Malaysia Market Focus Investment Strategy

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KLCIKLCIKLCIKLCI :::: 1,1,1,1,809.72809.72809.72809.72 Analyst Bernard CHING +603 2604 3918 [email protected] Malaysian Research Team +603 2604 3333 [email protected]

TOP BUY PICKS

Price Price Price Price Mkt CapMkt CapMkt CapMkt Cap Target PriceTarget PriceTarget PriceTarget Price Performance (%)Performance (%)Performance (%)Performance (%)

RMRMRMRM US$mUS$mUS$mUS$m RMRMRMRM 3 mth3 mth3 mth3 mth 12 mth12 mth12 mth12 mth RatingRatingRatingRating

Tenaga Nasional 13.98 21,849 16.00 (1.3) 13.8 BUY Petronas Gas Bhd 22.10 12,110 25.40 (0.9) (8.1) BUY Gamuda 5.21 3,430 6.00 1.2 14.3 BUY Time dotCom 6.12 973 7.10 5.7 36.9 BUY Unisem 2.56 481 3.05 28.6 91.0 BUY Globetronics Technology Bhd

6.09 474 7.50 25.8 58.6 BUY Muhibbah Engineering

2.64 342 3.50 18.4 (4.0) BUY TOP SELL PICKS

Price Price Price Price Mkt CapMkt CapMkt CapMkt Cap Target PriceTarget PriceTarget PriceTarget Price Performance (%)Performance (%)Performance (%)Performance (%)

RMRMRMRM US$mUS$mUS$mUS$m RMRMRMRM 3 mth3 mth3 mth3 mth 12 mth12 mth12 mth12 mth RatingRatingRatingRating

Maxis 6.99 14,534 5.85 (1.3) 0.9 FV Petronas Chem 6.29 13,935 4.25 16.7 (7.6) FV IOI Corp 4.19 7,362 4.15 (11.0) (20.3) FV KLK 22.06 6,506 19.60 (1.6) (10.7) FV UMW OG 2.04 1,221 1.75 (27.7) (49.0) FV MMHE 1.33 589 0.90 (9.5) (65.5) FV Source: AllianceDBS

DBS Group Research . Equity

20 May 2015

Malaysia Market Focus

Investment Strategy

Refer to important disclosures at the end of this report

The grind continues • Despite widespread media coverage of political

and governance issues, economic issues remain a key concern for electorates

• Strong 1Q15 GDP due to pre-GST front-loading; consumer sentiment and spending may take up to four quarters to normalise

• Valuations are rich; end-2015 KLCI target unchanged at 1,750

•••• Focus on defensive stocks and proxies for strong USD and 11MP

Economic issues remain a concern. Rising cost of living has depressed the consumer sentiment index to a 6-year low. The strong 1Q15 GDP growth of 5.6% was likely due to pre-GST front-loading. Consumer sentiment and spending are unlikely to improve in the near term due to GST implementation in April, and could take up to four quarters to normalise. Corporate earnings remain lacklustre. Weak consumer spending, normalisation of credit growth, and weak commodity prices, continue to dampen corporate earnings growth. Following a 4.7% decline in 2014 FBMKLCI earnings, we forecast earnings will rebound by 9.3% in 2015, but there is still downside risk particularly from the banking sector. It pays to be defensive. The FBMKLCI is trading at 17x CY15 P/E (+1 SD) amid risk of downgrades to earnings and sovereign credit rating. And in the immediate term, Malaysian equity performance is likely to be pedestrian at best. We are retaining our end-2015 KLCI target of 1,750 (CY16 14.6x P/E), and do not see immediate re-rating catalysts to support broad-base accumulation until fundamentals improve. Key themes for 2H15: strong USD and 11MP. The flip side of a weaker MYR is stronger export earnings. In this respect, the technology sector is a prime beneficiary, besides riding on sustained demand for smartphones and wearable devices. Meanwhile, the construction sector will be a prime beneficiary of infrastructure spending under the 11

th Malaysia Plan (11MP)

which will be released on 21 May. We also overweight the utilities sector because of resilient earnings. Buy on weakness. We would advise to sell on technical rebound and buy on weakness. Our top picks for 2H15 include Tenaga, Petronas Gas, Gamuda, Muhibbah, Time dotCom, Globetronics, and Unisem.

Market Focus

Investment Strategy

A depressed nation?

There is generally weak sentiment in Malaysia currently as the

media has been rife with issues that include rising cost of living,

high indebtedness (at both household and government levels),

domestic political concerns, and the lack of transparency at

1MDB.

In a March survey by the Merdeka Center on public perception

towards the 1MDB controversy, 69% of respondents seem to

have little awareness of the issue, and only 33% feel they are

affected. In the January survey, 47% of respondents feel the

country is heading in the wrong direction compared to 39% who

feel it is moving in the right direction. Note that the percentage

of naysayers has exceeded the optimists since end 2013. While

approval ratings for the Prime Minister has dropped to 44%, the

lowest since Jan 2014, what is interesting is that an

overwhelming 62% of respondents viewed economic concerns

as the main issue compared to only 3% each who believe it is

political and racial issues which have hogged the headlines.

Clearly, the electorates are more interested in issues which hurt

their pockets rather than engage in coffee shop politics.

Results of voters survey on 1MDB

Source: Merdeka Center

Approval rating for the Prime Minister


Market Focus

Investment Strategy

Issues facing voters


Strong 1Q GDP but slower growth ahead

While 1Q15 real GDP growth of 5.6% was close to expectations

(5.5%), the strength of private consumption (1Q15: +8.8% y-o-

y) was largely attributed to pre-GST front-loading of consumer

spending. As GST was implemented on 1 April 2015, we expect

GDP growth to moderate from 2Q onwards. Drawing from

observations of GST implementation/rate hikes in other nations,

inflation will spike while GDP growth will slow post-GST

implementation. Though this is transitory, it typically takes up to

four quarters to normalise. Furthermore, the expected slowdown

in domestic consumption is supported by a 6-year low MIER

consumer sentiment index reading of 72.6 in 1Q15.

Impact of GST implementation/rate hike on GDP

Source: AllianceDBS

Impact of GST implementation/rate hike on inflation

Source: AllianceDBS

MIER consumer sentiment index

60

70

80

90

100

110

120

130

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

Source: Malaysian Institute of Economic Research

Market Focus

Investment Strategy

We had highlighted in our strategy report dated Dec 2014, that

besides slower domestic consumption as a result of weak

consumer sentiment, growth trajectory would also be affected by

cyclically slower credit growth and depressed commodity prices.

