PP 7767/09/2011(028730)

Corporate Highlights

Malaysia
RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
S e cto r Upd at e Company No: 233327 -M

7 October 2010
MARKET DATELINE
Consumer Sector Recom : Neutral
(Maintained)
Rising Consumerism, Tobacco Hit By Early Excise,
Brewery To Await Verdict

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) FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY11 FY11
KFC Dec 3.12 3.61 22.5 26.1 16.7 15.7 13.8 12.0 1.9 10.3 9.0 OP
Carlsberg Dec 5.27 6.03 42.8 47.5 5.2 10.8 12.3 11.1 2.6 10.2 4.9 OP
KPJ Health Dec 3.54 4.51 26.6 29.9 10.7 12.2 13.3 11.8 1.6 10.5 4.5 OP
Parkson Jun 5.85 7.72 37.3 47.9 26.6 28.5 15.7 12.2 2.7 5.7 1.4 OP
Faber Dec 3.08 3.82 34.2 38.2 30.4 11.4 9.0 8.1 2.1 5.8 2.6 OP
QL Resources Mar 4.81 5.41 34.7 41.1 13.0 18.4 13.9 11.7 2.8 13.3 2.4 OP
Daibochi Dec 3.05 4.12 31.9 35.3 9.3 10.9 9.6 8.6 2.9 7.9 6.6 OP
Amway Dec 7.90 8.45 56.5 58.4 3.5 3.5 14.0 13.5 5.1 8.7 6.6 MP
AEON Dec 5.99 5.72 44.0 47.5 7.2 7.8 13.6 12.6 1.7 5.6 2.0 MP
Hai-O^ Apr 3.02 2.84 28.6 32.2 2.5 12.6 10.6 9.4 1.0 4.1 6.3 UP
BAT Dec 47.50 42.60 229.3 226.0 -7.9 -1.4 20.7 21.0 n.m 17.6 4.3 UP
Sector Avg 11.1 10.8 15.8 14.2
^ FY11-12valuations refer to those of FY12-FY13

♦ Consumer spending growth to moderate but remain resilient. RHBRI Table 2: Basis For Fair Value Estimates
forecasts a consumer spending growth of 5.4% p.a. for 2011. Although this Company Valuation Basis
is a more moderate growth compared to the forecasted consumer spending KFC Target PER of 16x CY11
growth for 2010 of 5.6%, we believe the growth is still relatively resilient, discount to the sector
given the rising consumerism and high savings of the Malaysian population. benchmark.
Amway DCF based on WACC of 8.1%.
The main reasons for the slight dip in consumer spending growth in 2011
are: 1) the subsidy removal; 2) the reinstatement of EPF employee’s Carlsberg DCF based on WACC of 9.2%.
contribution to 11% from 8%; and 3) the higher base effect. Hai-O Target PER of 10x CY11
♦ Domestic demand to drive retail sales. We expect the growth in discount to the sector
benchmark due to smaller
consumer spending to drive topline growth for a few of our retail players market capitalisation.
such as AEON (MP, FV=RM5.72) and Amway (MP, FV=RM8.45), and to a Parkson SOP based on: 1) target PER
certain extent, Parkson (OP, FV=RM7.72). For Hai-O (UP, FV=RM2.84) of 22x CY11 for PRG; 2)
however, we believe its topline growth will be affected by the internal issues target PER of 11.5x CY11 EPS
for Vietnam; 3) target PER of
with regards to its MLM division’s tighter stocking rules, thus affecting
14x CY11 for Malaysia; 4) 6
membership drive and productivity. excluded stores in China at
♦ Daibochi will be boosted by an oversupply of plastic resin. The 10x PE; and 5) net cash
(debt) balance.
margins of plastic packaging player Daibochi (OP, FV=RM4.12) will be QL Target PER of 16x CY11.
boosted by an expected oversupply of plastic resin, its main raw material. Resources
We understand that the oversupply is expected to come at the end of 2010
AEON Target PER of 13x CY11
due to new capacity from the Middle-East. The new capacity would increase
the global supply of plastic resin, putting downward pressure on prices.
♦ F&B will be driven by geographical and segmental expansion. The BAT DCF based on WACC of 7.5%.
resilient growth in consumer spending will also be a factor for KFC (OP, Daibochi Target PER of 13x FY11
FV=RM3.61) and QL Resources (OP, FV=RM5.25) revenue growth.
However, for KFC, our view is that moving forward, its revenue will likely be
driven more by its expansion plans locally and overseas, mainly India. For
basic food industry player QL Resources, we continue to like its outlook
given its recent acquisition of a 23.29% stake in Lay Hong, which is
involved in the production of eggs, broiler farming and feedmill activities,
similar to QL.
♦ Risks. 1) Further drop in consumers’ disposable income; and 2) Rising Hoe Lee Leng
costs of goods and services, hence reducing consumers’ spending power. (603) 92802641
♦ Maintain Neutral. We are maintaining our Neutral stance on the sector. hoe.lee.leng@rhb.com.my
Our top picks are Parkson and Carlsberg.

