PP 7767/09/2010(025354)

29 March 2010

Malaysia Corporate Highlights

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

Sector Upda te
29 March 2010
MARKET DATELINE

Building Materials Recom : Overweight

(Upgraded)
Investors’ Risk Appetite For Cement Stocks To Improve

Table 1 : Building Material Sector Valuations

Price Fair EPS growth PER P/NTA P/CF GDY
FYE Value EPS (sen) (%) (x) (x) (x) (%) Rec
RM/s RM/s FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Kinsteel Dec 1.01 1.22 10.2 11.7 n.a. 15.2 9.9 8.6 1.1 3.4 1.0 OP
Ann Joo Dec 2.77 3.53 40.1 45.0 +>100 12.2 6.9 6.2 1.3 n.m 8.7 OP
Hiap Teck Jul 1.41 2.01 22.1 22.6 +>100 2.1 6.4 6.2 0.7 n.m 1.4 OP
CSC Steel Dec 1.76 2.02 22.4 22.5 -7.2 0.3 7.8 7.8 0.9 12.2 6.4 OP
Lafarge M Cement Dec 6.16 7.21 51.5 52.6 6.1 2.3 12.0 11.7 1.6 9.3 4.9 OP
Sino Hua-An Dec 0.49 0.71 5.9 9.5 +>100 59.9 8.3 5.2 0.7 7.6 0.0 OP
Perwaja Hldgs Dec 1.46 1.79 15.0 22.8 +>100 51.8 4.3 3.7 0.8 36.6 0.0 OP
YTL Cement Jun 4.25 5.07 46.6 45.8 -9.0 -1.7 9.1 9.3 1.4 6.7 7.1 OP
Sector Avg 30.4 10.3 9.6 8.7
# Former name Ornasteel
^ FY08-09 valuations refer to those of FY10-11

♦ Cement sub-sector due for a re-rating. Share prices of cement Chart 1. Cement Production
producers under RHBRI’s coverage (Lafarge and YTL Cement) have '0 00 t o nne s
24,000

underperformed the market by 3.7-4.6% pts YTD. We believe the cement 22,000
21,910

sub-sector is due for a re-rating, prompted by: 20,000 19,456 19,635

18,000

1. New expectations leading up to the announcement of 10MP, which will

17,243 17,326
16,659

16,000

in turn boost investors’ risk appetite towards construction-related 14,000

13,820
14,336

stocks; and 12,000

2. The anticipation of a meaningful pick-up in domestic cement

10,000
2001 2002 2003 2004 2005 2006 2007 2008

consumption from 2Q 2010.

♦ Rebates likely to decline, higher dividend is possible. Given higher Chart 2. Market Share By
expected demand going forward, we believe rebates given by cement Clinker Capacity

producers are likely to decline. With higher expected net selling prices and
minimal capex going forward, we believe cement producers are likely to 3%1%
16%
declare higher dividend in the near term.
23%

♦
CIMA
Expecting higher energy costs in 2010. Nevertheless, we expect the Lafarge
Tasek

rise in net selling prices and domestic demand for cement to be partly YTL Cement
Sarawak Clinker

offset by higher energy cost. 13%

Aalborg RCI

44%

♦ 1-year target forward PER raised. Given better investors’ risk appetite
in the near term, we are raising our 1-year target forward PER for the
cement stocks from 9-12x to 11-14x.
♦ Indicative fair values raised. Our indicative fair values for the cement
stocks are raised by 16.7-21.9% and our recommendations are upgraded
from underperform to Outperform.
♦ Investment case. Given the improved outlook on the cement sub-sector,
we are upgrading our rating for the cement sub-sector from underweight
to Overweight and our top pick for the cement sub-sector is Lafarge.
Overall, our call on the building materials sector (which includes the steel
sub-sector) has been upgraded to Overweight from neutral.
Chye Wen Fei
(603) 92802172
chye.wen.fei@rhb.com.my

Please read important disclosures at the end of this report.

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♦ Cement sub-sector due for re-rating. Share prices of cement producers under RHBRI’s coverage (Lafarge
and YTL Cement) have underperformed the market by 3.7-4.6% pts YTD (see Chart 3). We believe the poor
share price performance was mainly due to the slow pace of the roll-out of public projects. However, we believe
the cement sub-sector is due for a re-rating, underpinned by:

1. New expectations leading up to the announcement of the 10th Malaysia Plan (10MP) in Jun 10, which will in
turn boost investors’ risk appetite towards construction-related stocks (including cement producers, whose
fortunes are tied largely to construction activities); and

2. The anticipation of a meaningful pick-up for domestic cement consumption from 2Q 2010 arising from the
implementation of large-scale projects (see Table 2) as well as a pick-up in property development activities
(as evidenced in the surge in property launches since 2H 09).

