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

Marke t Upda te
29 March 2010
MARKET DATELINE

Sarawak Focus
Settling The SCORE

♦ Sarawak elections soon? Sarawak is due to hold its state elections at

Table 1. Sarawak-Related Plays
the latest by May 2011, although indications are that polls could be held
Price# FV Rec
this year. As it stands, both sides of the political fence have recently
(RM) (RM)
focused effort on strengthening and expanding their support in the state,
HSL 1.48 1.56 MP
thus keeping expectations high. The constant news flow will likely be the
TNB 7.97 9.50 OP
catalyst for local companies there.
Ta Ann 5.80 5.95 OP
♦ Why the focus on Sarawak? We had stated in 2008 that the Sarawak WTK 1.19 1.18 MP
Corridor Of Renewable Energy (SCORE) was the most attractive of the Jaya Tiasa 3.50 2.35 UP
five economic corridors launched by former PM Tun Abdullah Badawi. This Sime Darby 8.61 9.85 OP
view is still valid as SCORE is underpinned by the potential availability of IOI 5.39 6.65 OP
hydro-based energy, which is being used to attract energy-intensive CBIP 2.87 3.60 OP
industries (to be developed in the state’s new industrial parks in Bintulu Wah Seong 2.56 3.09 OP
and Samalaju). This will have knock-on effects on the construction, Dialog 1.10 1.29 OP
building materials and housing sectors. # As at 25 Mar
Source: Bloomberg, RHBRI
♦ Targeting the resources ... Sarawak currently has 750,000ha of land
planted with oil palm, although the state government plans to add a
further 1m ha. Sarawak is also the largest timber-producing state, as well
as the main processing centre for East Malaysia oil and gas resources (in
Bintulu). More importantly, we understand there is some 20,000MW of
potential hydroelectric capacity in the state.

♦ FDI ... The state government is thus keen to attract more FDI by
leveraging on its abundant resources. Other than Rio Tinto’s proposed
aluminium smelter and Tokuyama’s plant for polycrystalline silicone used
in solar cells, two other jv smelter projects have been proposed with
China’s Chalco/Tan Sri Syed Mohktar (worth US$1bn) and State Grid Corp
of China (SGCC)/1MDB (worth US$3bn). SGCC has also proposed to
invest US$3-4bn on three hydroelectric power projects in the state.

♦ … and votes. The Sarawak state election would be the first state-wide
election held since the 8 Mar 2008 general election. We note that in the
May 2006 state election, Barisan Nasional won 62 out of the 71 seats
contested in the May 2006 state election. We expect the ruling coalition to
devote considerable resources to maintain that margin at the state polls.

♦ Risks. We highlight two key risks for the state’s investment projects: 1)
the state’s relatively low population density of 16.6 per square km could
be a concern in terms of availability of skilled labour; and 2) The long lead
time to bring the electricity system up to sufficient capacity to power
future industrial projects is also a concern.

♦ Conclusion. As it stands, the Sarawak-based companies like HSL, Naim,

CMS and Weida have already outperformed the FBM KLCI for the YTD,
and in our view will continue to be supported by positive news flow.
Among the Sarawak stocks that we cover, we believe HSL will likely be a
prime beneficiary of more construction contracts. The timber players are
less tied into domestic projects but nevertheless could potentially be
involved in other downstream activities. We believe the plantation
Yap Huey Chiang
companies may also be beneficiaries if the state government opens up (603) 92802171
more land for oil palm plantations. yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

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Settling the SCORE

♦ Sarawak elections coming. Sarawak is due to hold its state elections at the latest by May 2011, although
indications are that polls could be held this year. As it stands, both sides of the political fence have recently
focused effort on strengthening and expanding their support in the state thus keeping expectations high for the
state. The constant news flow will likely be the catalyst for local companies there.

♦ Why the focus on Sarawak? Although Sarawak’s population stands at 2.5m or just 8.8% of Malaysia’s total
population of 28.3m, the state accounts for 37.7% of the country’s land area, We had stated in 2008 that the
Sarawak Corridor Of Renewable Energy (SCORE) was the most attractive of the five economic corridors launched
by former PM Tun Abdullah Badawi. This view is still valid as SCORE is underpinned by the potential availability
of hydro-based energy, which is being used to attract energy-intensive industries (to be developed in the state’s
new industrial parks in Bintulu and Samalaju). This will have knock-on effects on the construction, building
materials and housing sectors.