Please read important disclosures at the end of this report.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 1 of 6
available for download from www.rhbinvest.com
 Consumer Spending Outlook

♦ Consumer spending growth to moderate but remain resilient. RHBRI forecasts a consumer spending
growth of 5.4% p.a. for 2011. Although this is a more moderate growth compared to the forecasted consumer
spending growth for 2010 of 5.6%, we believe the growth is still relatively resilient, given the rising
consumerism and high savings of the Malaysian population. The main reasons for the slight dip in consumer
spending growth in 2011 are: 1) the subsidy removal; 2) the reinstatement of EPF employee’s contribution to
11% from 8%; 3) the higher base effect.

Chart 1. Domestic demand on account of consumer spending

% yoy
25
Domestic demand
Consumer spending
20

15

10

-5
00 01 02 03 04 05 06 07 08 09 10

Source: Department of statistics

♦ Rising consumerism. Private consumption as a percentage of GDP has grown over the last 10 years, indicating
a more consumer-centric economy. In absolute terms, 2000-2009 private consumption has grown at a CAGR of
6.6% p.a., faster than 4.3% p.a. GDP growth throughout the period.

Chart 2. Private consumption as a % of GDP

%
58 80000

56 70000

54
60000

52
50000
50
40000
48
30000
46

20000
44

42 10000

40 0
00 01 02 03 04 05 06 07 08 09 10

Source: Department of statistics

Retail

♦ Domestic demand to drive retail sales. We expect the growth in consumer spending to drive topline growth
for a few of our retail players such as AEON (MP, FV=RM5.72) and Amway (MP, FV=RM8.45), and to a certain
extent, Parkson (OP, FV=RM7.72). For Hai-O (UP, FV=RM2.84) however, we believe its topline growth will be
affected by the internal issues with regards to its MLM division’s tighter stocking rules, thus affecting
membership drive and productivity. Given that Hai-O’s MLM division contributes the bulk of its revenues and PBT

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 2 of 6
available for download from www.rhbinvest.com
 7 October 2010

(FY04/10: 64% and 59% for revenue and PBT respectively), we expect a contraction of Hai-O’s FY11 topline and
net profit.

♦ China consumer spending to drive Parkson. Parkson would, to a certain extent, be able to ride on the rising
domestic demand. However, the bigger impact towards its topline and earnings would come from its department
stores in China, given that it contributes 95% towards Parkson’s PBT. We believe Parkson would benefit from
China’s recent plan to increase its minimum wage by 20% p.a., ultimately doubling it by 2015.

♦ MLM to see better margins. Notwithstanding Hai-O’s internal issues, we expect both Hai-O and Amway’s gross
margins to improve in 2011 given the stronger ringgit against the USD, as both purchase a portion of their
products in US$. Although the impact for Amway would be stronger, given ~80% of its product purchases are
denominated in US$, as compared to Hai-O’s ~20%. However, the impact for Amway will only be felt in 2011 as
it has hedged its inventory for 2010.