Our banking analyst, Lim Sue Lin, is now projecting industry loan

growth of just 8% in 2015 and 2016, at the lower end of the

8%-14% range over the last six years. BNM-led tighter credit

underwriting, high household indebtedness and subdued

business conditions are among the reasons for the slower credit

growth ahead.

While crude oil price has rebounded 15.5% YTD and is now

hovering at around USD66 (Brent), we remain cautious of the

near-term outlook for oil price given continued aggressive

production by OPEC members, prospect of large supply from Iran

after the sanction is lifted, and a pick-up in shale oil production

at higher price levels. In 2015, Malaysia will also be impacted by

the lag effect of lower LNG prices, which typically lag crude

prices by six months.

Crude palm oil (CPO) spot prices have fallen 5.7% YTD to

RM2,166/MT (as of 18 May) because of excess supply of soybean

and CPO, as well as weak exports. Though the recent El Nino

reporting by Australia’s Bureau of Meteorology has created some

excitement, it is still at a nascent stage and much depends on the

severity of the El Nino and the impact it has not just on oil palm

plantation, but more importantly, soybean harvest.

Corporate earnings to remain lacklustre

We expect corporate earnings growth to remain lacklustre in the

near term in view of the weak growth drivers outlined earlier.

Our forecast for FBMKLCI aggregate free-float weighted earnings

for CY2015 is cut by 2.4%. We are now projecting 9.3%

earnings growth in 2015 (2014: -4.7%), the second slowest

growth among the ASEAN-5. The banking sector is the largest

earnings growth driver in 2015 with 37.6% contribution to

growth. This remains a concern as banking earnings have been

under pressure due to NIM compression, slow loan growth,

higher provisions, and GST-induced higher operating costs.

Hence, we remain convinced the earnings downgrade cycle is not

over yet.

FBMKLCI CY15 earnings forecasts

28,000

29,000

30,000

31,000

32,000

33,000

34,000

35,000 Aggregated free-float weighted 2015 KLCI earnings

Source: AllianceDBS, Bloomberg

Earnings growth comparison in ASEAN 5

9.0%

9.3%

10.7%

12.7%

15.0%

18.8%

0% 5% 10% 15% 20%

Singapore

Malaysia

South East Asia

Philippines

Thailand

Indonesia

Source: AllianceDBS, Bloomberg Finance L.P.

FBMKLCI earnings growth trend

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

F

20

16

F

-4.7%

9.3%11.0%

Source: AllianceDBS, Bloomberg Finance L.P.

Source of FBMKLCI earnings growth in 2015

37.6%

2.2%

17.8%

3.7%

7.5%

2.5%

22.0%

6.9%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Banking Media Telco Consumer Plantation Oil & Gas Utilities Others

KLCI CY15 Earnings Growth Contributors

Source: AllianceDBS

Market Focus

Investment Strategy

Key themes for 2H15

It pays to It pays to It pays to It pays to be be be be defensivedefensivedefensivedefensive

The FBMKLCI is currently trading at 17x CY15 P/E (marginally

higher than +1SD P/E of 16.8x) on the back of CY15 earnings

growth of 9.3%. Given the prevalent earnings risk, Malaysian

equities are trading at rich valuations. And given the risk of a

potential sovereign credit rating downgrade by Fitch Rating and

weaker earnings post-GST implementation, Malaysian equity

performance is likely to be pedestrian at best in the immediate

term. On the external front, the impending interest rate hike in

the US and risk of Greece exiting the Eurozone are some of the

risk factors in the global equity markets.

FBMKLCI P/E trend

8

10

12

14

16

18

20

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Mean:

15.2x

+ 1 s.d.

16.8x

(x)

- 1 s.d.

13.6x


Despite weaker fundamentals, Malaysian equities are still trading

at 0.9x P/E premium over the MSCI ASEAN Index, in line with its

historical mean premium of 1.1x.

Malaysia P/E premium over ASEAN

-0.5

0

0.5

1

1.5

2

2.5

No

v-0

9

Ma

r-1

0

Jul-

10

No

v-1

0

Ma

r-1

1

Jul-

11

No

v-1

1

Ma

r-1

2

Jul-

12

No

v-1

2

Ma

r-1

3

Jul-

13

No

v-1

3

Ma

r-1

4

Jul-

14

No

v-1

4

Ma

r-1

5

Mean:

1.1

+ 1 s.d.

- 1 s.d.

Source: Bloomberg

On a brighter note, Malaysia is a low beta market, and the least-

sensitive to a weak domestic currency among the ASEAN-5. In

the event of a global equity sell down on US interest rate hike,

we expect Malaysian equity to remain relatively sheltered.

Ranking of Asia markets’ sensitivity to domestic currency weakness

Source: Datastream, DBS Bank

We are retaining our end-2015 KLCI target of 1,750 (CY15 16.3x

P/E, CY16 14.6x P/E), which reflects our current cautious stance.

Although we estimate only 5% downside to our KLCI target

from current level, there are no immediate re-rating catalysts to

justify broad-base accumulation until fundamentals improve. As

such, we advise investors to be defensive, to sell on strength and

buy on weakness.

We prefer stocks with resilient earnings, strong cash flows, and

that are liquid. The large caps that fit these criteria include

Tenaga NasionalTenaga NasionalTenaga NasionalTenaga Nasional, Petronas GasPetronas GasPetronas GasPetronas Gas, and Public BankPublic BankPublic BankPublic Bank.

Our top sell ideas include IOI Corp, KLK, Maxis, Petronas

Chemicals, MMHE and UMW Oil & Gas.

Strong USD continues to favour technology playersStrong USD continues to favour technology playersStrong USD continues to favour technology playersStrong USD continues to favour technology players

Over the last 12 months, the Ringgit has depreciated by 9.4%

against the USD. A weaker Ringgit favours corporates which

revenues are denominated in a stronger foreign currency, such as

the USD. Some of the sectors that have benefitted from this

include technology, oil & gas, glove and furniture. Among these

sectors, we prefer the technology sector as a proxy play because

they will also benefit from sustainable demand for smartphones

and wearable devices. Our top picks in this sector are

GlobetronicsGlobetronicsGlobetronicsGlobetronics and UnisemUnisemUnisemUnisem.

Market Focus

Investment Strategy

MYR-USD cross rate

2.90

3.00

3.10

3.20

3.30

3.40

3.50

3.60

3.70

3.80

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Source: Bloomberg

11111111tttthhhh Malaysia Plan is a sentiment boosterMalaysia Plan is a sentiment boosterMalaysia Plan is a sentiment boosterMalaysia Plan is a sentiment booster

The 11th Malaysia Plan (11MP), a development blueprint by the

government for 2016-2020, will be announced on 21 May. Like

the previous Malaysia Plans, the construction sector will be a

major recipient of budget allocation. Therefore, any increase in

the headline budget over the previous amount of RM230bn will

likely be a sentiment booster. Key mega projects to be included

in the 11MP are unlikely to surprise as most have been much-

anticipated, including MRT Line 2, LRT Line 3, RAPID, Pan Borneo

Highway, five highways in Peninsular Malaysia, and Penang

Integrated Transport Master Plan. The KL Construction Index is

currently trading at mean level or 1-year forward P/E of 17x.

