at Aug 2009, loans for residential property made up 27% of banking loans.

Capital market • A second wave of privatization to enable GLCs to operate more effectively and expand their activities. Maybank IB said this may benefit PLCs which have the financial resources to take on the activities.

• Liberalisation of remisier commissions in two stages. Stage 1, effective immediately, sees a flexible brokerage sharing at a 40% minimum for remisiers. Stage 2, starting Jan 1 2010 will see a full liberalisation of commission sharing.

This will spur competition for remisiers and may erode margins of stockbrokers with a large retail base, said OSK Research. However, it is hoped that the higher commissions will encourage remisiers to attract new business and increase retail participation in the stock market.

Construction and Building Materials sectors • The government is re-

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•

•

ducing its allocation for development expenditure by 4.4%. This is mildly negative for the construction sector as the slack can be taken up by the private sector, said Maybank IB. Construction real GDP is expected to grow at a healthy 3.2% in 2010 (+3.5% estimated in 2009). This also sets expectations for more PFI projects in the Tenth Malaysia Plan.

OSK Research added that Malaysian contractors have become less reliant on domestic projects. It noted that the budget appeared to focus on infrastructure development and rural aid in East Malaysia.

Th e r e a r e a t o ta l o f RM34b worth of jobs for the construction sector in the Budget speech, which are related to community and social infrastructure.

This would benefit small and medium-sized contractors and rural development.

Additional major infrastructure jobs in the pipeline (see pg 14).

Healthcare sector • Healthcare service providers offering services to foreign health tourists will enjoy 100% income tax exemption, from the current 50%. Potential beneficiaries include KPJ Healthcare but the industry is still small in Malaysia, said OSK Research.

Power sector • Tenaga Nasional will spend RM5b to implement electricity generation, transmission and distribution projects in 2010. The higher capex may impact Tenaga’s dividends. The RM5b capex differs from management’s previous estimates of around RM4b.

The additional RM1b capex could reduce Tenaga’s gross DPS by up to 12 sen (based on its policy of paying out 40%60% of free cash flow as dividends). Tenaga may also succeed in getting a net tariff hike to fund the additional capex.

Property/REIT sector • Real Property Gains Tax (RPGT) of 5% effective 1 Jan 2010. The decision surprised many analysts.

Maybank IB considered this a slight negative, especially on high-end developers such a Bandar Raya, DNP, E&O, IGB and Sunrise. However overall, housing demand will be relatively intact as individuals can offset this tax with an increase in individual personal tax relief, it said.

OSK Research said the property and construction sectors would be most affected by the Budget, especially the luxury condo segment.

• Iskandar Malaysia. Maybank IB said employment incentives – 15% tax instead of the previous

•

•

26% - will entice more skilled professionals to work there. “It will in turn spur fresh residential and commercial developments in Iskandar Malaysia,” it said.

The government plans to dispose of and jointly develop government-owned land with governmentlinked companies. This could benefit companies with government ties or previous experience such as MRCB. RM1.5b is allocated to promote “green” or environmentally-friendly buildings and provide soft loans to companies that supply and utilise green technology.

Building owners obtaining Green Building Index certification between 24 Oct and 31 Dec will receive tax incentives. Green building developments will enjoy stamp duty exemptions.

OSK Research said the impact is likely minimal in the short-to-mid term as very few developers are developing such buildings. Those that are known to adopt green technology are SP Setia, Sunway City and Putrajaya Perdana.

Telecoms sector • The personal tax relief for broadband subscription is likely to drive broadband take-up, as it makes broadband services more affordable. This should benefit Telekom Malaysia and other telcos.

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Just say it text : Ameer Ali Mohamed

Ameer Ali Mohamed is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.

A HIT ON CONSUMERS

S

tarting next year, there will be no more “free lunches” for owning credit cards even if the issuers continue to waive the annual fee. Cardholders will, on an annual basis, pay RM50 for every principal card and RM25 for every supplementary card held.

This was one of the measures introduced in the 2010 Budget that would affect most of the working population.

Another surprise measure was the re-imposition of a real property gains tax (RPGT) though not in the original form prior to its withdrawal about two years ago.

Many would wonder about the main reason for the annual service tax of credit cards, once introduced in 1996 and removed in 2001. Is it “to promote prudent spending” or to finance government spending, as it was reported that the service tax may rake in more than RM500 million per annum from some 10 million principal and 1.5 million supplementary cardholders?

If the move was to promote

prudent spending, penalizing the working population and housewives for having one or two credit cards each does not serve the purpose. Why are charge card holders also levied such a service tax? The use of charge card without any credit facility is actually a prudent way of using the plastic money.