Packaging

♦ Daibochi will be boosted by an oversupply of plastic resin. The margins of plastic packaging player
Daibochi (OP, FV=RM4.12) will be boosted by an expected oversupply of plastic resin, its main raw material. We
understand that the oversupply is expected to come at the end of 2010 due to new capacity from the Middle-
East. The new capacity would increase the global supply of plastic resin, putting downward pressure on prices.
As Daibochi’s earnings were recently affected by rising plastic resin cost, we believe this is a positive news and
we expect Daibochi to be able to take advantage of its expanding margins. Demand wise, we expect Daibochi’s
continuous product innovation and foray into the non-F&B sector to continue to drive revenue growth.

Food and Beverage

♦ F&B will be driven by geographical and segmental expansion. The resilient growth in consumer spending
will also be a factor for KFC (OP, FV=RM3.61) and QL Resources (OP, FV=RM5.25) revenue growth. However,
for KFC, our view is that moving forward, its revenue will likely be driven more by its expansion plans locally and
overseas, mainly India. For basic food industry player QL Resources, we continue to like its outlook given its
recent acquisition of a 23.29% stake in Lay Hong, which is involved in the production of eggs, broiler farming
and feedmill activities, similar to QL. We believe the acquisition will contribute positively for QL in terms of
synergistic cost savings and incremental earnings. Furthermore, it is in the process of expanding its palm oil
division, with its recent purchase of 40.51% stake in Boilermech, a palm oil biomass boiler manufacturer. The
purchase would complement its palm oil division.

Tobacco

♦ Dark days for tobacco players continue. For the third time in a row, the excise duty was increased earlier
than the tabling of the Budget. We believe this surprise hike was done so as to stop smokers from stocking up
before the announcement is made. To add to the misery, the hike was higher than expected, at 3 sen/stick,
translating to a hike of 70 sen per 20 stick pack. Note that we have previously assumed a lower hike of 1
sen/stick. BAT’s premium segment pack price rose to RM10 from RM9.30, while its value for money segment
pack price rose to RM8.50 from RM7.80. This new pricing does not include a potential further increase which
could be implemented as a result of an additional 0.5 sen/stick cess to be paid to the NKTB, although there is no
confirmation if and when it will come into play. We believe the price rise will be followed by a further increase in
illicit trade of cigarettes, which is currently estimated to be at ~38% of the market as the price diferential
between illicit and legal cigarettes has now widened. The rise in illicit coupled with the Government’s various
initiatives (Table 2), will cause a further drop in TIV, which has already been on the downtrend. We estimate
that for 2011, the TIV could drop by 5%. The only positive thing for smokers now is that with cigarette prices at
RM10, they do not need to wait for the change.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 3 of 6
available for download from www.rhbinvest.com
 7 October 2010

Table 2 Directives from Ministry of Health

Implementation Directive Comment
Nov 08 Price parity for all packs of cigarettes Price of 25s pack was increased by as much as RM1.50 (only
applicable to BAT).

Feb / Mar 09 Price discounting of not more than 5% and
not to last for more than a month
Jun 09 Price/stick of cigarette for packs less than
20s to be at least 5% more than price/stick
for 20s
Implemented to reduce price war among industry players.
Industry players adjusted the prices of its 14s and 18s to be at
least 5% more than the price/stick for 20s.

Jun 09 Pictorial health warning Initial impact from the pictorial health warning could be as short
as two months, as they expect smokers to gradually become
immune to the new pictorial health warnings. However, these
pictorial health warnings would likely have to be replaced every
two to three years, which would cause additional printing cost
moving forward.

Jan 10 Minimum floor price of 32sen/stick Implemented to ensure that cigarettes are not easily accessible
to smokers, especially youths, as well as to ensure that cheap
cigarettes will not be flooding the market, once the AFTA-Cept
takes place. Would not have as great an impact to the Big Three
cigarette players as they have successfully differentiated their
VFM packs from the ELPCs i.e. raised their price bar to
RM7.80/pack, which is RM1.40 (or 22%) above the minimum
threshold.