Drawing parallels from the onset of the 10MP in June 2010, the

Index also traded at mean level but subsequently moved up to

>2SD six months later.

KL Construction Index PE

-2SD

-1SD

Mean

+1SD

+2SD

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

2-Jan-09

2-Jul-09

2-Jan-10

2-Jul-10

2-Jan-11

2-Jul-11

2-Jan-12

2-Jul-12

2-Jan-13

2-Jul-13

2-Jan-14

2-Jul-14

2-Jan-15

PE (x)


While construction players are generally bullish on the outlook

for contract flows from the government, a lot still hinges on the

implementation timeline for these projects. Our top pick for the

construction sector is GamudaGamudaGamudaGamuda as it is the best proxy to the

transportation projects (MRT, High Speed Rail and Penang

Transport). The smaller cap companies which we like include

MuhibbahMuhibbahMuhibbahMuhibbah (diversified expertise in civil engineering works, marine

and oil & gas) and KimlunKimlunKimlunKimlun (front-runner for more tunnelling

lining segment and segmental box girders for MRT Line 2).

Sector weightings

There are no changes to our sector weightings except for a

downgrade of the shipping sector from overweight to neutral

following the recent run up in share prices. We continue to

overweight the following sectors: ConstructionConstructionConstructionConstruction (infrastructure

spending under 11MP), technologytechnologytechnologytechnology (benefit from sustained

global demand for smartphones/wearable devices and stronger

USD), and utiliutiliutiliutilitiestiestiesties (resilient earnings stream and beneficiary of

energy reform in Malaysia).

The consumerconsumerconsumerconsumer sector remains our only underweight as continued

weak consumption will dampen spending ahead.

Sector Views

OverweightOverweightOverweightOverweight

Construction Technology Utilities

NeutralNeutralNeutralNeutral

Automotive Aviation Banks Gaming Glove Healthcare Oil & Gas Plantation Property REITs Shipping (↓) Telecommunication

UnderweightUnderweightUnderweightUnderweight Consumer

Source: AllianceDBS

Market Focus

Investment Strategy

Top stock picks

Our top picks for 2H15 reflect our defensive stance until

sentiment and outlook improve:

Tenaga NasionalTenaga NasionalTenaga NasionalTenaga Nasional (TP: RM16.00) has strong earnings visibility from

full implementation of the fuel cost pass-through mechanism as

it will no longer bear the risk of volatile fuel costs. It will also

benefit from the expansion of its internal power generation

capacity (Janamanjung 4 commissioned in Mar 15) which will

reduce its generation cost.

Petronas GasPetronas GasPetronas GasPetronas Gas (TP: RM25.40) is defensive with steady recurring

income from the processing and distribution of gas, but without

exposure to the volatility in energy prices. Pengerang

regasification plant is the next earnings growth catalyst when it

commences operation by 2018.

GamudaGamudaGamudaGamuda (TP: RM6.00) is the best proxy to the transportation

project play. After clinching the PDP role for MRT line 2, it will be

a front-runner for tunnelling works for MRT line 2 as tunnel

boring machines used for line 1 are a sunk cost. It is also a front

runner for Penang Integrated Transport and LRT Line 3.

MuhibbahMuhibbahMuhibbahMuhibbah (TP: RM3.50) has been excessively sold down along

with other oil & gas stocks, which is not justified given its

exposure to various segments of infrastructure other than oil &

gas. It remains in a good position to secure jobs in RAPID and is

our favoured mid-cap pick for exposure to RAPID.

GlobetronicsGlobetronicsGlobetronicsGlobetronics (TP: RM7.50) continues to see healthy volume

growth for its proximity sensors which are used in smartphones

and tablets, and wearable sensors. The ongoing ramp up in

capex for a new depth imaging sensor will double its capacity by

1H16. Despite a good run in the share price, Globetronics should

trade at a premium to its historical P/E given impressive 3-year

earnings CAGR of 25%. Globetronics is also our sole High

Conviction BUY.

UnisemUnisemUnisemUnisem (TP: RM3.05) is poised to see improving margins due to

strong demand for its high-margin wafer bumping and wafer-

level chip scale packaging segment (WLCSP) and cost

rationalisation exercises. Furthermore, it is a net beneficiary of a

stronger USD as all its sales are in USD, compared to only 50-

60% of total cost.

Time dotComTime dotComTime dotComTime dotCom (TP: RM7.10) is a prime beneficiary of the secular

growth trend in data, amid the rapid expansion of its global

bandwidth and data centre business. The recent disposal of

49.9m DiGi shares will boost its war chest for regional expansion,

consolidation of the data centre market in Malaysia, and/or

raising dividend payout.

Please refer to page 16 and 17 for detailed key investment merits

of these stock picks.

Market Focus

Investment Strategy

FBMKLCI earnings estimate for CY15 and CY16

FBMKLCI

2015 2016 2015 2016

AMMB Holdings Bhd 2.37 1,748.2 11,188.7 Yes 1,782.0 2,016.2 1,033.5 1,169.4

Astro Malaysia Holdings Bhd 1.01 1,559.2 4,895.9 Yes 699.9 938.3 209.8 281.3

Axiata Group Bhd 6.54 4,982.6 33,632.8 Yes 2,648.1 2,942.7 1,533.8 1,704.3

British American Tobacco Malaysia Bhd 1.81 142.8 9,208.3 Yes 934.4 947.0 467.2 473.5

CIMB Group Holdings Bhd 7.30 5,266.8 31,337.3 Yes 3,649.1 4,231.1 2,263.8 2,624.8

DiGi.Com Bhd 4.02 3,732.0 22,429.3 Yes 2,175.1 2,387.6 1,044.1 1,146.0

Felda Global Ventures Holdings Bhd 1.46 1,860.6 3,832.7 Yes 456.7 541.3 232.9 276.0

Genting Bhd 4.16 2,216.5 19,948.9 Yes 1,559.8 1,635.1 929.9 974.8

Genting Malaysia Bhd 2.33 2,967.7 12,642.2 Yes 1,338.2 1,554.1 700.4 813.3

Hong Leong Bank Bhd 1.59 606.8 8,458.3 Yes 2,414.1 2,668.8 814.3 900.2

Hong Leong Financial Group Bhd 0.63 210.6 3,482.6 Yes 1,982.8 2,212.4 396.6 442.5