Having a couple of credit cards now is no longer a luxury but indeed a necessity as it simplifies a lot of required transactions – purchase of

petrol, buying groceries at supermarkets, paying monthly or quarterly insurance premiums and other unexpected transactions such as placing deposit for hospital admission.

Without credit or charge cards, people must then keep and carry a lot more cash.

Psychologically, this may also lead to imprudent spending as all outlets accept cash. It is also dangerous especially with escalating snatch theft cases of late.

No more “free lunches” for owning credit cards

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If the reason is to partfinance some of the national expenditure in view of falling revenues, it may be based on wrong assumptions. The reason is simple: the number of cards in issue may fall drastically over the next few months as those holding multiple cards could return surplus cards to the issuers.

Some may just end up not having any card at all.

The victims will be those who are forced to hold on to their credit cards – and hence pay the service tax – because they either have outstanding balances that are too large to be paid immediately or have outstanding installment payments that are credited and subject to payment over a period of time.

If promoting prudent spending is indeed the main reason, there are other approaches that can be introduced, such as: * Not subjecting the service tax on charge cards that have no credit facilities; * Allowing a waiver of the service tax for up to two principal and two supplemen-

31-1231-12-92 92 31-12-93 31-1231-12-94 93 INTERIM

EPS EPS 73.345 – – 984.661 984.661.144 73.345 984.661 .144 114.797 1,110.615.187 114.797 .187 1,110.6– 1,110.6 200.591 200.591 .259 15 1,765.835 15 .259 – – 156.831 156.831 – 1,765.8 1,765.8 *.2*.2

$12.00 $11.00 $10.00 $9.00 $8.00 $7.00

FOR YOUR INFO

tary cards for every principal cardholder – either through reimbursement of the service tax already paid through the card issuers, or by paying the service tax directly to the government using MyKad or the e-government system; * Limiting the issuance of cards to those above 25 years of age; * Raising the minimum annual salary level to RM30,000 for principal cardholders; * Banning all card issuers and merchants from offering purchases on credit card installment plans, either with or without zero interest.

On another note, the imposition of the RPGT would be a nightmare to homeowners who did not keep receipts of their renovation or upgrading costs. These are required as proof of additional cost to home ownership for deductions during tax calculations, if they were to sell their houses next year.

There are two groups of such homeowners: one would be those who did not care about keeping receipts fol-

lowing the RPGT’s suspension in April 2007. It did not make any difference then whether the receipts were kept or not.

Another group would be those who owned their respective houses for so many years that even under the previous RPGT structure, such receipts were not required. Property disposals then did not attract RPGT if it was done after more than five years of ownership.

The perpetual tax rate of 5% also did not consider inflationary factors. A house priced at RM100,000 some 30 years ago may now be valued at RM1m, but the cost of other goods and services may also have risen tenfold.

The previous RPGT was seen as a way of managing “punters” in the property market, but the revised RPGT to be effective next year, will also hit long-term property investors and owners.

Hopefully some amendments will be introduced before both these new measures are implemented come New Year.

Baltic Dry Index Baltic Dry Index is an index covering dry bulk shipping rates and managed by the Baltic Exchange in London. The index provides an assessment of the price of moving major raw materials by sea.

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Perspective text : Stephen Chin

Construction zone

T

he government’s announcement in Oct that development expenditure for the Tenth Malaysia Plan (10MP) will be within RM230b (as per the Ninth Malaysia Plan, 9MP) is seen as good news for the construction industry, particularly in East Malaysia.

The 10MP, expected to be released in June 2010, aims to double the country’s per capita income within the next decade.

For Budget 2010, Prime Minister-cum-Finance Minister Najib Tun Razak announced a 4.4% y-o-y reduction in allocation for development spending, the first contraction in five years.

This signals more emphasis will be placed on private finance initiatives to drive the 10MP, while the government, seeking to curb its fiscal deficit, will play the role of facilitator.

Nonetheless, expenditure allocations from 9MP will spill over to the next period. Previously with the 8MP, although the targeted expenditure was met, about 35% of its scheduled projects were carried forward to the 9MP. A similar occurrence is expected for 10MP because as of 1H09, only 55% of 9MP’s RM230b allocation has been spent.

Analysts expect to see a more vigorous implementation of several major infrastructure projects that are currently at various pre-award stages.

