PP 7767/09/2010(025354)

Malaysia Corporate Highlights

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

B r ief ing Not e

27 May 2010
MARKET DATELINE

Malaysian Pacific Industries Share Price

Fair Value
:
:
RM6.29
RM8.46
Stronger Growth Ahead Recom : Outperform
(Maintained)

Table 1: Investment Statistics (MPI; Code: 3867) Bloomberg: MPI MK

Core Net Core Core EPS Core EV/ Net
FYE Revenue Profit # EPS Growth PER P/NTA C.EPS* EBITDA P/CF Gearing GDY
Jun (RMm) (RMm) (sen) (%) (x) (x) (sen) (x) (x) (x) (%)
2009a 1,150.6 (14.9) (7.1) (113) (88.6) 1.4 - 9.8 7.7 0.5 3.3
2010f 1,332.4 94.7 45.1 736 13.3 1.4 42 3.9 3.4 0.3 5.5
2011f 1,459.0 141.9 67.6 50 9.3 1.4 63 3.9 2.7 0.3 8.3
2012f 1,619.5 132.8 63.3 (6) 9.9 1.3 72 3.4 3.2 0.1 8.3
# Adjusted for exceptional items
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Stronger growth expected. Management expects 4QFY06/10 revenue to Issued Capital (m shares) 209.9
register stronger qoq growth, given 3QFY06/10 qoq growth of +2.0% which Market Cap (RMm) 1,320.2
bucks the trend of a seasonally weaker quarter. In addition, management Daily Trading Vol (m shs) 0.1
52wk Price Range (RM) 4.22-7.50
expects 4QFY06/10 net profit to grow sequentially on the back of: 1) higher
Major Shareholders: (%)
utilisation rate; 2) stronger contribution from MLP and high-density
Hong Leong Industries 62.7
packages; and 3) margin expansion stemming from higher contribution of
MPI 5.2
high-density packages and cost-cutting measures. We understand that
overall utilisation rates increased to 95% from 85% in 2QFY06/10. Note
that utilisation rates for Ipoh, Suzhou, and Dynacraft plants currently stand FYE June FY10 FY11 FY12
at 95%, 100%, and 90% respectively (vs. 90%, 100%, and 85% in EPS chg (%) - - -
Var to Cons (%) +7.4 +7.3 -12.1
3QFY06/10).
Share Price Chart
♦ Capacity Expansion. With Ipoh and Suzhou plants currently running at
full-capacity, we understand that MPI expects to raise capacity for these
plants by 25% and 30% by Sep-10. Note that MPI is targeting to increase
its higher-margin MLP capacity to 12m/day by end-FY10 (vs. 8m/day
currently). In addition, management had stated that it will be using the
spare capacity from the Advance Packages (AP) line to expand its MLP
packages as well as high-density packages. Furthermore, given the capex of
around RM3m for its new etch and strip plating capacity, MPI expects
capacity for Dynacraft to increase by 20%.
Relative Performance To FBM KLCI
♦ Risks to our view. 1) Slower-than-expected economic recovery
dampening demand for equipment and consumer electronics; 2) MPI
strengthening of RM against US$; and 3) higher raw material cost.

♦ Forecasts. No change to our forecasts for now. FBM KLCI

♦ Investment case. Going forward, we believe MPI’s medium-term earnings

visibility remains bright given still-resilient chips demand from China.
Further-out, we highlight that earnings growth would be driven by stronger
chips demand from US and Europe as well as margin expansion stemming
from higher contribution of high-density packages and module packages.
Hence, we reiterate our Outperform call with fair value of RM8.46/share Wong Chin Wai
which is based on unchanged 15x CY10 PER. (603) 92802158
wong.chin.wai@rhb.com.my

Yap Huey Chiang

(603)92802166
Please read important disclosures at the end of this report. yap.huey.chiang@rhb.com.my

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Salient points from the briefing

♦ Stronger growth expected. Management expects 4QFY06/10 revenue to register stronger qoq growth, given
3QFY06/10 qoq growth of +2.0% which bucks the trend of a seasonally weaker quarter. In addition, management
expects 4QFY06/10 net profit to grow sequentially on the back of: 1) higher utilisation rate; 2) stronger contribution
from MLP and high-density packages; and 3) margin expansion stemming from higher contribution of high-density
packages and cost-cutting measures. We understand that overall utilisation rates increased to 95% from 85% in
2QFY06/10. Note that utilisation rates for Ipoh, Suzhou, and Dynacraft plants currently stand at 95%, 100%, and
90% respectively (vs. 90%, 100%, and 85% in 3QFY06/10).

♦ More qualifications for the X3-MLP. Management expects higher-margin X3-MLP to go into volume production as
more of its customers begin to qualify its line in Suzhou. We understand that the company expects to ramp up its X3-
MLP capacity to 10m/week by end-10 (vs. 2m/week currently). Note that X3-MLP is the smallest package
(approximately 50% of current MLP footprint) and would be used in the mobile phone application (i.e. for the
transient voltage suppression technology).

♦ Capacity Expansion. With Ipoh and Suzhou plants currently running at full-capacity, we understand that MPI
expects to raise capacity for these plants by 25% and 30% by Sep-10. Note that MPI is targeting to increase its
higher-margin MLP capacity to 12m/day by end-FY10 (vs. 8m/day currently). In addition, management had stated
that it will be using the spare capacity from the Advance Packages (AP) line to expand its MLP packages as well as
high-density packages. Furthermore, given the capex of around RM3m for its new etch and strip plating capacity, MPI
expects capacity for Dynacraft to increase by 20%.