IHH Healthcare Bhd 2.27 2,739.4 16,409.0 Yes 926.3 1,092.7 308.9 364.4

IOI Corp Bhd 3.67 3,719.8 15,920.9 Yes 1,127.5 1,496.5 660.5 876.8

KLCCP Stapled Group 0.56 451.3 3,281.2 Yes 713.4 734.2 178.3 183.5

Kuala Lumpur Kepong Bhd 2.46 534.4 11,916.8 Yes 950.5 1,110.8 476.9 557.4

Malayan Banking Bhd 7.98 4,304.5 40,289.8 Yes 6,881.0 7,951.8 3,175.0 3,669.1

Maxis Bhd 3.35 2,625.0 18,611.2 Yes 2,079.0 2,227.1 726.9 778.6

MISC Bhd 1.81 1,473.1 12,579.9 Yes 2,347.3 2,518.0 774.6 830.9

Petronas Chemicals Group Bhd 3.68 2,880.0 18,259.2 Yes 2,726.1 2,864.4 981.4 1,031.2

Petronas Dagangan BHD 1.35 298.0 5,948.8 Yes 726.1 751.4 217.8 225.4

Petronas Gas Bhd 3.67 791.5 18,584.3 Yes 1,737.8 1,790.5 695.1 716.2

PPB Group Bhd 1.67 592.7 9,519.6 Yes 948.6 968.1 474.3 484.0

Public Bank Bhd 11.57 3,108.1 59,799.7 Yes 4,861.5 5,409.6 3,913.0 4,354.1

RHB Capital Bhd 1.12 694.6 5,404.1 Yes 2,115.1 2,326.2 567.6 624.2

Sapurakencana Petroleum Bhd 3.16 3,835.0 10,392.8 Yes 1,110.1 1,184.9 710.5 758.3

Sime Darby Bhd 5.69 3,119.0 28,039.4 Yes 2,734.6 3,198.7 1,373.2 1,606.2

Telekom Malaysia Bhd 2.52 2,110.7 15,618.9 Yes 1,025.0 1,175.6 581.6 667.1

Tenaga Nasional Bhd 7.26 3,133.9 44,814.7 Yes 6,616.7 7,003.7 3,674.3 3,889.2

UMW Holdings Bhd 1.37 662.5 7,167.8 Yes 673.4 692.8 381.8 392.8

YTL Corp Bhd 1.63 5,368.9 8,912.3 No 1,414.8 1,446.1 729.0 745.2

Total 512,527.4 29 61,354.9 68,017.6 30,227.1 33,561.1

% Coverage / earnings growth 98.26 9.6 10.9 9.3 11.0

Current implied P/E 17.1 15.4 17.0 15.3

Net Profit (CY)Free Float Weighted

NP

Under

coverage

Weight in

Index

Shares in

KLCI

Wgt'd Mkt

Cap

Source: AllianceDBS Price date: 18 May 2015

Market Focus

Investment Strategy

Sector Outlook

SectorSectorSectorSector OutlookOutlookOutlookOutlook TopTopTopTop Stock PicksStock PicksStock PicksStock Picks

AutomotiveAutomotiveAutomotiveAutomotive

Neutral

• Tighter consumer conditions could further dampen consumer sentiment. This may be

partly offset by aggressive product launches and promotions.

• For manufacturers, the USD would increase the cost of imported material and

pressure margins. Hence, 2015 will be a challenging year for auto players.

None

AviationAviationAviationAviation

Neutral

• Malaysia Airlines (MAB) is in the midst of a restructuring exercise to return the airline

to profitability by 2017. It plans to cut capacity by 10% in 2015, the bulk of which

will be from the European and Middle-Eastern routes. Thereafter, MAB plans to grow

domestic and ASEAN route capacity by 6-7% per annum, and Asia-Pacific route

capacity by 5% per annum. In the near-term, MAB’s plan to shed 6,000 or 30% of

its existing workforce (at the old entity i.e. Malaysian Airline System) will be closely

watched as a key milestone of the restructuring exercise.

• The cheaper fuel cost is a boon for airlines, but we expect the airlines to pass on a

significant portion of the fuel cost savings to consumers. AirAsia and AAX’s decision

to remove fuel surcharge suggests that a significant portion of the fuel cost savings

will be passed on to the consumers. Meanwhile, the stronger USD will weigh on the

airlines’ profitability, as USD-denominated OPEX (fuel, maintenance, operating lease)

and finance cost (from USD-borrowings) will be more expensive. Note that the

majority of Malaysian-listed airlines’ revenues are denominated in local and regional

currencies (i.e. RM, IDR, THB, SGD).

• MAHB’s near-term earnings outlook remains bleak, bogged down by weak passenger

traffic and higher depreciation and finance charges. MAB is planning to cut capacity

by 10% in 2015, and will focus on yield management going forward. Meanwhile, the

other domestic airlines are also toning down their capacity growth going forward, in

a bid to reduce the downward pressure on airfares. Also, the implementation of GST

could reduce consumer discretionary spending – another dampener of travel

demand. In light of all these challenges, the airport operator is only targeting 3%

growth in passenger traffic in 2015, but even this seem to be a tall order to achieve,

going by the YTD passenger statistics (-1.5% y-o-y in 1Q15).

None

BanksBanksBanksBanks

Neutral

• NIM is expected to remain under pressure due to deposit competition as banks

prepare to meet the Liquidity Coverage Ratio requirement under Basel III.

• Sector loan growth forecast is 8% for 2015. Downside risk to our loan growth

assumption would be conversion of loans to bonds as an alternative method of

funding.

• We like PBK and HLBK for its strong credit culture and liquidity. However, HLBK is

contemplating a capital raising exercise to beef up their capital position.

Public Bank, Hong Leong

Bank

Building materialsBuilding materialsBuilding materialsBuilding materials

Neutral

• Competition among cement players is likely to intensify in 2015 as YTL Cement will

add 8% to industry capacity when its expansion is completed early 2015.

• The saving grace for the industry is the prevailing low coal prices. Meanwhile, subsidy

rationalisation measures for electricity tariff have been put on hold.

• CMS is on a better footing as the Sarawak-based company will not be impacted by

price competition, unlike its Peninsular peers.

None

Market Focus

Investment Strategy

Sector Outlook (cont’d)

SectorSectorSectorSector OutlookOutlookOutlookOutlook Top Stock PicksTop Stock PicksTop Stock PicksTop Stock Picks

ConstructionConstructionConstructionConstruction

Overweight

• 11MP to lay foundation11MP to lay foundation11MP to lay foundation11MP to lay foundation. The next key event for the sector is the tabling of the 11MP

in late May. This will create the foundation for the sector over the next five years

(2015-2020) and provide some indication of what projects would be rolled out. A

headline number above the RM230bn allocated under the 10MP would be a

sentiment booster, although we would not read too much into this.