“There should be some awards of sizeable construction jobs soon, namely Sepang LCCT earthworks and road works in Sarawak. The Klang Valley Light Rapid Transit (LRT) extension, Pahang-Selangor water transfer and Sepang LCCT are expected to be awarded in 2010,” said Maybank IB in a report. “We also expect more intensive initiatives under the Sarawak Corridor of Renewable Energy (SCORE) regional development plan to benefit the construction sector.”

OSK Research noted that most construction jobs in Sarawak will be centred on basic infrastructure: RM4b in road works will be implemented in the state. “There are strong political incentives for projects to be implemented as state elections (due in 2010) approach.

As Sarawak played a key role in Barisan Nasional’s 2008 election win, Barisan cannot afford to lose its support,” it said in a report.

Development expenditure for East Malaysia increased RM2b during the 9MP midterm review. The Prime Minister also promised additional allocations for infrastructure developments in East Malaysia.

SCORE was the last of five growth corridors launched by the federal government with targeted investments of RM305b, which is second only to Iskandar Malaysia’s

RM334b target. Covering a total of 70,000 sq km from Tanjung Manis to Samalaju and the Sarawak hinterland, SCORE will be developed over a 22-year period from 2008 to 2030 and will create jobs for over 1.5m people.

Tanjung Manis is earmarked as a regional port city; Samalaju as an industrial city; Mukah, a smart city and services hub, and; Baram and Tunoh, rural growth centres.

Mega projects such as the Salco aluminium smelter, Tatay pulp and paper factory and a zinc electro refinery, are not likely to kick off within the next 2-3 years, said OSK Research.

Basic infrastructure is needed to support these projects and convince corporations to commit such large-scale investments.

Jobs for building bridges, roads, land reclamation, lowcost housing, government outlets and schools are picking up, OSK observed. Rural development and an expected rise in rural-urban migration will also increase demand for low-cost housing.

Local construction players, such as Naim Holdings Hock Seng Lee and KKB Engineering, are in a good position to benefit from this.

POTENTIAL BENEFICIARIES

Most of Naim’s development projects are in the mid-range to

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affordable housing segment.

As of 14 Oct, its order book balance stood at RM1.32b.

It also holds Letters of Intent collectively worth RM1.29b, mostly comprising phases of the Kuching flood mitigation project (it has already been awarded Phase 1 of the job).

It also holds a Letter of Intent to supply and install equipment for a college in Sarawak.

Naim is expected to secure some road projects estimated at RM200m. It is currently undertaking road jobs worth RM31m in Fiji and in Sept, the Fiji government offered it a US$100m contract to rehabilitate a 338km national highway. It is sorting out several issues before making a decision.

The company owns 36% of Dayang, which is buying a 40% in Borcos, the second largest domestic vessel operator. The acquisition comes with a profit guarantee of RM65m for FY10 which is estimated to boost Dayang’s earnings by 40%. OSK named Naim as its top pick for Sarawak construction plays.

Another major player in Sarawak is Hock Seng Lee. As at 14 Oct, HSL has secured RM320m worth of jobs year-to-date. This includes an affordable-housing project in Bintulu and the Sibu flood mitigation project.

HSL is currently working on Phase 1 of the Kuching City Central Wastewater Management System worth RM452m.

As Phase 1 covers about 20%25% of Kuching’s wastewater system, the overall project could total RM1.8b –RM2.3b.

Given that HSL has the required experience and equipment for the job, it is likely to be awarded the subsequent phases, said OSK Research.

HSL is also launching “The Leaf” guarded and gated property development in Kuching (targeted end Oct). The Leaf has a gross development value of RM30m and comprises 54 link houses, semi-detached houses and duplex villas. Another development “La Promenade” (GDV=RM600m) is also in the pipeline, comprising 1000 high-end residential homes, 200 shops, office blocks and a shopping mall.

Ninth Malaysia Plan projects that will flow into the Tenth Malaysia Plans

Double tracking rail – Ipoh to Padang Besar Double tracking rail – Seremban to Gemas East Coast Expressway, Phase 2 Pahang-Selangor water transfer – 45km tunnel Klang Valley LRT extension – Kelana JayaPutra Heights-Sri Petaling Pahang-Selangor water transfer – Kelau Dam, pumping station, pipes Penang Second Bridge Sepang low-cost carrier terminal

Main contractor: MMC-Gamuda JV Main contractor: IRCON Sub-contractors: IJM Corp, Loh & Loh Fajarbaru Main contractor: MTD Cap Main contractor: Shimizu-Nishimatsu-UEM Builders-IJM Corp consortium First award expected in 1Q10 Potential beneficiaries: IJM Corp, Gamuda, WCT, Sunway, Loh & Loh, UEM Builders, Mudajaya, MRCB, Scomi To be awarded, possibly end-2009 Potential beneficiary: Loh & Loh Main contractors: CHEC, UEM Builders Bidding ongoing

