PP 7767/09/2010(025354)

Malaysia Corporate Highlights

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

Sector Upda te
1 July 2010
MARKET DATELINE

Recom : Neutral
Consumer Sector (Maintained)

Resilient, Though Slowing Growth Trend Envisaged In

The 2H

Table 1 Consumer Valuations

Fair EPS EPS growth PER P/NTA P/CF GDY
FYE Price Value (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
KFC Dec 10.12 11.20 77.1 89.5 17.2 16.2 13.1 11.3 2.4 8.4 2.6 OP
Amway Dec 7.95 8.45 54.5 56.5 23.6 3.5 14.6 14.1 5.3 7.9 6.3 OP
Carlsberg Dec 5.00 5.85 40.7 42.8 64.8 5.2 12.3 11.7 2.7 -14.2 4.9 OP
KPJ Health Dec 3.27 4.25 24.0 26.6 14.6 10.7 13.6 12.3 1.5 13.0 4.3 OP
Parkson Jun 5.45 6.40 29.2 36.3 15.0 24.3 18.7 15.0 2.9 7.4 1.3 OP
Faber Dec 2.67 3.54 26.5 24.2 16.4 -8.8 10.1 11.0 2.2 6.3 2.6 OP
QL Resources Mar 3.95 4.60 31.1 36.5 15.4 17.4 12.7 10.8 2.7 8.8 2.6 OP
Daibochi Dec 3.17 4.20 35.1 38.0 16.9 8.3 9.0 8.3 3.4 7.6 7.1 OP
AEON Dec 4.90 5.80 41.4 45.2 8.7 9.4 11.8 10.8 1.6 10.8 2.4 OP
Hai-O^ Apr 3.79 4.06 37.3 42.3 6.7 13.2 10.1 9.0 1.3 4.7 6.6 MP
BAT Dec 43.88 38.95 243.5 233.2 -6.9 -4.2 18.0 18.8 n.m 13.4 5.0 UP
Sector Avg 7.9 6.7 15.3 14.4
^ FY10-11 valuations refer to those of FY11-FY12

♦ Slower increase in consumer spending outlook. RHBRI’s economics Table 2: Basis For Fair Value Estimates
team envisages consumer spending to grow at a slower pace of 4.6% yoy in Company Valuation Basis
the 2H vs. +5.4% yoy in the 1H. For the full-year, however, consumer KFC Target PER of 12.5x CY11
spending will likely bounce back to +5.0% in 2010 (from +0.7% in 2009). discount to the sector
Nevertheless, there is still a risk in our consumer spending projections, benchmark.
Amway DCF based on WACC of 8.1%.
arising from the uncertainty in government policies, especially on the cut in
consumer subsidy. We believe this uncertainty could further dampen Carlsberg DCF based on WACC of 9.2%.
consumer spending particularly on big-ticket items, until clearer KPJ Target PER of 16x FY11 (10%
implementation strategies are in place. We expect retailers and MLM players Healthcare discount to the regional
to be most affected by the removal in subsidy, while healthcare and F&B peers’ average).
sectors would be least affected. Hai-O Target PER of 10x CY11
discount to the sector
♦ Changing dynamics of healthcare sub-sector. Malaysia healthcare benchmark due to smaller
market capitalisation.
sector is expected to grow at a resilient 8-10% p.a. driven by: 1) Parkson SOP based on: 1) target PER
approximately 2% steady population growth; 2) ageing population; and 3) of 24x CY10 for PRG; 2)
greater affluence in healthcare standards to fuel strong demand for target PER of 11.5x CY10 EPS
healthcare services. We anticipate the growth in public healthcare sector, for Vietnam; 3) target PER of
driven by higher allocations from the government to benefit Faber (OP; FV 14x CY10 for Malaysia; 4) 6
excluded stores in China at
= RM3.54). Furthermore, it was recently reported that UEM Group is looking 10x PE; and 5) net cash
to dispose of its 34% stake in Faber as part of its on-going asset disposal (debt) balance.
programme, which could further provide trading opportunity for the stock. Daibochi Target PER of 10x CY10
Meanwhile, the higher uptake in insurance policies in Malaysia would benefit discount to retail benchmark
due to smaller market
the private healthcare sector, such as KPJ (OP; FV = RM4.25). Furthermore,
capitalisation.
with the news flow on M&A in the private healthcare sector in the region Faber SOP based on: 1) DCF on its
going strong, we believe that KPJ will be in investors’ spotlight and deserves concession IFM; 2) 14x FY11
to be trading at a higher valuation, further narrowing its discount to on non-concession IFM; 3)
regional peers’ PER of 18x. DCF on its property; and 4)
net cash (debt) balance.
♦ Risks. 1) Further drop in consumers’ disposable income; and 2) Rising QL
Resources
Target PER of 13x CY11,
discount to the sector
costs of goods and services, hence reducing consumers’ spending power. benchmark.
AEON Target PER of 14x CY10, the
♦ Investment case. Our top pick for the sector is KPJ. We continue to like average PER for the retail
KPJ for its leading position and its expansion plans in Malaysia’s growing sector.
healthcare market. We maintain our fair value of RM4.25 based on BAT DCF based on WACC of 7.9%.
unchanged target FY11 PER of 16x (after imputing a 10% discount to
regional peers’ average PER). We reiterate our Outperform call on the
stock. Nevertheless, we are keeping our Neutral stance for the consumer Hoe Lee Leng
sector given: 1) our Underperform recommendation on BAT; and 2) slower (603) 92802239
increase in consumer spending outlook coupled with uncertainties arising hoe.lee.leng@rhb.com.my
from the cut in consumer subsidy issue.