♦ SCORE – A Recap. Tun Abdullah Ahmad Badawi launched SCORE on 11 Feb 2008, with a focus on 10 Priority
Industries, including: 1) oil-based; 2) aluminium; 3) steel; 4) glass; 5) tourism; 6) palm oil; 7) timber-based; 8)
livestock; 9) aquaculture; and 10) marine engineering. According to the Sarawak SCORE website, the state has
proposed special incentives for investors (see Table 2) with a development period spanning some 20 years.

Table 2. SCORE
Priority Industries Incentives Phases Of Development

Oil-Based Attractive energy prices that are optimal in the Phase I (2008-2015): Building the Corridor
long run for both the investors and the Foundation
Aluminium
state/nation.
To build basic infrastructure for the Corridor
Steel
Attractively-priced land leases.
To grab pioneer industries for the Corridor
Glass
Attractive immigration rules for foreign
Tourism expertise and workers, at least in the initial
stages of the Corridor development. Phase II (2016-2020): Towards Vision 2020
Palm Oil
Adequate provision of sufficient basic utilities To ensure the growth and development of the
Timber-based
and infrastructure (roads, ports, utilities). Corridor by building industrial clusters
Livestock
Attractive tax incentives including pioneer To develop R&D capabilities
Aquaculture status, investment tax allowance, and
reinvestment allowance.
Marine engineering
Phase III (2021-2030): Fruition of the
Corridor

R&D to sustain the economy

More internally generated investments

Source: Sarawak Score website

Focus On The Resources, Naturally

♦ Cheap power. Since the delisting of Sarawak Energy end-2009, there are no longer any significant direct plays
on the power sector in Sarawak. We believe the state’s focus on delivering cheap energy as a catalyst for foreign
investments would have undermined the value of the sector, turning it into a cost centre rather than a profit
centre. In any case, we believe it is worthwhile drawing attention to the state’s abundant resources for
generating cheap power.

o Hydropower – Prior to being taken private, Sarawak Energy’s management had informed us that there are
some 50+ sites that could be developed to provide 20,000MW of potential hydroelectric capacity given the
major river basins across the state. The plan is to develop 10,000MW of capacity by 2020, which would
significantly raise the state’s installed capacity from 1,176MW currently. The 944MW Murum Hydroelectric
Dam project is already underway and expected to be operational by 2013. Thereafter, the Baram
(1,000MW) and Baleh (1,400MW) hydropower projects are expected to come onstream by 2016 and 2017

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 29 March 2010

respectively. Other hydropower projects in the pipeline include Limbang 1 (160MW), Lawas (100MW) and
Trusan 2 (160MW), which are expected to be developed by 2013-15 and will serve the northern region as
well as for potential exports to Brunei and Sabah. We note that Bakun is a federal government project and
will be ready this year. However, we believe the state is keen to use Bakun’s capacity to lock in the smelter
projects but this requires a long-term commitment on power supply which Murum can only provide from
2013 at the earliest. In contrast, Peninsular Malaysia needs Bakun for its long-term energy security in the
face of rising fuel costs and especially given the expiry of the 1st generation PPAs in 2015-2016.

o Coal – Sarawak state has around 1bn tonnes of coal reserves in Kapit and Mukah which could be used for
coal-fired power plants. We highlight that Sarawak’s coal is lower-grade with high moisture content and
therefore have a lower calorific value (CV) compared to the 5,500-6,000CV coal that is purchased by TNB.
In any case, Sarawak’s coal is already being used for the Mukah and Sejingkat coal-fired power plants.
Sarawak Energy is planning to expand the generation capacity of the Mukah power plant, and invest in a
new 1,200MW coal-fired power plant in Merit-Pila.

♦ Other natural resources.

o Palm oil - According to the Malaysian Palm Oil Board (MPOB), Sarawak currently has 750,000ha of land
planted with oil palm, with an annual production of 1.99m tonnes of crude palm oil (or 11.4% of Malaysia’s
total). News reports have stated that the state government is targeting to add 1m ha “in the near future”
which would boost annual CPO production significantly, and potentially would make Sarawak the largest CPO
producer in the country, leapfrogging past Sabah which currently leads with 5.45m tonnes produced in
2009. While this should be viewed positively, we believe the issue of native customary rights (NCR) will have
to be addressed, thus slowing down the execution of these expansion plans.