Projects likely to commence during 10MP

Bidding ongoing Construction offered to Chinese contractors during Prime Minister’s diplomatic visit to China on 2-5 June 2009 Bakun undersea cable Potential beneficiary: MRCB New Klang Valley LRT line – Kota DamanPotential beneficiaries: IJM Corp, Gamuda, WCT, sara-Cheras Sunway, UEM Builders, Mudajaya, MRCB, Scomi Pahang-Selangor water transfer – Langat 2 Potential beneficiaries: Kumpulan Perangsang Selangor, treatment plant Gamuda, Loh & Loh Papar-Penampang dam and water treatment Private finance initiative project plant (Sabah) Potential beneficiary: WCT Double tracking rail – Gemas to Johor Bahru

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Perspective text : Securities Commission Malaysia

What are Shariah-Compliant Securities?

S

hariah-compliant securities are stocks (i.e. ordinary shares/ equities) of a company listed on Bursa Malaysia which is approved by the Shariah Advisory Council (SAC) of the Securities Commission Malaysia as being Shariah permissible for investment.

Primarily the principal business and investment activities that generate income for the company under consideration must also conform with the Shariah principles in order for its shares to be classified as Shariah-compliant company.

According to the SAC, the shares of a company can be classified as Shariah-compliant if the company is not significantly involved in the following activities: • • • • • • • •

Why do we need to have Shariah-compliant stocks list?

The list of Shariah-compliant stocks become a major reference for individual and institutional investors (e.g.

Tabung Haji, Employees Provident Fund (EPF) and Islamic unit trust funds) who seek to participate in investments in stocks. In addition, the list can be used as a basis in constructing Shariah Index.

How is the screening process being conducted?

The SAC of SC determines income contribution from Shariah prohibited activities of listed companies based on its own Shariah methodology and criteria. It also classifies a stock as Shariah-compliant if income of mixed contribution

from the prohibited activities is within the Shariah tolerable level by using the following benchmarks: Below are the steps conducted by SC for the Shariah screening process: 1. Extract relevant financial information from audited financial report and other material information.

2. Undertake Shariah compliance review process: a) Quantitative Analysis: Identify contribution from non-permissible activities (Refer Diagram 1). Companies principally involved in the above activities (non-permissible activities) are automatically excluded in the first stage of the screening.

If a company is involved

Financial services based on riba (interest) Gambling Manufacturing or sale of non-halal products Conventional insurance Entertainment Manufacture or sale of tobacco-based products or related products Stock broking or share trading in Shariah non-compliant securities Other activities deemed non-permissible

Diagram 1

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in mixed activities, SC will compare against the Shariah financial benchmark (Refer Diagram 2) by computing the contribution of the non-permissible activities and compare with the group turnover and profit before tax. b) Qualitative Analysis:

This include factors such as reputation and image of the company in relation to its activities.

3. Tabled the result to the SAC for final consideration and decision.

4. Compile the result and issue list of Shariah-compliant securities. The list

will be updated twice a year i.e. in May and November.

Conclusion

The benchmarking method under the Shariah screening process was introduced to assist Muslim investors in making Shariah-compliant investment.

• The 5% benchmark is to assess the level of mixed contributions from the activities that are clearly prohibited such as riba (interest-based companies like conventional banks), gambling, liquor and pork.

• The 10% benchmark is to assess the level of mixed contributions from the activities that involve the element of ‘umum balwa’ which is prohibited element affecting most people and difficult to avoid e.g. interest income from fixed deposits in conventional banks and tobacco-related activities.

• The 20% benchmark is to assess the level of non permissible rental activities of listed companies.

• The 25% benchmark is to assess the level of mixed contributions from the activities that generally permissible according to Shariah and have an element of maslahah (benefit in general) to the public, but there are other elements that may effect the Shariah status of these activities e.g. hotel and resort operations, share trading, stock broking, as these activities may also involve other activities that are deemed non-permissible to the Shariah.