♦ Margin Expansion. Management believes that implementation of the following technological innovation will help lift
margins going forward.

♦ Moving away from legacy packages. Management expects to gradually replace its IC/Micro packages to high-
density lead frames, effectively increasing unit density per lead frame by 60-100%. Note that high-density
packages margins are higher by 17-20%-pts than low density packages which are 15-30%.

♦ Migrating to high-density MLP package. In the same vein, management has indicated that it would also be
migrating its current matrix-based MLP packages to high-density frames. While currently only 20% of its
customers are qualified for the product, MPI expects this to increase to 100% by 3QFY06/11. We understand that
these new packages are designed with high-density copper lead frames which require lower amounts of raw
materials (i.e. resins).

♦ Test expansion. Management expects stronger capex ahead to expand its test capacity as the test business
would help drive demand for its higher-margin turnkey packaging services.

♦ Copper wire bonding. The company expects the adoption of copper wire bonding to pick up, driven mainly by
cost-reduction initiatives by chips producers. We understand major players in the industry (i.e. ASE and UTAC)
are moving into the copper bonding technology in a major way. Note that Ipoh and Suzhou have already qualified
for the copper wire bonding. We highlight that MPI’s wire-related cost is expected to fall to RM30-40m/year from
RM220/year if 50% of its customers were to migrate from gold to copper bonding.

♦ Capex. Management has highlighted its capex plans for 2H2010 given stronger-than-expected chips demand. While
RM71m has already been spent in 1H2010, MPI expects capex 4QFY06/10 to be about RM40-50m which will be used
to expand its high-density packages capacity, MLP capacity, and test capacity expansion in Ipoh.

♦ No issues in Europe. While concern for chips demand from Europe has risen given the Euro zone credit crisis,
management highlighted that orders from European customers remain resilient, driven mainly by the robust demand
for handheld devices as well as LCD and HD-TVs. Note that 25% of FY09 total revenue contribution comes from
Europe.

♦ Tax incentives. Management has stated that Dynacraft and Carsem would not be able to renew its pioneer status
which is expected to expire this Sept-10 and Dec-10 respectively. However, this is partly mitigated as we understand
MPI will benefit from the capital reinvestment allowances given its continuous capex spending. Note that this would
effectively halve the statutory tax rate for FY10.

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 27 May 2010

Risks

♦ Risks to our view. We believe MPI faces a number of risks which include: 1) Slower chips demand if economic
recovery in US and Europe turns up to be weaker than expected; and 2) Fluctuations in exchange rate. Mitigating
factors include: 1) lower raw material costs; and 2) cost-cutting initiatives through technological innovation and
operational restructuring.

Forecast and Recommendations

♦ Forecast. No change to our forecasts for now but we highlight potential earnings upside in FY10-12 arising from: 1)
stronger-than-expected chips demand from US and Europe; 2) higher oeprating margin driven by high-density matrix
leadframe and migration into copper wirebonding; and 3) higher contribution from module packages.

♦ Investment case. Going forward, we believe MPI’s medium-term earnings visibility remains bright given still-
resilient chips demand from China. Further-out, we highlight that earnings growth would be driven by stronger chips
demand from US and Europe as well as margin expansion stemming from higher contribution of high-density
packages and module packages. Hence, we reiterate our Outperform call with fair value of RM8.46/share which is
based on unchanged 15x CY10 PER.

Table 2. Earnings Forecasts Table 3. Forecast Assumptions

FYE June (RMm) FY09 FY10F FY11F FY12F FYE June FY10F FY11F FY12F
Capacity utilisation
Turnover 1150.6 1332.4 1459.0 1619.5 Ipoh (%) 70.0 90.0 90.0
Turnover growth (%) (20.0) 15.8 9.5 11.0 Suzhou (%) 75.0 85.0 85.0

Cost of Sales 1068.7 (1132.6) (1203.7) (1376.6)

Gross Profit 82.0 199.9 255.3 242.9

EBITDA 153.3 371.0 427.9 416.8

EBITDA margin (%) 13.3 27.8 29.3 25.7

Depreciation (231.9) (236.5) (241.2) (245.9)

Interest income (70.2) 3.7 4.4 5.3
Interest exp (79.0) (82.2) (85.4) (88.9)

Pretax Profit (61.7) 121.4 174.3 159.4

Tax (4.2) (9.1) (14.8) (13.5)
Minority interest 26.0 (17.6) (17.6) (13.0)

Net Profit (39.9) 94.7 141.9 132.8

Core Net Profit (14.9) 94.7 141.9 132.8
Source: Company data, RHBRI estimates

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 Chart 1: MPI Technical View Point
♦ The share price of MPI staged a powerful technical
rebound in Jan 2010, after crossing RM5.47
important level and headed straight to a high of
RM7.50.

♦ However, after failing its attempt to cut above

RM7.50, it was dragged down to a support level of
RM6.15 in Feb 2010.

♦ It only managed to reach RM7.33 in Apr, before

succumbing to selling pressure and fall to below
RM6.15 on Tuesday, but rebounded sharply again
to RM6.29 yesterday.

♦ Sealed with a huge bullish candle back to above the

RM6.15 support level, coupled with the uptick
momentum readings near the “oversold” region,
the stock is poised to stage further rebound in the
near term.

♦ But it must cross above the 10-day SMA of RM6.33

to entice more buying support. Otherwise, selling
may return soon.

♦ A fall to below RM6.15 will trigger a more bearish

sell signal on the chart. Next support is seen at
RM5.47.

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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.

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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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