Table 3. Plantation Companies In Sarawak (2009)

Company Planted Area (ha) 2009 FFB Production (m tonnes)
Sime Darby 42,893 982,250*
IOI Corp 9,040 235,311*
CBIP 15,750* 246,500*
Sarawak Plantation 34,980 317,307
Sarawak Oil Palm 47,900 660,000
Ta Ann 26,056 238,767
Jaya Tiasa 12,000 155,767
WTK Holdings 7,000* 786
* Estimates
Source: Companies, RHBRI

o Timber – Other than oil palm, Sarawak is also the largest timber-producing state, accounting for over 70%
of Malaysia’s timber exports. The industry is largely dominated by a small number of timber players,
including the four main listed companies Jaya Tiasa, Lingui, Ta Ann and WTK (see Table 4), plus non-listed
group Shin Yang. More recently, some of these companies have also ventured into oil palm plantations (see
Table 3) to diversify their earnings base, as well as to improve their medium-term cashflow in order to
invest in longer-term forest plantations. We note that the timber-based industry is one of the priority
industries identified for SCORE. According to the Sarawak Forestry Corporation, around half of Sarawak’s
total land area of 12m ha is reserved for Permanent Forest Estates (PFE) which are gazetted for sustainable
timber production.

Table 4. Timber Companies In Sarawak (2009)

Company Forest concession (ha) Log production (m3) Plywood production (m3)
Ta Ann 383,067 526,760 221,130
WTK 387,777 526,642 195,300*
Jaya Tiasa 712,463 1,026,438 220,000*
Lingui 764,000 816,764 330,000*
* Estimates
Source: Companies, RHBRI

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o Oil & gas – Bintulu in Sarawak is the main processing centre for East Malaysia’s oil and gas resources.
Petronas’ new 512km Sabah-Sarawak Gas Pipeline (SSGP) will bring the oil and gas produced in deepwater
fields off Sabah (Kikeh and Gumusut Kakap) to the Petronas LNG complex in Bintulu. Wah Seong is coating
the pipes while Dialog is laying the pipeline. Most of the gas currently produced from gas fields off Bintulu
coast is exported as LNG via Bintulu Port. The export volumes will rise once the SSGP is completed in Mar
2011. As it stands, Bintulu Port is believed to be the single largest LNG export terminal in the world.
Nevertheless, SCORE has identified oil-based industries as a priority which suggests the potential for new
downstream processing activities in the area. Increased oil & gas deepwater exploration and production
(E&P) activities off the East Malaysia coast will also provide a catalyst for the support services companies
based in Sarawak, including Dayang (brownfield engineering services) as well as non-listed shipyards
located in Miri.

More Important Considerations?

♦ FDI. While there are already some heavy industries (e.g. shipbuilding and fabrication) in Sarawak mainly
supporting the oil & gas sector, the state government is keen to attract more FDI by leveraging on its abundant
resources. As it stands, three key industries appear to be drawing the most investments, and related to the
state’s promise of cheap energy and expansion of the power generation capacity.

o Aluminium smelters – There are currently four aluminium smelter projects in the pipeline including Rio
Tinto/CMS proposed US$2bn jv, Press Metal’s smelter, and two other proposed jv smelter projects with
China’s Chalco/Tan Sri Syed Mohktar (worth US$1bn) and State Grid Corp of China (SGCC)/1MDB (worth
US$3bn).

o Solar – Japan’s Tokuyama Corporation is investing RM1.5bn to build its second plant to manufacture
polycrystalline silicone used in solar cells. This second plant will be located in the Samalaju Industrial Park in
Sarawak.

o Hydro-electric power – State Grid Corp of China has proposed to invest US$3-4bn on three hydroelectric
power projects in the state.

♦ Votes. The Sarawak state election would be the first state-wide election to be held after the 8 Mar 2008 general
election. In the 2008 general election, Barisan Nasional won 140 out of the 222 parliamentary seats, with
Sarawak accounting for 29 of those seats, the most of all Malaysian states. In the May 2006 state election,
Barisan Nasional won 62 out of the 71 seats contested. We thus expect the ruling coalition to devote
considerable resources to maintain that margin at the next state polls.

Table 5. Existing Projects And Players In Sarawak

Sector Company Business
Ports Bintulu Port Provides the main logistics facilities for Petronas’ LNG
complex in Bintulu
Power Sarawak Energy (Not listed) Power generation, transmission and distribution
TNB O&M for the proposed High-Voltage Direct Current (HVDC)
submarine cables from Sarawak to Peninsular Malaysia
Construction / Hock Seng Lee Marine and road construction, property development
Property
Cahya Mata Sarawak Road construction, quarries, cement, property
development
Naim Construction of power transmission network, roads and
dams, flood mitigation works, property development
Weida Construction of water/waste water infrastructure and
manufacture of HDPE water pipes and telecom towers
Oil and Gas Dayang Oil and gas engineering and maintenance
Oil palm Sime Darby, IOI Corporation, CBIP, Sarawak Plantations, 750,000ha of planted estates, and 11.4% of the national
plantations Sarawak Oil Palm, Rimbunan Sawit, other local and state output for crude palm oil
companies, Ta Ann, WTK, Jaya Tiasa, and Lingui
Timber Ta Ann, WTK, Jaya Tiasa, Lingui Around 3m ha of forest concessions or 42% of the 7m ha
of primary forests in the state
Source:Media, RHBRI