Diagram 2

REFERENCE:

INCEIF. 2006.1st Edition. Wealth Planning and Management. Kuala Lumpur Securities Comission Malaysia. 2009. 1st Edition. Islamic Equity Market. LexisNexis, Kuala Lumpur Securities Commission Malaysia’s website: www.sc.org.my Data

Reference

Scheduled Released Dates

as at 31 Oct 2009

6 Nov 2009

Index of Industrial Production

Sep 2009

10 Nov 2009

Salaries / Wages (manufacturing)

Sep 2009

10 Nov 2009

Consumer Price Index

Oct 2009

18 Nov 2009

International Reserves

as at 13 Nov 2009

20 Nov 2009

External Trade International Reserves

Monetary Policy Statement Release of GDP figures

Producer Price Index

Malaysia Economic Diary

Sep 2009

4 Nov 2009

8/2009

24 Nov 2009

3RD Quarter of 2009

25 Nov 2009 (NLT)

Oct 2009

Source: Websites of Department of Statistics of Malaysia and Bank Negara Malaysia

30 Nov 2009

NLT = not later than

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Perspective text : Stephen Chin

ECONOMICS MATHEMATICS

A

t the Budget announcement, the government revised its GDP forecasts to a 3% contraction for 2009 (from -5%) and a 2%-3% growth for 2010. The economy will only return to growth in 4Q. GDP depends on several pillars including government expenditure, private consumption, private sector growth and foreign direct investment (FDI). Yet in the Budget, the government is slashing its expenditure in order to reduce its deficit.

There were few incentives to boost private consumption or private sector growth. FDI has also fallen drastically, as suggested by the total approved foreign manufacturing investment with Jan-Aug 2009 figures totalling RM12.2b, compared with RM46b for the whole of 2008.

Maybank Investment Bank’s chief economist, Suhaimi Ilias, pointed out that the key issue should be to gear up private sector investment as it had been lagging. In the current decade, private sector invest-

ment as percentage of GDP has dropped to an average of 11% of GDP, compared with the high of about one-third in 1997-1998, he said.

However, with the exception of Islamic finance tax incentives, the Budget contained only a sprinkling of incentives at targeted industries such as health tourism, information and computer technology, halal products and creative industries, he said. Even then, the Islamic tax incentives were mostly extensions of existing ones that were expiring.

In any case, the government’s growth forecast is actually quite conservative, he added. The market consensus ranges between 3.5% and slightly above 4%. “The economy will rebound next year,” he said confidently, “although admittedly it will be far from the ‘normal’ pre-crisis levels.”

The recent fall in economic activities has been described as “the worst since Great Depression”, meaning it was even deeper than the tumultuous 70s and 80s, Suhaimi

pointed out. Therefore, any subsequent growth will look impressive, especially in the initial stage of a rebound, because of the “low base” factor.

Nonetheless, there will be a real recovery due to several factors. First, there is the direct impact from fiscal and monetary stimulus on economic activities, such as consumer and government spending. “We are seeing this effect in major economies like US, China, South Korea and Australia since 2Q09. As of Sept 2009, Malaysia only spent about 40% of RM22b allocated for government spending in the two stimulus packages. So, there is a lot of fiscal impulse left,” he explained.

Second, there has been a resumption of activities – not necessarily normalisation – in the financial markets, such as lending and credit creation in debt markets. “At least for Malaysia, loans approvals are rebounding again,” he said.

External trade is also recovering as the global economy has stabilised and is in re-

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covery mode. There are also signs of positive wealth effects from gains in equity markets.

“I mean, in the US and UK, they are talking about bankers in Wall Street and City of London making big bonuses again!” he exclaimed.

Suhaimi warned against expectations of an immediate fix to the country’s economic woes. “Reforms, liberalisation and transformation measures need time to take effect. There is also implementation risk to consider. I don’t understand why people expect instant results. No pain, no gain!

“Look at Indonesia. It currently has a recession-proof economy and is back on investors’ radar screen again.

To get there, it took plenty of pain including an earlier phase of political instability and uncertainties, as well as reforms in areas like banking, fiscal and corruption, but it is now paying off. We must go through the same process because, truthfully, we did not really restructure or re-

form after 1998. We became complacent with our resourcebased exporter status when commodity – especially crude oil – prices boomed,” he explained.

“In any case, recovery in 2010 is a done deal. I see growth surging in 1H10 because of the low base in 1H09.

We might see up to 6% y-o-y real GDP in 1Q10. But growth will taper off to just over 3% in 4Q10 as the effects of the fiscal and monetary ‘steroids’ wear off, and fiscal consolidation and monetary tightening set in,” he said.

So, the government’s forecast is achievable, given the current momentum in quarterly real GDP worldwide and further improvement in economic activities seen in 3Q09.