• Timely rollout and execution is more crucialTimely rollout and execution is more crucialTimely rollout and execution is more crucialTimely rollout and execution is more crucial. We feel the priority should be the

scheduled rollout of key high-multiplier projects. Based on our conversation with

contractors, they are more bullish now on potential contract flows compared to

beginning of the year. We expect some overlap of projects mentioned in Budget

2015 as well as the ETP, such as five highways (RM16bn), MRT Line 2 (RM25bn), LRT

3 (RM9bn), High Speed Rail (RM40bn). and Pan Borneo Highway (RM27bn). MRT Line

2 public display will be from May 15 to August 17, suggesting no more delays to the

tender scheduled for end-2015 and awards by mid-2016. Recently, PDP fees for LRT

3 had been finalized at 6% and an award is expected by July 2015.

• Top picks Gamuda, Muhibbah, KTop picks Gamuda, Muhibbah, KTop picks Gamuda, Muhibbah, KTop picks Gamuda, Muhibbah, Kimlun.imlun.imlun.imlun. For larger caps, we prefer Gamuda over IJM.

Gamuda is the best proxy to transportation projects (MRT, High Speed Rail and

Penang Transport) while it also has ample capacity now to take on more projects. For

exposure to smaller cap names, we like Muhibbah which is a good all-round proxy to

civil engineering, marine and oil & gas works. Kimlun is also a good proxy to MRT

Line 2 given its niche in tunnelling lining segment and segmental box girders.

Gamuda, Muhibbah and

Kimlun

ConsumerConsumerConsumerConsumer

Underweight

• 1Q15 consumer sentiment index slumped 10.4 points q-o-q to a six-year low of 72.6

(4Q14: 83), indicating a potentially sharp drop in consumer spending in the coming

quarters as consumers are increasingly wary of the future and becoming more

cautious due to rising cost of living.

• Companies are still in the midst of reporting their 1QCY15 results, with the majority

of the announcements expected out later this month. Overall, we expect quarterly

results to be unexciting given that the sector is generally plagued by rising cost

pressures and is unable to pass on the higher costs due to (1) slower consumer

spending, and. (2) an increasingly competitive operating environment. As such,

margins could continue to be suppressed. We also do not anticipate the pre-GST

front-loading to boost sector earnings significantly in 1QCY15.

• In view of the uninspiring near-term earnings prospects, we are maintaining our

Underweight call for the sector. OldTown remains our top pick for the following

reasons: (1) undemanding valuation compared to regional peers, and (2) the group is

well-positioned to capitalise on rising coffee consumption in Asia, particularly China.

OldTown

GamingGamingGamingGaming

Neutral

• We do not see any major re-rating catalysts for the sector in the near term. We had

downgraded earnings for gaming players in February, as we understand they would

fully absorb the 6% GST imposed without lowering prize payouts. Nonetheless,

weakening domestic consumer sentiment could slow down discretionary spending,

which could in turn further drag Genting Malaysia’s domestic leisure & hospitality

operations and NFO ticket sales.

• Also, the sector may be exposed to the risk of higher sin tax at the next budget.

None

Market Focus

Investment Strategy



GlovesGlovesGlovesGloves

Neutral

• The top four Malaysian-listed glovemakers are set to grow production capacity by

14%/11%/11% in 2015/16/17. While this will exceed forecast global glove

consumption growth of 6-8% p.a., the additional output will be readily absorbed as

(1) these are mainly nitrile gloves where global demand remains strong (i.e. the 6-8%

global glove consumption growth are mainly driven by this product segment), and (2)

increasing trend for outsourcing to Malaysian shores (Halyard Health will close one of

its Thai glove facilities and outsource the production of 3bn gloves p.a. to Malaysian

glovemakers). Meanwhile, progressive commissioning of the production lines and

potential delays in some expansion plans present downside risk to the incoming

supply forecast.

• Nevertheless, competition would likely still heat-up among the glovemakers.

Hartalega with its best-in-class operating structure (i.e. lowest breakeven utilisation)

could choose to be more aggressive in its pricing to: (1) grab market share, (2)

maximise utilisation and profits, and (3) derail competitors expansion plans by

depressing IRRs for future projects. Already, the price competition could be

underway, with Hartalega registering a decline in EBIT/k gloves in 1Q15.

• After the recent run-up in the prices of glove stocks, we only have Supermax on our

BUY list for the sector, premised on its cheap valuation. After repeated delays,

commissioning works at its Plant #10 and #11 are reportedly in progress, and are on

track for full commercial production by end-2015 However, Supermax’s longer-term

growth outlook remains uncertain at this juncture, given the challenges in securing

the necessary infrastructure for the production of rubber gloves.

Supermax

HealthcareHealthcareHealthcareHealthcare

Neutral

• We remain optimistic of the growth prospects for private hospitals operators due to

increasing demand for quality healthcare amid rising disposable income. Capacity

constraint at government healthcare facilities is also expected to drive affluent

patients to private hospitals. The constraint is expected to worsen with public

healthcare development expenditure cut from RM3.7bn in 2010 to RM1.6bn in 2015.

• Generic pharmaceutical players are expected to enter a new growth phase with the

approach of the patent cliff. This provides an opportunity for them to launch new

products and improve sales. Valuation are also more palatable vis-à-vis the hospital

operators.

• There is increasing competition within the retail pharmacy segment with the

emergence of several independent retail pharmacies. The exceptionally high ROEs of

30-40% will be a thing of the past. We expect an industry-wide price war to drive

margins down going forward.

None

MediaMediaMediaMedia

Neutral

• GST implementation will be a dampener for adex in 2015, although adex should

recover slightly in the absence of negative events. Thus, our view is that adex would

remain flat in 2015 as consumers slowly get used to the new tax system and

consumer sentiment gradually normalises.

• Low newsprint cost is a blessing for newspapers publishers, though this will be partly

offset by the weaker Ringgit.

• Nonetheless, downside risks are limited given decent dividend yields for the sector.

None

Market Focus

Investment Strategy



Oil & GaOil & GaOil & GaOil & Gassss

Neutral

• Our view for the year is that crude oil prices will average between USD55-65/barrel.

While there are some catalysts emerging, like US stockpiles inching down, there

remains a possibility of Iran flooding the market with more output. The confluence of

these factors, we believe, will keep crude oil prices range-bound.