Chart 3: YTD Share Price Performance Of Cement Producers under RHBRI’s Coverage

( %)
6.0

4.0

2.0

YTD Performance
0.0 Absolute Relative
(%) (%)
-2.0 Lafarge -1.4 -4.5
YTL Cement -0.9 -4.0
-4.0

-6.0

-8.0

FB M KLCI Lafarge YTL Cement

Source: Bloomberg

Table 2: The Expected Flow Of Large-Scale Projects

Project Value (RMbn)
2009 (Awarded)
Pahang-Selangor Water Transfer - Upstream (water tunnel) 1.3
Medini, Iskandar (utility & infrastructure packages) 1.0
New LCCT (Earthwork Package 1) 0.4
Sub-total 2.7

2010
New LCCT (Earthwork Package 2) (Awarded) 0.3
New LCCT (Terminal, satellite, parking apron & runway) 1.9
Pahang-Selangor Water Transfer - Upstream (Klau Dam, dual pipelines & Semantan pump station) 2.5
Nanga Merit access road, Kapit, Sarawak 1.2
Murum access road, Kapit, Sarawak 0.9
Sub-total 6.8

2011
Ampang & Kelana Jaya LRT line extension (civil works) 3.5
Medini & EduCity (infrastructure and building) 2.0
Mengkuang Dam, Seberang Prai 1.0
Sub-total 6.5

2012 & Beyond

Gemas-JB double tracking 5.0
Pahang-Selangor Water Transfer - Downstream (Langat 2 water treatment plant) 4.1
Kota Damansara - Cheras new LRT line 25.0
Sub-total 34.1
Total 50.1
Source: Bursa Malaysia, RHBRI, various news reports

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♦ Rebates likely to decline, higher dividend is possible. Given the higher demand going forward, we believe
rebates given by cement producers are likely to decline (hence resulting in higher net selling prices). With higher
net selling prices and minimal capex going forward, we believe cement producers are likely to declare higher
dividend in the near term. We estimate that Lafarge can raise gross dividend per share (GDPS) from 38 sen in
FY12/09 to 45 sen, assuming: (1) Net gearing is to be maintained at 0.1x from FY12/09; and (2) Free cash flow
of RM350m in FY12/10. For YTL Cement, we estimate that YTL Cement can double GDPS from 7.5 sen in
FY06/09 to 15 sen, assuming: (1) Net gearing is to be maintained at 0.3x; and (2) Free cash flow of RM250m in
FY06/10.

♦ Expecting higher energy costs in 2010. Nevertheless, we do expect the rise in net selling prices and
domestic demand for cement to be partly offset by higher energy cost. This is mainly due to the global economic
recovery that has boosted demand for electricity (and hence demand and prices of thermal coal that is one of
the major inputs in power generation).

Risks

♦ Risks for cement sector. The risks include: (1) Delays in the roll-out of projects, resulting in lower cement
consumption; and (2) Steep rise in energy prices.

Valuations

♦ Earnings forecasts maintained, 1-year target forward PER raised from 9-12x to 11-14x. We are
maintaining our earnings forecasts for both YTL Cement and Lafarge, as we believe we have adequately reflected
the improved fundamentals in our earnings forecasts. Given our anticipation of better investors’ risk appetite in
the near term, we are raising our 1-year target forward PER for the cement stocks from 9-12x to 11-14x that is
roughly in line with our 1-year target forward PER for the construction sector.

♦ Indicative fair values raised. Following the raise in 1-year target forward PER, our indicative fair values for
the cement stocks are raised by 16.7-21.9% (see Table 3) and our recommendations are upgraded from
underperform to Outperform.

Table 3: Changes in Indicative Fair Values & Recommendation

Indicative Fair Value Recommendation
Old New Change Old New Change
(RM) (RM) (%)
Lafarge 6.18 7.21 +16.7 Underperform Outperform ↑
YTL Cement 4.16 5.07 +21.9 Underperform Outperform ↑
Source: RHBRI

Sector rating

♦ Upgraded from underweight to Overweight. Given the improved outlook on the cement sub-sector, we are
upgrading our rating for the cement sub-sector from Underweight to Overweight. Our top pick for the cement
sub-sector is Lafarge. Overall, our call on the building materials sector (which includes the steel sub-sector) has
been upgraded to Overweight from neutral.

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
Berhad (previously known as RHB Sakura Merchant Bankers Berhad). 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

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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.

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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