PP 7767/09/2010(025354)

17 March 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
17 March 2010
MARKET DATELINE

Timber Sector Recom : Neutral

(Maintained)
Prospects Are Looking Better

Table 1 : Timber Sector Valuations

Fair EPS EPS growth PER P/NTA P/CF GDY Rec
FYE Price Value (sen) (%) (x) (x) (x) (%)
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Ta Ann Dec 5.41 5.95 46.1 62.9 61.8 36.4 11.7 8.6 1.6 7.5 1.3 OP
Evergreen Dec 1.52 2.35 21.3 23.3 26.1 9.4 7.1 6.5 1.0 10.0 3.3 OP
WTKH Dec 1.19 1.18 8.4 13.5 +>100 60.0 14.1 8.8 0.7 n.m 5.0 MP
Jaya Tiasa^ Apr 3.01 2.30 22.1 52.5 +>100 +>100 13.6 5.7 0.8 8.3 0.0 UP
Sector Avg 82.2 50.1 10.8 7.2
^ FY10-11 valuations refer to those of FY11-FY12

Chart 1. Japan Total Log

♦ Japan housing starts may recover from February onwards. Japan housing Imports
starts have recorded a 14th straight month of decline, with the latest Jan 10 figure '000m3

standing at 64,951 units, a drop of 8.1% yoy. Nevertheless, the rate of decline
180
160

has been narrowing since Sep 09 and accordingly, there have been some signs of
140
120

economic recovery. Given the low base in Feb 09, we could potentially see a first
100
80

yoy growth (in 15 months) for Japan housing starts in Feb 10.
60
40
20

♦
-
Gradual recovery in Japan housing starts in 2010? Japan housing starts

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09
dropped 27.9% yoy to 787,410 units in 2009, the lowest starts since 1964’s
751,429 units and the first “less than one million units” housing starts in 41 years.
Given the low base in 2009 and improving economic indicators, we believe that
we could potentially see a yoy recovery in 2010, albeit a weak and gradual one.

♦ Selling prices for plywood firming up. While official figures have yet to
Chart 2 Japan Total Plywood
confirm this trend, we understand from industry players that average selling Imports
prices for plywood products have been inching up by 3-5% qoq in 1Q10 from '000m3

4Q09, the strongest increase being for floor base products. We believe that the 500

increase in average selling prices was driven mainly by shortages in supply, which 400

led to some panic buying from Japan trading houses. 300

200

♦ Forecasts. We increased Jaya Tiasa’s FY11-12 earnings forecasts by 30-57%

100

after increasing our plantation FFB yield assumptions by 20-44%.

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09
♦ Risks: 1) Timber demand improving significantly, resulting in higher-than-
expected timber prices; 2) A sharper-than-expected recovery in Japan’s economy;
3) Reduced competition from other major plywood exporting countries (i.e.
Indonesia and China) due to plant closure etc.; and 4) Significant reductions in
glue and logistics costs.

♦ Maintain Neutral, top picks are Ta Ann and Evergreen. Average selling prices
are currently seeing a gradual recovery and we estimate an average of 5-10%
increase for plywood products in 2010, as major drivers such as Japan housing
starts start to recover during the year. We note however that another false start
to the economic recovery in Japan would result in timber prices remaining at
current levels or even falling (as has happened several times since the 1990s). As
such, we are maintaining our sector call of Neutral. Our top picks are Ta Ann (OP;
FV = RM5.95) and Evergreen (OP; FV = RM2.35). For Ta Ann, earnings would be
driven mainly by its plantation division while any further upside to the plywood Hoe Lee Leng
division would further boost its earnings. For Evergreen, structural changes in the (603) 92802239
industry i.e. gradual increase in real demand and supply shortages from the hoe.lee.leng@rhb.com.my
closure of plants will be the major boosters to capacity utilisation and average
selling prices and thus, earnings for the group.