• The decision by PETRONAS to cut capex and opex is beginning to take its toll on

companies in the sector. There are similar cuts at other oil majors like Shell and

Exxon’s Malaysia operations. 4Q14 and 1Q15 results have started to show weakness

as companies find that work orders have slowed, there is pressure to cut chartering

rates, and services costs are rising. Furthermore, tender books are shrinking as many

projects, local and abroad, are either delayed or re-tendered, or taken off the table.

• We continue to find room for earnings downgrades, especially in FY15 estimates, but

view that earnings could start to normalise from FY16 onwards. We forecast FY16

crude oil prices will be stronger at USD65-75/barrel as demand and supply forces

adjust to the new crude oil price equilibrium. This will bring many projects back to

the market, although we expect cautiousness to ensue, which suggests lingering

margin pressure for contractors.

• For a play on the recovery of crude oil prices, SapuraKencana is a good proxy given its

upstream exposure. However, we reiterate our HOLD recommendation for now, as

weaker earnings on the back of a sluggish contracting market have not been fully

priced in. In the small cap space, we like Pantech for its RAPID exposure. Tendering

activity is picking up at RAPID, and the group is poised to see improving orderflow

from late FY15 onwards. We continue to recommend avoiding fabricators like MMHE

and TH Heavy which are seeing depleting orderbooks with no replenishment in sight.

We would also avoid pure play rig owner UMW Oil & Gas, which is fighting an uphill

battle with an oversupply of rigs coupled with declining drilling activity.

SapuraKencana, and

Pantech.

PlantationPlantationPlantationPlantation

Neutral

• After hitting a low of RM2,082 at end Apr15, palm oil futures bounced back 7% to

RM2,225 by mid-May. This was largely driven by a similar jump in soybean oil prices.

Unless El Nino conditions worsen dramatically, we do not expect recent price recovery

to maintain its current trajectory; as we understand fruit formation is currently set for

a strong peak season.

• So far, 1QCY15 results revealed a more pronounced low crop season. While some

producers have attributed the lower yields to dry weather in 1QCY14, comparisons

were made against a high base. Lower CPO output did not prevent CPO prices (in

USD terms) from dropping 23% y-o-y in 1QCY15 - given record global soybean crop

in the current season. While stronger USD YTD helped to buffer earnings in Ringgit

and Rupiah, it also encouraged South American farmers to plant more soybeans and

caused translation FX losses for planters with USD borrowings.

• Assuming Indonesia’s B15 programme kicks off on 1 July 2015, we expect Indonesian

biodiesel production to reach 2.6m MT by the end of this year – representing a 28%

drop y-o-y. While we believe efforts to channel palm oil exports for domestic

biodiesel consumption should necessitate faster crushing of global soybean supply to

replace the oil, we believe this would only impact CY16 prices – rather than CY15

• In the short term, Indonesian B15 export levies will have negative impact on

Indonesian planters’ earnings as well as on Malaysian planters with significant

contribution from Indonesian subsidiaries. Our earnings forecasts are under review

pending the publication of Indonesian regulations.

• We remain cautious on CPO prices and plantation earnings in the near term, subject

to deterioration of El Nino conditions and a recovery in crude oil prices. Based on our

Genting Plantations

Market Focus

Investment Strategy

sensitivity analysis, at current CPO prices, biodiesel production would breakeven at

Brent price of US$78/bbl.

PropertyPropertyPropertyProperty

Neutral

• We expect slower property sales volumes in 2015 although prices should hold up due

to cost-push factors. Sentiment should remain subdued following the recent

tightening measures and inflationary pressures, but mass-market products at strategic

locations will continue to enjoy robust sales as affordability remains a factor among

purchasers.

• Rising building material prices as well as tight foreign labour supply could heighten

execution risk and dampen developers' margins. There is no property bubble for now

but we fear an oversupply of KL office space, hybrid high-rise units and Iskandar

Malaysia high-end condos.

• MKH is our pick for the sector given its large exposure to affordable housing and

landed properties in the Kajang-Semenyih growth corridor. We also like SP Setia for

its strong earnings visibility and focus on sustainable township developments.

MKH, SP Setia

REITsREITsREITsREITs

Neutral

• Rental reversion growth is expected to be moderate-to-low for all subsectors. Retail

rents and occupancy should remain resilient at prime locations, but weak consumer

sentiment and the GST implementation will dampen spending, thus reducing tenants’

ability to stomach higher rentals. Office spaces continue to be in an oversupply, and

will focus more on maintaining occupancy than hiking rents. Industrial rents should

maintain a steady growth pace, but is also subject to the general climate of softer

business and consumer sentiment.

• Inorganic growth via acquisitions is the theme for the year in the face of weak

organic growth. To date MRCB-Quill, Axis and Sunway REIT have completed some

planned purchases in 1Q; while CapitaMalls Malaysia Trust, Amanah Harta Tanah,

Amfirst REIT, and Al-‘Aqar Healthcare REIT have respectively announced proposed

acquisitions targets. However, the key point remains as to whether the REITs manage

to inject at a value that will be DPU accretive to unitholders.

• Overall, the prospects for REITs in 2015 are neutral. Valuation-wise, spreads of larger-

cap REITs of c.1.9% are near the longer-term average of 2% against the 10-year

Malaysian Government Security yield of c.3.9%. We deem this comfortable barring

interest rate changes, as spreads historically have narrowed to below 1.7% before.

• Our top pick is Sunway REIT predicated on strong DPU growth from the completion

of Sunway Putra refurbishments, as well as a visible pipeline of potential asset

injections from sponsor Sunway Bhd.

Sunway REIT

Market Focus

Investment Strategy



ShippingShippingShippingShipping

Neutral

• LNG rates are expected to remain under pressure due to smaller cargo following

delays in several major LNG projects, as well as the burgeoning LNG orderbook which

is largely driven by financial investors and private equity funds. Japan’s bid to restart

its nuclear power plants could lead to a more acute oversupply situation in the LNG

tanker markets, as it will dampen the LNG trade.

• Crude tanker rates will continue to trend up. Increasing long-haul trade (i.e. West

Africa to China and India) is expected to generate higher tonne-miles, which will lead

to higher deadweight demand (+2.3% in 2015). This comes at a time when crude

tanker supply is expected to contract (+1.1% in 2015). Product tanker rates are

expected to remain lacklustre, with tonnage supply expected to grow at a faster

5.7% vs tonnage demand growth of 4.4% in 2015.

• Chemical tanker rates are expected to remain lacklustre on slower eastbound trade,

due to weak Chinese chemical imports. Rates for the transatlantic eastbound routes

are most affected by this.