As for any efforts to increase FDI, Suhaimi said Malaysia’s major selling point is the ongoing reform, liberalisation and transformation of the economy. Among others, these include the opening up

Growth GDP Supply Side Agriculture Mining Manufacturing Construction Services Demand Side Private consumption Public consumption Gross fixed capital formation Exports of goods & services Imports of goods & services

2009e -3.0%

-2.3% -2.9% -12.1% 3.5% 2.1%

1.6% 2.2% 0.1% -15.6% -14.4%

of services sector to foreign investors, the removal of Bumiputera shareholder and shareholding requirements in corporate public listing and direct investments, performance-based and result-oriented public sector, and more liberal human resource policy to attract knowledge workers/talents, reversing brain drain (e.g. 15% top personal income tax rate for employees in qualified industries in Iskandar Malaysia, automatic visas to expats’ working and dependent family members, PR status to foreign husbands of Malaysian women).

Another key item is the restructuring of subsidies, beginning with fuel next year, followed by other commodities. “This has been an issue for foreign investors as the process lacked transparency and appeared to be ad hoc.

It had an adverse effect on pricing signals, business costs and planning, as well as misallocation of resources,” he said.

2010f 2.0% to 3.0%

2.5% 1.1% 1.7% 3.2% 3.6% 2.9% -3.4% 0.0% 3.5% 5.2%

Malaysia GDP Growth - Source: Ministry of Finance

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INVESTORS’ CORNER

compiled : Stephen Chin

TELCO, CONSTRUCTION TO BENEFIT FROM BUDGET DiGi.com

Budget 2010 offered individual tax payers a tax relief on broadband subscription fee of up to RM500 a year from 2010 to 2012. This was in line with the National Broadband Plan to increase broadband penetration from 21% currently to 50% by 2010 and 75% by 2012.

All mobile operators marketing 3G wireless broadband services and WiMAX spectrum holders are expected to benefit. According to OSK Research, the number of subscriber additions for mobile broadband has exceeded that of fixed broadband since 3Q08. Total wireless broadband subscribers is projected to well exceed fixed broadband by 2Q10, it added.

Telcos such as Digi, Axiata, GPacket, Maxis (soon to be listed) are expected to benefit.

Telekom Malaysia will also benefit because it dominates the fixed broadband space and it plans to commercialise its high-speed broadband service in 1Q10.

DiGi is targeting to outgrow DiGi.Com (FY Dec 2009) Research dated Forecast EPS 09 (sen) PER 09 (x) Forecast DPS 09 (sen) Div. Yield 09 (%) Call Target price (RM)

the industry for both mobile and broadband revenues over the next three to five years.

Currently, advanced data revenue (including broadband revenue) represents some 6% of mobile revenue.

Digi recorded a 3Q09 net profit of RM244.1m (+4.1% q-o-q) on revenue of RM1.2b (+2.8% q-o-q) due to strong improvements in subscriber base.

Maybank Investment Bank said the 3Q09 results fell below its expectations. “Average tariffs fell by more than subscriber growth, which lead to lower-than-expected earnings and EBITDA margins.

On the other hand, OSK Research argued that 9M09 core earnings made up 74%76% of market consensus’ full forecast. The company halted three consecutive quarters of contraction in pre-paid revenue to record a 2% q-o-q growth. It launched a new prepaid plan in July that featured a low voice tariff and SMS threshold.

DiGi declared 75 sen per share tax-exempt special diviMaybank Investment Bank 29 Oct 2009 130.2 16.8 232.2 10.6 Sell 19.60

Share price as at 30 Oct, 2009: RM21.84

dend and raised its dividend pay-out policy from 50% of net profit to 80% from 2010.

Given the business’ highly cash-generative nature, the pay-out ratio may reach 100% in 2010-11, Maybank IB said.

WCT

WCT is a likely beneficiary of major infrastructure jobs currently at various pre-award stages. It has replenished its order book by RM1.4b yearto-date, above its internal target of RM1b. As at Aug 2009, its outstanding order book stood at RM2.8b.

WCT is still actively vying for several sizeable jobs, including the Sepang low-cost carrier terminal and three jobs in East Malaysia. It has already received three letters of intent for the latter, one of which may translate into awards as early as this year-end, said Maybank IB in a report.

In Vietnam, WCT is concentrating on property development. It is launching commercial units for its Platinum project in 2010.

OSK Research 29 Oct 2009 127.2 17.2 187.1 8.6 Neutral 22.00

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WCT (FY Dec 2009) Research dated Forecast EPS 09 (sen) PER 09 (x) Forecast DPS 09 (sen) Div. Yield 09 (%) Call Target price (RM)

Maybank Investment Bank 29 Oct 2009 20.9 12.6 9.4 3.6 Buy 3.30

Share price as at 30 Oct, 2009: RM2.63

Closer to home, it has signed a conditional agreement with Medini Land Sdn Bhd (wholly owned by Iskandar Investment Bhd) to jointly develop and co-own a residential and commercial development in Medini, Iskandar Malaysia.