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 17 March 2010

♦ Japan housing starts may recover from February onwards. Japan housing starts have recorded a 14th
straight month of decline, with the latest Jan 10 figure standing at 64,951 units, a drop of 8.1% yoy (see Chart
3). Nevertheless, the rate of decline has been narrowing since Sep 09 and accordingly, there have been some
signs of economic recovery given improving wage levels and unemployment rate (dropping to a 10-month low of
4.9% in Jan 10). Given the low base in Feb 09, we could potentially see a first yoy growth (in 15 months) for
Japan housing starts in Feb 10.

Chart 3: Monthly Japan Housing Starts

'000 units
130
120
110
100
90
80
70
60
50
40
30
20
10
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2005 2006 2007 2008 2009 2010

Source: Japan Lumber Report, RHBRI

♦ Gradual recovery in Japan housing starts in 2010? Japan housing starts dropped 27.9% yoy to 787,410
units in 2009 (see Chart 4), the lowest starts since 1964’s 751,429 units (when the database collection first
started) and the first “less than one million units” housing starts in 41 years. Given the low base in 2009 and
improving economic indicators, we believe that we could potentially see a yoy recovery in 2010, albeit a weak
and gradual one. As such, we do not expect housing starts to cross the one million unit mark in 2010, and expect
this to potentially happen only in 2011.

Chart 4: Yearly Japan Housing Starts

1400.0
1290.4
1236.1
1189.0
1200.0
1093.5
1060.8

1000.0

788.4
'000 units

800.0

600.0

400.0

200.0

0.0
2004 2005 2006 2007 2008 2009

Source: Japan Lumber Report, RHBRI

♦ Selling prices for plywood firming up. While official figures have yet to confirm this trend, we understand
from industry players i.e. Ta Ann and WTK that average selling prices for plywood products, have been inching up
by 3-5% qoq in 1Q10 (Chart 5) from 4Q09, the strongest increase being for floor base products. We believe that
the increase in average selling prices was driven mainly by shortages in supply, as the largest supplier of plywood
products (which we believe to be Shin Yang) in Malaysia started to shift its market focus away from Japan in
1Q10 due to low volumes and prices offered (according to Japan Lumber). This led to some panic buying from
Japan trading houses as their inventory levels started to decline. If this supplier continues to halt its supply to
Japan, we believe that in the near term, there could be upward price pressure for plywood products and this

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 17 March 2010

could potentially benefit the timber players under our coverage. However, there is still a risk that Shin Yang
(which has plywood capacity of 1.2m m3, or double that of Ta Ann and WTK’s combined plywood capacity) may
return to the Japanese market when market condition improves and if demand is not enough to offset this supply,
the downward price pressure for plywood could come back again. We are currently forecasting a 5-7% yoy
increase in average selling prices for FY10-12 for Ta Ann, WTK and Jaya Tiasa. Pending further signs of
confirmation that average selling prices have settled at a higher equilibrium, we maintain our forecasts for now.

Chart 5: Ta Ann Average Selling Prices Trend

650

600

550

500
USD/m3

450

400

350

300

250 CP SP Floor Base

200
Jan '06

Mar '06

May '06

Jul '06

Sept '06

Nov '06

Jan '07

Mar '07

Nov '07

Jan'08

Mar '08

May '08

Jul 08

Sep '08

Nov '08

Jan'09

Mar '09

May '09

Jul 09

Sep '09

Nov '09

Jan'10

Mar '10

May '10
May '07

Jul '07

Sept '07

Source: Japan Lumber Report, RHBRI

Mar – May 10 are indicative average selling prices

Risks

♦ Upside risk. The risks include: 1) timber demand improving significantly, resulting in higher-than-expected
timber prices; 2) a sharper-than-expected recovery in Japan’s economy; 3) reduced competition from other
major plywood exporting countries (i.e. Indonesia and China) due to plant closure etc.; and 4) significant
reductions in glue and logistics costs.

♦ Downside risk. The risks include: 1) longer-than-expected recovery for the timber sector; and 2) price
discounting from neighbouring countries with lower cost of production, resulting in lower exports from Malaysia to
its major export markets.

Forecasts

♦ Raised forecast for Jaya Tiasa. We have raised our forecast for Jaya Tiasa by 30-57% for FY11-12 after
increasing our plantation FFB yield assumptions by 20-44%.