• Dry bulk recovery is expected to be punctuated with volatile rates, as the reversal of

slow-steaming could unwind the trapped capacity and pressure rates. The risk of this

happening is higher if oil prices remain at current depressed levels. Meanwhile,

China’s determination to tackle air pollution and excess steel capacity may put a

brake on Chinese iron ore and coal imports. This will reduce demand for capesize and

panamax bulkers.

• We like MISC for its resilient cash flow, backed by its-long-term LNG charters and

offshore Oil & Gas assets. In addition, its petroleum segment has firmly turnaround,

and will be a key earnings driver in FY15F. However, valuation is rich at the moment,

which lead us to rate the stock as a HOLD.

None

TechnologyTechnologyTechnologyTechnology

Overweight

• Earnings of Malaysian semiconductor players have been largely underpinned by

healthy demand growth and the weaker Ringgit. Forward guidance remains positive

with most players busy expanding their capacity to meet customers’ demand. This is

mainly driven by the smartphone segment, where their key customers (mainly in RF)

are gaining additional content wins in new smartphone models amid the secular

growth trend in rising 4G LTE adoption.

• We like Globetronics for its healthy balance sheet and strong earnings growth,

underpinned by new product wins for a key customer of its sensor division.

• We also expect better performance by Unisem given robust demand and capacity

expansion of its high-margin wafer bumping and wafer level chip-scale packaging

(WLCSP) segment in FY15.

Globetronics, Unisem

TelecommunicationTelecommunicationTelecommunicationTelecommunication

Neutral

• We believe expectations of the positive impact of passing on the 6% GST to prepaid

subscribers have been priced in, and hence, a reversion will be a setback for mobile

operators.

• Recent quarterly results of mobile operators have also been lacklustre, while there are

signs that competition is heating up especially in the prepaid segment.

• We prefer fixed-line operators TIME and TM, given their compelling valuation and

growth potential.

Time dotCom

Market Focus

Investment Strategy


SectSectSectSectorororor OutlookOutlookOutlookOutlook Top Stock PicksTop Stock PicksTop Stock PicksTop Stock Picks

UtilitiesUtilitiesUtilitiesUtilities

Overweight

• Expect promising energy demand growth with the implementation of infrastructure

projects, export recovery and urbanisation. The resilient and growing recurring

income for utilities players could re-rate the sector further.

• Tenaga Nasional and Petronas Gas are the biggest beneficiaries of the sector reform

(fuel subsidy rationalisation and fuel diversification).

• Our top pick is TNB for more attractive valuation and improving earnings visibility

from the implementation of the incentive-based regulated return (IBR). We also like

Petronas Gas for its solid fundamentals with no fuel and pricing risks as well as

potential upside from gas subsidy rationalisation plan.

TNB, Petronas Gas

Market Focus

Investment Strategy

Top Stock Picks

StocksStocksStocksStocks KeyKeyKeyKey Investment MeritsInvestment MeritsInvestment MeritsInvestment Merits

Tenaga Tenaga Tenaga Tenaga

NasionalNasionalNasionalNasional

• Strong earnings visibility.Strong earnings visibility.Strong earnings visibility.Strong earnings visibility. The full implementation of fuel cost pass through mechanism will be a strong re-rating catalyst

for TNB as the national utility will no longer bear the burden of volatile fuel cost.

• Capacity eCapacity eCapacity eCapacity expansionxpansionxpansionxpansion. TNB’s coal-fired Janamanjung 4 (1010 MW) plant will be commissioned by Mar15. All in, we

estimate TNB’s net generation capacity would increase by 15% by 2017. Ultimately, the new power plants will reduce

generation cost because of more efficient technology.

• Top pickTop pickTop pickTop pick. Current valuation remains undemanding despite the strong performance of the share price in FY14. The tariff-

setting mechanism and robust outlook for electricity demand will support strong earnings ahead.

Petronas GasPetronas GasPetronas GasPetronas Gas • Steady recurrinSteady recurrinSteady recurrinSteady recurring earnings. g earnings. g earnings. g earnings. The new Gas Processing Agreement and Gas Transportation Agreement will continue to

underpin earnings visibility going forward. With the higher reservation charges, Petgas will enjoy more resilient earnings

which will help to offset the lower charge under the performance-based earnings.

• Pengerang regas plant the next growth driver. Pengerang regas plant the next growth driver. Pengerang regas plant the next growth driver. Pengerang regas plant the next growth driver. The recently announced Pengerang regasification terminal is expected to

enhance Petgas’ earnings by 6-7% when the plant is operational by 2018. The LNG will be mainly supplied to

PETRONAS’ Refinery and Petrochemical Integrated Development (RAPID) and there will be no fuel risk to Petgas.

• Maintain BUY with RM25.40 TP. Maintain BUY with RM25.40 TP. Maintain BUY with RM25.40 TP. Maintain BUY with RM25.40 TP. We continue to like Petgas for its promising outlook, supported by rising gas demand,

solid balance sheet, and strong parentage. Our DCF-derived TP is based on 7% WACC and 3% terminal growth.

GamudaGamudaGamudaGamuda • Best tBest tBest tBest transportation proxyransportation proxyransportation proxyransportation proxy. Gamuda has ample capacity to take on large scale projects given MRT line 1 is at its tail end.

We expect it to be a front runner for more transportation related works such as MRT line 2, Penang Integrated Transport

and also LRT 3. The recent finalisation of the public display for MRT Line 2 also suggests that the project is on track.

• Earnings uptrend to resume in FY17Earnings uptrend to resume in FY17Earnings uptrend to resume in FY17Earnings uptrend to resume in FY17. FY15 is expected to be a peak year for earnings with earnings expected to decline

in FY16 as MRT Line 2 will not yet contribute. Starting FY17, we expect its high quality earnings to start its uptrend again

once it beefs up its orderbook.

• BUY, TP RM6.00BUY, TP RM6.00BUY, TP RM6.00BUY, TP RM6.00. Our preference is for Gamuda among the large caps as we think there will be more catalysts to look

out for. Given its less diversified nature compared to IJM, it also represents a more leveraged proxy to the sector.

MuhibbahMuhibbahMuhibbahMuhibbah • Infrastructure division most promising.Infrastructure division most promising.Infrastructure division most promising.Infrastructure division most promising. Muhibbah believes the infrastructure sector is on a multi-year upcycle with

potentially RM140bn worth of projects (Table 1) up for grabs. Also, raw material costs are more benign now with

cement and steel prices 5% and 15% cheaper y-o-y, respectively. Muhibbah will be bidding for major projects such as

RAPID, MRT Line 2 and West Coast Expressway, and is quietly confident of clinching two other jobs with a combined

value of RM900m. One is for a local port and the other an overseas job. YTD win is RM277m, and it should close the

year better than the RM504m wins in 2014.