Jan 10 Price discounting of maximum three times a Implemented to reduce price war among industry players.
year

June 10 Less than 20s pack ban Implemented to curb younger smokers.

Source: Media, BAT, RHBRI

Brewery

♦ Brewer’s verdict next. On the brewery side, we opine that a potential excise duty hike might be on the cards
this year as the industry has had excise duty hike free years for the past 4 years. We estimate that an extreme
case scenario of a 20% increase in excise duty will cause Carlsberg’s gross profit to contract by 28% assuming
no subsequent price hike. However, should there be an excise duty hike, it is likely that a price hike would
ensue, although the quantum of hike may not completely cover the incremental cost caused by the excise duty
hike as has been the case in previous years. Furthermore, Carlsberg’s margins could also be affected by wheat
prices, its main raw material, which is experiencing upward pressure due to Russia’s export ban on wheat.
However, the near-term risk of eroding margins due to the rise in wheat prices is mitigated as Carlsberg has
secured most of its input requirements up to early 2012.

Valuations and Recommendation

♦ Retail, F&B and Packaging. In terms of valuations, we have in our recent strategy piece increased most of our
target PERs for our PER based valuation stocks by 1-1.5x, given improving growth prospects. For KFC and QL,
we increased the target PERs by 1.5x to 16x CY11 as we believe both stocks should trade in line with the market
given their strong fundamentals and reasonable liquidity. The changes in fair values and recommendations for
the said companies are laid out in Table 3.

♦ BAT and Carlsberg. After the excise duty hike, we are maintaining our Underperform call on BAT, but
increased its DCF derived fair value to RM42.60 (from RM40.25) to account for an updated WACC of 7.5% (from
7.9% previously) in line with RHBRI’s current assumptions. We believe that the current share price of RM47.50
has run up ahead of its fundamentals, which is currently trading at rich valuations of 20.7x and 18.4x of our and
the street FY11 earnings estimates respectively. Comparatively, JTI, BAT’s competitor, is trading at only 11.6x

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 4 of 6
available for download from www.rhbinvest.com
 7 October 2010

FY11 street estimates. We are also maintaining our Outperform call on Carlsberg with an unchanged DCF-
derived fair value of RM6.03.

♦ Maintain Neutral. We are maintaining our Neutral stance on the sector. Our top picks are Parkson and
Carlsberg.

Table 3. Change In Target PER, Fair Value and Recommendation

PER Indicative Fair Value Recommendation
Old New Old New Change Old New Change
(RM) (RM) (%)
Daibochi 12.0 13.0 3.80 4.12 8.3 OP OP -
KFC 14.5 16.0 3.27 3.61 6.9 OP OP -
QL Resources 14.5 16.0 4.90 5.41 7.2 OP OP -
AEON 12.0 13.0 5.28 5.72 8.3 MP MP -
Hai-O 10.0 10.0 2.84 2.84 - UP UP

Chart 3: HaiO Technical View Point

♦ After a strong rally to a fresh all-time high of
RM4.93 and the record of a bearish “shooting star”
candle, the share price of HaiO turned into a bear
trend.

♦ Though it has always tried to stage a technical

rebound, the stock was constantly capped at below
the Downtrend Resistance Line (DRL).

♦ In early Sep 2010, when it launched a technical

rebound to above the RM3.20 level, the DRL near
RM3.40 – RM3.50 region capped its upside.

♦ As a result, the stock plunged to below the RM3.20

level with a huge technical gap on the chart. It
recently touched a fresh year low of RM2.85.

♦ Technically, given the strong resistance at the DRL,

coupled with the firm downtrend on both the 10-
day and 40-day SMAs, the stock is likely to stay
within the current downtrend.

♦ Any increase in selling momentum will press the

stock towards the support at RM2.59, or even
RM2.00.

♦ It must remove RM3.20, near the DRL, and both

the SMAs convincingly before it can reverse the
current bearish scenario, in our view.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 5 of 6
available for download from www.rhbinvest.com
 7 October 2010

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
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
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
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

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.

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.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for
the actions of third parties in this respect.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 6 of 6
available for download from www.rhbinvest.com