With a gross development value of RM600m, the 1Medini project will be the first residential development in Medini once it is completed by 2015. The project comprises 1332 condominium units and 68,800 sq feet of commercial area. It will be launched in mid-2010 with the first phase of more than 300 units scheduled for completion by 2013.

WCT announced that it would hold a 70% stake in the development. The company is already undertaking a RM766m integrated infrastructure job in Medini. “This development is a sign that WCT is serious on 1Medini.

Axis (FY Dec 2009) Research dated Forecast EPU 09 (sen) PER 09 (x) Forecast DPU 09 (sen) Div. Yield 09 (%) Call Target price (RM)

We do not discount the possibility of more infra jobs being secured there,” said OSK Research.

It added that the target buyers are likely to be Singaporeans for investment.

“Rental prospects should not be an issue given its proximity to Legoland, NUMed and the financial district,” it said.

AXIS REIT

Axis REIT (AXRB) reported 3Q09 core net income of RM10.2m (+4.0% y-o-y; -3.1% q-o-q) on RM17.7m in revenue (+8.0% y-o-y; +1.8% q-o-q). Revenue was stronger due to rental contributions following the acquisitions of Delfi Warehouse and Axis Vista.

Maybank IB expects a stronger 4Q09 with AXRB’s recently completed acquisition of Axis Steel Centre (ASC) for RM65m. Rental contributions from ASC will offset a rental shortfall of RM0.3m in Dec Maybank Investment Bank 21 Oct 2009 15.7 12.2 15.2 7.9 Buy 2.21

Share price as at 30 Oct, 2009: RM1.91

OSK Research 29 Oct 2009 19.6 13.4 7.0 3.1 Buy 3.35

following the expiry of Nestle House’s lease end-Nov. AXRB will spend RM7m in capex to enhance the building before putting it back on the market by end-1Q10.

Axis REIT (AXRB) recapitalised its balance sheet with RM85m in Sept 2009 with 51.2m new units issued at RM1.66 per unit to selected investors. This fresh capital can finance further asset acquisitions.

According to Maybank IB, it is targeting to seal another deal worth some RM100m before end-2009 to bring its total asset under management to RM900m.

It has also identified another RM300m worth of properties from its sponsors and external parties.

OSK Research said the share price as of 21 Oct exceeded its target, which prompted it downgrade its call to Neutral.

OSK Research 21 Oct 2009 17.0 11.3 14.1 7.4 Neutral 1.72 21

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Across the causeway text : Aw Jie Sheng

Etika International:

Storming The Tea Cups

T

o murder a line off Shakespeare, Etika International Holdings’ success thus far, is about a great business idea thrust upon the Tan Brothers. Three former employees of Fraser & Neave’s (F&N) dairy division approached Kamal, Jaya and Tajuddin Tan in 1997 to establish a joint venture in sweetened condensed milk. Given that the demand for the condensed milk was stable and that the expertise presented itself, the Tans agreed to the proposition - and Etika was born.

Management should also be given credit for executing the business idea. While a relatively new entrant, Etika has managed to capture about 20% of the mature Malaysian dairies market since inception.

Etika's CFO Desmond Thong in an email interview, says that Etika is the 2nd largest player after F&N, and its Dairy Champ brand is the 3rd largest after F&N and Teapot (Nestlè). Desmond attributes the grabbing of domestic market share from established players, to the value positioning, superior quality and reasonable pricing of Etika’s Dairy Champ products.

No official figures exist, but Desmond estimates the total dairies market in Malaysia to worth RM2.5b per annum

and grow at an average rate of 6%. The condensed and evaporated milk market alone is estimated to be worth RM1b.

Etika has also successfully penetrated overseas markets, having established a distribution network spanning more than 50 countries including ASEAN, Africa, Middle East, Central and South America and the Asia Pacific. Overseas buying houses and distributors overseas make up for more than 50% of its dairies products.

Milking New Opportunities

Not content to rest on his laurels, CEO Dato´ Kamal Tan has informally set RM1b as a milestone to achieve within the next 5 years. Desmond

revealed that management has been in top gear to achieve the target. New distributors in Hong Kong and China have been appointed. This geographic segment will contribute strongly to FY09 results following the shift in consumer preference for imported milk products over Mainland products after last year’s melamine scandal.