• Cambodian airports double capacity. Cambodian airports double capacity. Cambodian airports double capacity. Cambodian airports double capacity. Effective July, the Siam Reap and Phnom Penh airports will double their existing

capacity to 12m passengers. The US$85m capex was financed by only one year of operating cashflow, which suggests

the airports are cash cows. Passenger arrivals reached 5.7m in 2014 (+12 % y-o-y) led by a recovery in Chinese tourists

(20% of total; +22% y-o-y). We estimate its 21% stake is worth RM580m (DCF, WACC of 10%, RM/USD3.65 and

average passenger growth of 5% until 2040) which is already 63% of its market cap.

• Favco capitalising on other revenue streams. Favco capitalising on other revenue streams. Favco capitalising on other revenue streams. Favco capitalising on other revenue streams. Favco has been receiving increasing orders in the US for tower cranes, and is

beefing up its maintenance division (c.10% of revenues). This should cushion potentially softer orders for oil and gas

cranes. We still expect a record year for Favco as it runs down its high-margin peak RM1bn orderbook. It is also exploring

supplying cranes to RAPID.

• Separating wheat from chaff Separating wheat from chaff Separating wheat from chaff Separating wheat from chaff ---- BUY. BUY. BUY. BUY. We remain convinced the stock had been unfairly sold down for its implied O&G

exposure. Petronas has reiterated that RAPID will proceed as planned, and it represents just one of the many projects

Muhibbah is looking to capitalise on. At current price, the market is assigning negligible value for the infrastructure,

shipyard, Roadcare and Petronas license. BUY for 58% upside to our TP of RM3.50, which is pegged to 15x CY15 EPS

(sector average).

Market Focus

Investment Strategy

Top Stock Picks (cont’d)

StocksStocksStocksStocks Key Investment MeritsKey Investment MeritsKey Investment MeritsKey Investment Merits

TTTTime dotComime dotComime dotComime dotCom • Leveraging on secular growth in dataLeveraging on secular growth in dataLeveraging on secular growth in dataLeveraging on secular growth in data. TIME is a prime beneficiary of the secular growth trend in data (>80% of revenue)

amid the rapid expansion of its global bandwidth and data centre business. Investment into 3 new submarine cable

systems (i.e. APG, FASTER, and AAE-1) will underpin near-term earnings growth once they start to come online in 2016-

2017

• Domestic business still growing healthilyDomestic business still growing healthilyDomestic business still growing healthilyDomestic business still growing healthily. Demand for higher speed bandwidth services and fibre connectivity

requirements by Malaysia mobile operators for their LTE network rollout will drive further growth for TIME domestic

wholesale bandwidth business in 2015.

• Beefing up war chestBeefing up war chestBeefing up war chestBeefing up war chest. The company recently disposed 49.9m DiGi shares (out of 137.5m shares it owned) and raised

RM311m cash. This could potentially be utilized in the near term for its regional expansion, consolidation of the data

centre market in Malaysia, and/or higher dividend payout.

• Undemanding valuationUndemanding valuationUndemanding valuationUndemanding valuation. Our SOP-based RM7.10 TP implies a FY16 valuation of 18.8x PE for TIME core business

(excluding net cash, dividend income, and the value of DiGi stake), cheapest among the Malaysian telcos.

GlobetronicsGlobetronicsGlobetronicsGlobetronics • Strong growth in sensor business. Strong growth in sensor business. Strong growth in sensor business. Strong growth in sensor business. GTB continues to see healthy volume for proximity sensors (built into smartphone) and

wearable sensors from its Swiss customer. In addition, the company is also ramping up capex for a new depth imaging

sensor which will more than double its existing capacity upon completion by 1H16. We expect contribution from the

sensor division to rise to 41-53% in FY15-16F, vs. 32% in FY14.

• Quartz devices and LED/SSL divisions remain solid. Quartz devices and LED/SSL divisions remain solid. Quartz devices and LED/SSL divisions remain solid. Quartz devices and LED/SSL divisions remain solid. Monthly production volumes for its quartz devices and LED/SSL

divisions remain healthy given robust demand and new product transfers by existing key customers i.e. Epson Toyocom,

Osram and Cree.

• HighHighHighHigh----conviction BUY, RM7.50 TP conviction BUY, RM7.50 TP conviction BUY, RM7.50 TP conviction BUY, RM7.50 TP pegged to 18x FY16 EPS, which is +2 SD of its 5-year historical P/E band. This is

reasonable given GTB’s strong earnings growth (3-year earnings CAGR of 25%) and healthy balance sheet with net cash

position. A key re-rating catalyst will be its new depth imaging sensor going into mass production.

UnisemUnisemUnisemUnisem • Improving marginsImproving marginsImproving marginsImproving margins. The company’s margins and profitability have been improving, thanks to: 1) strong demand for its

high-margin wafer bumping and wafer-level chip scale packaging segment (WLCSP); and 2) cost rationalisation exercises.

• WLCSP and wafer bumping a sweet spotWLCSP and wafer bumping a sweet spotWLCSP and wafer bumping a sweet spotWLCSP and wafer bumping a sweet spot. Unisem is targeting 8% revenue growth (in USD terms) in FY15, largely

underpinned by the 25-40% capacity expansion of its wafer bumping and WLCSP segment. The strong demand for its

advanced packaging segment is stemming from its top 2 customers i.e. Skyworks Solutions and Qorvo.

• Benefiting from weaker RinggitBenefiting from weaker RinggitBenefiting from weaker RinggitBenefiting from weaker Ringgit. The company is a net beneficiary of a stronger USD as its sales are 100% based in USD,

while only 50-60% of total cost is based in USD.

• Compelling valuationCompelling valuationCompelling valuationCompelling valuation. Our RM3.05 TP is pegged to 1.7x FY16 BV (with 14% ROE). We believe rising contribution from

advanced packages amid strong relationship with RF customers should drive a re-rating in Unisem’s valuation.

Market Focus

Investment Strategy

AllianceDBS Research recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUYSTRONG BUYSTRONG BUYSTRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY BUY BUY BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLDHOLDHOLDHOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED (negative total return i.e.> -10% over the next 12 months)

SELLSELLSELLSELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (“ADBSR”), a subsidiary of Alliance Investment Bank Berhad (“AIBB”) and an associate of DBS Vickers Securities Holdings Pte Ltd (“DBSVH”). This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of ADBSR. The research set out in this report is based on information obtained from sources believed to be reliable and ADBSR, its holding company AIBB, their respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “Alliance Bank Group”) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The Alliance Bank Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The Alliance Bank Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The Alliance Bank Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other banking services for these companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the Alliance Bank Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

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