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Risks

♦ Risk factors. We highlight two key risks for the state’s investment projects: 1) the state’s relatively low
population density of 16.6 per square km could be a concern in terms of availability of skilled labour; and 2) The
long lead time to bring the electricity system up to sufficient capacity to power future industrial projects is also a
concern. As it stands, we believe there are competing interests for Bakun’s electricity, with the Sarawak state
government keen to keep the capacity for power-hungry projects in the state while Peninsular Malaysia will need
Bakun as well as the undersea cables to ensure long-term energy security there.

Conclusion

♦ More news flow to come. As it stands, the Sarawak-based companies have already outperformed the FBM
KLCI for the YTD, and in our view will continue to be supported by positive news flow. Among the Sarawak
stocks that we cover, we believe HSL will likely be a prime beneficiary of more construction contracts although
this is already partly in the share price. The timber players are less tied to domestic projects but nevertheless
could potentially be involved in other downstream activities. We believe the plantation companies may also be
beneficiaries if the state government opens up more land for oil palm plantations. We also highlight in Table 5
other Sarawak players that may benefit under the 10 priority industries of SCORE.

Table 6. Forecasts And Valuations Of Sarawak-Related Stocks

Rel
Price FV perf vs. EPS EPS Growth PER PBV PCF GDY
FYE (RM/s) (RM/s) KLCI (sen) (%) (x) (x) (x) (%) Rec
25-Mar YTD FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Construction/
Engineeering/
Power
HSL Dec 1.48 1.56 38.8 13.0 15.1 27.2 16.4 11.4 9.8 2.3 13.8 1.7 MP
Naim# Dec 3.43 - 17.7 39.5 43.2 14.8 9.4 8.7 7.9 1.2 8.6 3.4 NR
TNB Aug 7.97 9.50 -8.2 64.9 73.6 30.4 13.4 12.3 10.8 1.2 4.2 3.3 OP
CMS# Dec 2.50 - 73.3 19.7 16.0 15.9 -18.8 12.7 15.6 0.7 7.8 2.4 NR
Weida^# Mar 0.795 - 12.6 12.0 - -20.0 - 6.6 - 0.7 8.0 5.0 NR
Resources
Ta Ann Dec 5.80 5.95 16.7 46.1 62.9 61.8 36.4 12.6 9.2 1.5 8.1 1.2 OP
WTK Dec 1.19 1.18 11.3 8.4 13.5 +>100 60.0 14.1 8.8 0.5 n.m 5.0 MP
Jaya Tiasa^ Apr 3.50 2.35 39.4 22.1 52.5 +>100 +>100 15.8 6.7 0.9 9.7 0.0 UP
Sime Darby Jun 8.61 9.85 -6.7 40.7 51.6 8.5 26.8 21.1 16.7 2.3 15.2 2.6 OP
IOI Jun 5.39 6.65 -4.8 27.9 31.5 -13.0 13.0 19.3 17.1 3.7 16.9 2.2 OP
CBIP Dec 2.87 3.60 -5.0 41.2 49.7 37.5 20.6 7.0 5.8 1.4 5.5 4.9 OP
Sarawak Plant# Dec 2.12 - -1.5 19.0 21.5 +>100 13.2 11.2 9.9 1.1 9.2 3.8 NR
S’wak Oil Palm# Dec 2.78 - -3.4 27.3 24.0 31.3 -12.1 10.2 11.6 1.3 7.5 1.4 NR
O&G
Bintulu Port# Dec 6.33 - -5.7 36.4 37.0 11.0 1.6 17.4 17.1 2.9 15.6 7.2 NR
Dayang# Dec 1.87 - 4.7 18.0 19.0 33.3 5.6 10.4 9.8 1.9 - 5.9 NR
Wah Seong Dec 2.56 3.09 4.3 19.3 20.8 46.1 8.0 13.3 12.3 5.4 3.1 2.9 OP
Dialog Jun 1.10 1.29 18.5 6.4 9.3 -3.4 45.4 17.2 11.8 11.3 4.2 3.2 OP
Food
CCK# Jun 0.68 - 0.0 8.7 9.3 22.5 6.9 7.8 7.3 0.9 5.7 17.6 NR
#
^ FY10-11 valuations refer to those of FY11-FY12 Consensus estimates Source: RHBRI, Bloomberg

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

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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
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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
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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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