Valuations and recommendation

♦ Gradual recovery in sight, but no significant price drivers. Maintain Neutral call on sector. Average
selling prices are currently seeing a gradual recovery and we estimate an average 5-10% increase in prices for
plywood products and 8-9% for logs in FY10, as major drivers such as Japan housing starts start to recover
during the year. We note however that another false start to the economic recovery in Japan would result in
timber prices remaining at current levels or even falling (as has happened several times since the 1990s). As
such, we are maintaining our sector call of Neutral.

♦ Top pick Ta Ann and Evergreen. For Ta Ann, earnings would be driven mainly by its plantation division as it
moves into peak maturity age profile, potentially contributing 55-75% of total group earnings for FY10-12.

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 17 March 2010

Meanwhile, any further recovery in plywood division would provide further upside to earnings for the group.
Maintain Outperform recommendation with fair value of RM5.95 based on unchanged 14x FY10 timber division
earnings and 12x FY10 plantation division earnings. For Evergreen, structural changes in the industry i.e. gradual
increase in real demand and supply shortages from the closure of plants will be the major boosters to capacity
utilisation and average selling prices and thus, earnings for the group. We maintain our Outperform
recommendation with fair value of RM2.35 based on unchanged 11x CY10. Meanwhile, no changes to our Market
Perform call on WTK (FV = RM1.18) and Underperform call on Jaya Tiasa (FV = RM2.30 (from RM1.80) after
increasing our earnings forecasts for FY11-12) based on unchanged 14x FY10 timber division earnings and 14x
FY10 timber division earnings and 12x FY10 plantation division earnings respectively.

♦ Share price correlation with plywood prices highest for Ta Ann. We have plotted the correlation between
average plywood prices and share prices of timber players (i.e. Ta Ann, WTK and Jaya Tiasa) for the past 6 years
(from Jul 03-Dec 09). From a graphical perspective, we believe that Ta Ann’s share price generally outperforms
on the upside when plywood prices are rising, and in line with the market when plywood prices are on the
downtrend (see Chart 6). Meanwhile, for both WTK and Jaya Tiasa, their share prices generally perform in line
with plywood prices, except when plywood prices are on a downtrend, which would see their share prices
generally underperform. From a statistical perspective, we conclude that on average, Ta Ann has the highest
share price correlation with plywood prices (about 62%); as compared to WTK (about 44%) and Jaya Tiasa
(about 15%).

Chart 6: Correlation Between Average Plywood Prices And Share Prices Of Timber Players

400%

350% Ta Ann
WTK
300% Jaya Tiasa
Average plywood prices

250%

200%

150%

100%

50%

0%
O 3

Ja 3
04

4
04

Ja 4
05

05

Ja 5
06

6
06

Ja 6
07

08
07

Ja 7

8
08

Ja 8
09

O 9

Ja 9
10
0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0
n-

n-
l-

l-

n-

l-

n-

n-
l-

n-

n-
l-

l-

l-
pr

pr

pr

pr

pr

pr
ct

ct

ct

ct

ct

ct

ct
Ju

Ju

Ju

Ju

Ju

Ju

Ju
O

O
A

Source: Japan Lumber Report, Bloomberg, RHBRI

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 17 March 2010

Chart 7: TaAnn Technical View Point

♦ TaAnn kicked off a powerful rally, after a successful
breakout from the consolidation at between the
RM4.18 to RM4.81 range in early Mar 2010.

♦ It then charged ahead to a high of RM5.49,

touching its highest level since mid-Sep 2008.

♦ However, the recent formation of the “shooting

star” and “hangman” candles as well as the weak
short-term momentum readings point to a possible
technical pullback ahead.

♦ Therefore, unless it can overcome the recent high

of RM5.49 and expand its upside momentum
towards RM6.05 and RM6.45, it could be at risk of
breaking below RM5.40 on profit-taking pressure.

♦ A further loss of the 10-day SMA near RM5.33 will

trigger a technical correction, with the downside
risk at RM4.81, nearer the 40-day SMA.

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a
period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

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Industry/Sector Ratings

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Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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