In March this year, Etika formed a joint venture to set up a UHT Aseptic PET bottling plant in New Zealand. This is the first of its kind in Australasia and Southeast Asia and will complement its dairies division. This plant is expected to commence production in 2Q10.

It also proposed in July this year to acquire the Tan Viet Xuan Joint Stock Company

A great way to start your day

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in Vietnam. When completed in March next year, this would solidify the Group’s foray into ready-to-drink UHT liquid milk.

These overseas joint ventures and acquisitions will augment FY10 revenue growth.

The company is also keeping an eye on expenses. Etika is relocating both manufacturing plants in Johor and Selangor to a new plant-cum-warehouse facility in Klang, which is in closer proximity to its dairies division. This new plant is expected to come on-stream by 2Q10 and will hold additional production lines with increased production capacity of approximately 30% - catering largely to condensed milk. Desmond foresees greater production efficiencies, lowering product costs, and incurring substantial savings from transportation costs and lower inventory holding.

Geared For Success?

Growth through acquisition often obscures the organic growth rate of a company, as revenue and earnings of the target are booked into the company’s own account, inflating top and bottom lines. This concern applies less to Etika as the Etika International Holdings Price and PE (28 Oct closing) Ytd Price Increase Net Gearing (As of 1H09) 5-year Revenue Growth Rate* 5 year Earnings Growth Rate* Shares Outstanding (As of 1H09) Free Float

acquisition of production and distribution infrastructures are primary for capacity expansion, while fair value gains booked are negligible.

But for the first 6 months ending 31 March 2009, Etika’s gross and net gearing are at 1.2 times and 0.9 times respectively. According to data compiled

by Reuters, the average gross gearing for the industry is 0.5 times while figures do not exist for net gearing.

Desmond feels that the company’s financial leverage is “very sound”. He says Etika’s bankers are comfortable with a gearing of up to 3 times, in view of the Group’s nature of business. Hence, he does not foresee any problem raising the necessary financing for further expansion. Approximately 44% of total banking facilities is for working capital purposes. Nevertheless, Desmond stressed that the company has been very prudent about taking on additional bank borrowings, as Etika places great emphasis on its ability to meet all obligations.

Illiquid Assets

Etika’s share price has appreciated 147% on a year-to-

Substantial Shareholders (As of FY08) Tan Family

$0.37/5.6x 147% 0.90x 50.4% 58.7% 250.2m 77.0m 51.07%

*Calculated on a geometric mean basis from FY03-FY08

date basis, outperforming the STI and the 77% gains on its benchmark the FTSE Small Cap Index.

Notwithstanding this and an upgrade to the main board, only CIMB-GK and NRA Capital follow the Malaysia-based company. In its most recent research note issued on 31 August, NRA Capital kept a “Buy” rating on Etika with a fair value of “$0.43”.

The lack of trading interest in the company might concern some readers who require liquidity in their investments.

However, Desmond said that the company does not have the intention to undertake any new equity issues at the moment to boost daily volumes, when probed about the possibility.

Instead, he said that the company will continue to liase with analysts, promote Etika and engage in the necessary investor relations with the hope that both shareholders and investing public will see the potential of Etika as a long term company. Interestingly, PPB Group, which is linked to the influential Kuok Group, has share ownership bordering the 5% substantial threshold.

The condensed milk manufacturer will announce its full year result for its financial year ending 30 September 2009 in the middle of November. NRA Capital expects FY09 earnings to hit RM48.6m on the back of RM613.1m in revenue. With raw material prices stabilising and the second half being a traditionally stronger period, Etika looks likely to beat this estimate.

23

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Mail or fax completed form to: Pioneers & Leaders (Malaysia) Sdn Bhd Block F-05-3, Jalan SS 7/13A, Plaza Kelana Jaya, 47301 Petaling Jaya, Malaysia Tel : (603) 7875 6908 Fax : (603) 7877 8486 Attn: SI (Malaysia) Subscription Cheques to be made payable to: Pioneers & Leaders (M) Sdn Bhd or bank directly into: United Overseas Bank (Malaysia) Bhd (A/C 319-3001-2866)

Company: Address:

Tel:

China Edition

A/C payable to: Pioneers & Leaders (M) Sdn Bhd

Fax:

Email: If you are a current subscriber and would like to renew, please fill in your 6-digit Subscriber ID:

For bulk subscription & other enquiries: Tel : (603) 7877 8481 / 8482 Fax : (603) 7877 8486 Email: my.sharesinv@SharesInvestment.com *Overseas postage will be charged separately

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11/4/09 4:36:29 PM