PP 7767/09/2010(025354)

31 March 2010

Malaysia Corporate Highlights

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

R e su l ts N o t e
31 March 2010
MARKET DATELINE

Hiap Teck Venture Share Price

Fair Value
:
:
RM1.44
RM1.80
2QFY07/10 Net Profit Dips QoQ Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (HIAPTEK; Code: 5072) Bloomberg: HTVB MK

Net Core EPS Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE GDY
July (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009a 1,159.3 42.7 13.0 5.3 -88.7 27.1 - 0.8 0.7 -0.2 0.7
2010f 1,591.6 62.5 19.1 19.1 >100 7.5 20.0 0.8 1.0 10.0 1.4
2011f 1,806.7 69.6 21.2 21.2 11.3 6.8 22.6 0.7 1.0 10.1 1.7
2012f 1,890.8 71.3 21.8 21.8 2.5 6.6 27.0 0.6 0.9 9.5 1.7
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Below expectations. 1HFY07/10 net profit came in below expectations, at RHBRI Vs. Consensus
29.1-32.6% of our full-year forecast and the full-year market consensus. Above
We believe the variance against our forecast came largely from the lower- In Line
Below
than-expected sales volumes.
♦ YoY. Despite revenue falling by 8.9% to RM531.1m, 1HFY07/09 returned to Issued Capital (m shares) 327.4
the black with a net profit of RM21.1m from a net loss of RM2.4m a year Market Cap(RMm) 471.5
ago and this was mainly due to: Daily Trading Vol (m shs) 0.8

1. The absence of provision for diminution in inventory value and 52wk Price Range (RM) 0.615 – 1.57
Major Shareholders: (%)
unrealised foreign exchange loss. Recall, Hiap Teck made a total
KHL Sdn Bhd 25.8
provision of RM25.9m for diminution in inventory value and unrealised
United Coconut Fibre 10.7
foreign exchange loss in 1QFY07/09; and Lembaga Tabung Haji 9.0
2. A 36.6% decrease in finance costs.
♦ QoQ. 2QFY07/09 net profit declined by 76.9% to RM4.0m and this was FYE Jul FY10 FY11 FY12
EPS Revision (%) -13.7 -5.9 -2.3
mainly due to:
Var to Cons (%) -4.6 -6.0 -19.4
1. Lower sales volumes and higher production cost in 2Q. Recall, global
steel prices weakened in Nov-Dec 09, which resulted in weaker PE Band Chart
replenishing activities by steel stockists and margin squeeze at both
PER = 10x
trading and manufacturing divisions; and PER = 8x
2. Higher finance costs. PER = 6x
PER = 4x
♦ Expecting better numbers in 2H. We believe Hiap Teck will report good
performance over the next two quarters on the back of the recent sharp rise
in global steel prices (that are likely to sustain over the near term), which
will:
1. Boost inventory replenishing activities by steel stockists (as inventory
replenishing activities are historically stronger when steel prices are Relative Performance To FBM KLCI

trending up); and

2. Boost margins given current inventory level of 3-4 months. Hiap Teck Venture

♦ Risks. Risks for the steel sector include: (1) Oversupply in China that
results in dumping activities by Chinese steel producers in the international
market; and (2) Steep contraction in global steel consumption that will
FBM KLCI
weigh down on international steel prices.
♦ Earnings forecasts. We are lowering our FY07/10-12 net profit forecasts
by 2.3-13.7% to RM62.5m, RM69.6m and RM71.3m respectively to reflect
lower sales volume assumptions at the manufacturing division.
♦ Investment case. Correspondingly, our indicative fair value for Hiap Teck
has been reduced by 10.4% from RM2.01 to RM1.80, based on 9x revised Chye Wen Fei
(603) 92802172
CY2010 EPS of 20.0sen. Maintain Outperform, given the more positive
chye.wen.fei@rhb.com.my
outlook in the 2H as global steel prices continue to set the direction.

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Table 2: Earnings Review (YoY Cumulative)

FYE July 2009 2010 % YoY Observations/ Comments
(RMm) 6M 6M Chg
Turnover 583.0 531.1 -8.9 Due to: (1) Lower average selling price; and (2) Lower sales volumes.
Operating profit 15.9 36.7 >100 Boosted by the absence of inventory writedown and foreign exchange
loss.
Finance costs -9.6 -6.1 -36.6 Net debt decreased to RM180.5m from RM269.6m a year ago.
Pretax profit 6.3 30.7 >100 Boosted further by lower finance costs.
Taxation -8.6 -9.5 10.3
Net profit -2.4 21.1 >100 Filtered down from pretax profit.
EPS (sen) -0.7 6.6 >100

Operating margin (%) 2.7 6.9 4.2

Pretax margin (%) 1.1 5.8 4.7
Net profit margin (%) -0.4 4.0 4.4
Effective tax rate (%) 137.6 31.1 -106.5 Provision for inventory writedown and foreign exchange loss in
1QFY07/09 was not tax deductible.

Table 3: Earnings Review (QoQ)

FYE July 2010 2010 % QoQ Observations/ Comments
(RMm) 1Q 2Q Chg
Turnover 279.6 251.4 -10.1 Due to: (1) Lower average selling price; and (2) Lower sales volumes.
Operating profit 26.5 10.2 -61.3 Hit by: (1) Lower sales volumes; and (2) Margin squeeze on the back of
weaker global steel prices.
Finance costs -2.9 -3.2 7.3 Net debt increased to RM220.6m from RM180.5m in 1Q.
Pretax profit 23.6 7.1 -69.9 Hit further by higher finance costs.
Taxation -6.4 -3.1 -50.9
Net profit 17.2 4.0 -76.9 Filtered down from pretax profit.
EPS (sen) 5.3 1.2 -76.9

Operating margin (%) 9.5 4.1 -5.4 pts

Pretax margin (%) 8.4 2.8 -5.6 pts
Net profit margin (%) 6.1 1.6 -4.6 pts
Effective tax rate (%) 27.1 44.2 17.1 pts

Table 4: Earnings Forecasts Table 5: Forecast Assumptions

FYE Jul (RMm) FY09A FY10F FY11F FY12F FYE Jul FY10F FY11F FY12F

Turnover 1,159.3 1,591.6 1,806.7 1,890.8 Manufacturing Division

Turnover growth (%) -30.2 41.5 13.5 4.7 Total capacity ('000 mt) 660.0 660.0 660.0
Total production volume ('000 mt) 390.0 440.0 460.0
EBITDA 74.1 131.2 154.4 160.7 Total utilisation rate (%) 59.1 66.7 69.7
EBITDA margin (%) 6.4 8.2 8.5 8.5
Trading Division
Depreciation -23.8 -20.1 -20.1 -20.1 Revenue (RMm) 421.6 442.7 464.8
Net Interest -17.4 -20.8 -31.2 -34.2 EBIT margin 6.0% 6.5% 6.5%

Pretax Profit 32.9 90.3 103.1 106.4

Tax 9.8 -27.8 -33.6 -35.2
Minorities 0.0 0.0 0.0 0.0
Net Profit 42.7 62.5 69.6 71.3
Extraordinary Items 25.3 0.0 0.0 0.0
Core Net Profit 17.4 62.5 69.6 71.3
Source: Company data, RHBRI estimates

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 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
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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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