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♦ Slower increase in consumer spending outlook. RHBRI’s economics team expects softer export growth in
2H 2010, translating into a slower increase in production and jobs and consequently, a more moderate increase
in consumer spending. RHBRI’s economics team envisages consumer spending to grow at a slower pace of 4.6%
yoy in the 2H vs. +5.4% yoy in the 1H. For the full-year, however, consumer spending will likely bounce back to
+5.0% in 2010 (from +0.7% in 2009). Nevertheless, there is still a risk in our consumer spending projections,
arising from the uncertainty in government policies, especially on the cut in consumer subsidy. We believe this
uncertainty could further dampen consumer spending particularly on big-ticket items, until clearer
implementation strategies are in place. We expect retailers and MLM players to be most affected by the removal
in subsidy, while healthcare and F&B sectors would be least affected.

Changing Dynamics Of Healthcare Sub-sector

♦ Healthcare sector expected to grow at 8-10% p.a.. Over the years, total expenditure for healthcare in
Malaysia rose from RM8.2bn in 1997 to RM35.1bn in 2008 (see Chart 1), representing a CAGR of 12.9%. Total
healthcare expenditure of RM35.1bn in 2008 represents 4.8% of GDP, up from 2.9% in 1997. This growth was
supported by higher government healthcare spending as well as increasing contribution from the private sector
over the years. Given its relatively resilient industry, Malaysia’s healthcare industry is expected to grow at a
resilient 8-10% p.a. driven by: 1) approximately 2% steady population growth; 2) ageing population; and 3)
greater affluence in healthcare standards to fuel strong demand for healthcare services.

Chart 1: Trend for Total Expenditure on Health (from 1997-2008)

R M ( bn) % o f GD P
40000 6.00
35000
5.00
30000
4.00
25000
20000 3.00
15000
2.00
10000
1.00
5000
0 -
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Healthcare spending % to GDP

Source: Ministry of Health, Malaysia

♦ Growth in public healthcare to benefit Faber. In the 2010 Budget, the Government allocated a sum of
RM14.8bn to the healthcare sector to enhance the quality of healthcare services in Malaysia. We think the bulk
of this would go to the construction of new government hospitals, which would benefit Faber (OP; FV = RM3.54
(from RM3.40 after rolling forward target PER to FY11 for non-concession IFM business from FY10)) given that
the company provides integrated facilities management (IFM) services to government hospitals in six states
across Malaysia. It was recently reported that UEM Group is looking to dispose of its 34% stake in Faber as part
of its ongoing asset disposal programme. Although the potential buyer is still not known, we expect this would
provide a potential trading opportunity for the stock. We continue to like Faber for its resilient earnings derived
from the concession business in the IFM segments, ongoing expansion for its non-concession business both
locally and overseas, coupled with the possibility of further expansion through M&A.

♦ Higher uptake of medical insurance policies to benefit KPJ. As for the private healthcare business, we
expect it to grow on the back of higher uptake of medical insurance policies in Malaysia, which would benefit
players such as KPJ (OP; FV = RM4.25). Furthermore, the M&A activity in the healthcare sector recently, which
includes Khazanah‘s proposed partial general offer for Singapore-listed Parkway Holdings’ shares, and takeover
bids for Australia-listed Healthscope by private equity groups, has resulted in valuations moving higher. This
supports our view that there is significant growth potential for the healthcare sector in the region. We continue
to like KPJ for its leading position and its expansion plans in Malaysia’s growing healthcare market.

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Updates on other sub-sectors

♦ Expansion drive and resilient earnings expected from F&B players. In 2H2010, we expect F&B players to
persist with their expansion plans while continuing to generate stable earnings. For KFCH (OP; FV = RM11.20),
we understand that it will continue to expand in the Indian market, given its successful opening of its first outlet
in Pune in Apr 10, which is currently generating 2x the revenue of the average outlet in Malaysia. As for QL
Resources (OP; FV = RM4.60), its expansion plans in Indonesia (MPM, ILF and POA) and Vietnam (ILF) are
starting to bear fruit, which we believe would contribute more significantly from FY03/12 onwards. For Daibochi
(OP; FV = RM4.20), we expect earnings to be resilient as well, given that more than 90% of its clients are in the
F&B sector.

♦ Tobacco: Less than 20s pack ban in place. The Government has put in place the less than 20s pack ban with
effect from 2 Jun 10, after a flip flop in policy, which resulted in some temporary confusion amongst industry
players (BAT (UP; FV = RM38.95). We expect only to see a small tobacco excise duty hike in the upcoming
Budget 2011 (to control illicit cigarette levels).

♦ Brewery: Shift in trend to on-trade consumption, lead to higher sales and better margins. For the
brewers (Carlsberg (OP; FV = RM5.85), we believe the FIFA World Cup celebration would help boost earnings for
2Q and 3Q 2010. We understand that beer sales increased by 10-15% from FIFA World Cup 2006, which we
believe arose from the change in beer consumption habits i.e. greater on-trade vs. off-trade consumption, which
also yields higher margins. With the booming outlook of F&B outlets in Malaysia, we expect this trend in on-
trade beer consumption to continue in the near term.

♦ Retail / MLM sales may see signs of slowing down. Following the slower increase in consumer spending
envisaged for 2H vs. 1H, coupled with uncertainties looming around the reduction in consumer subsidy, we
believe that consumer confidence may be impacted and this could temporarily be negative for local retailers /
MLM players with big-ticket sales items such as Hai-O (MP; FV = RM4.06). Despite this, we believe prospects for
Amway (OP; FV = RM8.45) are still positive as 80-85% of its total cost is denominated in US$ and demand for
its healthcare products is resilient. Nevertheless, we maintain our Outperform recommendation for Parkson (FV
= RM6.40) and AEON (FV = RM5.80) as Parkson’s sales are more China-centric vs. Malaysia-centric (about 85-
90% of total sales is to China) while AEON’s products are mainly of lower-ticket value, which would be more
resilient.

Valuations and Recommendation

♦ Our top pick for the sector is KPJ. We continue to like KPJ for its leading position and its expansion plans in
Malaysia’s growing healthcare market. Furthermore, with the news flow on M&A in the healthcare sector in the
region going strong, we believe that KPJ will be in investor’s spotlight and deserves to be trading at a higher
valuation, further narrowing its discount to the regional peers’ PER of 18x. We maintain our fair value of RM4.25
based on unchanged target FY11 PER of 16x (after imputing a 10% discount to regional peers’ average PER). We
reiterate our Outperform call on the stock.

♦ Maintain Neutral. Nevertheless, we are keeping our Neutral stance for the consumer sector given: 1) our
Underperform recommendation on BAT; and 2) slower increase in consumer spending outlook coupled with
uncertainties arising from the cut in consumer subsidy issue.

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Chart 2: KPJ Technical View Point

♦ KPJ share price’s upward momentum accelerated in
Nov 2009 and reached a high of RM2.80 in Jan
2010.

♦ After a slight pullback in Feb and Mar, the stock

soared to a fresh high of RM3.10 in Apr, before
settling down with another consolidation phase.

♦ It once fell to a low of RM2.65 in May, but quickly

rebounded to above the UTL and geared up with
another rally.

♦ This round, it hit a new high of RM3.45, before

giving in to a profit-taking dip lately.

♦ Yesterday, despite opening steeply lower with a

4sen technical gap, it managed to register a
“hammer” candle suggesting a likely recovery soon.

♦ Technically, the stock’s medium-term uptrend

remains firmly intact, with a strong support at
RM3.10, near the supportive UTL of RM3.06.

♦ In the short term, if it manages to retake the 10-

day SMA near RM3.37 and the RM3.40 hurdle, it
will refresh its upward momentum and head higher
towards RM3.60, its next resistance level, in our
view.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
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contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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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.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

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Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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the actions of third parties in this respect.

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