PP 7767/09/2010(025354)

RHB Research
Malaysia Corporate Highlights
31 May 2010
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

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

Emas Kiara Industries Share Price

Fair Value
:
:
RM0.55
RM1.31
1QFY12/10 Net Profit Grows 23% YoY Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (EKIB; Code: 7189) Bloomberg: EKI MK

Net Net
FYE Turnover Profit# EPS# Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 137.5 9.8 11.7 (12.0) 4.7 - (55.2) 0.6 12.6 0.6 2.7
2010f 175.0 11.0 13.1 11.5 4.2 - 4.0 0.5 12.5 0.5 2.7
2011f 164.0 12.8 15.2 16.7 3.6 - 3.4 0.5 12.9 0.4 2.7
2012f 173.9 14.2 16.9 11.1 3.2 - 3.1 0.4 12.7 0.3 2.7
Main Market Listing /Non-Trustee Stock /Non Syariah-Approved Stock By The SC #Excluding EI * Consensus Based On IBES

♦ In line. 1QFY12/10 net profit came at 22% of our full-year forecast.

RHBRI Vs. Consensus
However, we consider the results within our expectation as we expect
Above -
stronger quarters ahead as work on the RM50m contract for the supply and In Line -
installation of geosynthetic products for the new permanent LCCT project Below -
gathers momentum.
Issued Capital (m shares) 84.0
♦ Investment case. We like Emas Kiara for: Market Cap (RMm) 46.2
1. The rising acceptance of geosynthetic products as substitutes to, or to be Daily Trading Vol (m shs) 0.008
used along with, conventional building materials; 52wk Price Range (RM) 0.35-0.59
Major Shareholders: (%)
2. The rising awareness towards environment protection, and in Malaysia, Roger Wong and family 30.6
particularly coastal erosion control and preservation of mangrove areas See Chii Wei 8.5
that are niche areas to geosynthetics; and
3. Emas Kiara’s commanding market position in Malaysia with an estimated
FYE Dec FY10 FY11 FY12
market share of 60%, with an edge over its local competitors by virtue EPS Revision (%) - - -
of its vertically-integrated operation and a wide product range, and over Var to Cons (%) na na na
the operations of foreign players in Malaysia by virtue of its
comparatively low cost structure (see Appendices 1 and 2 for Emas PE Band Chart
Kiara’s background and our detailed investment case for Emas Kiara).
♦ Risks to our view. The risks include: (1) Weaker-than-expected pick-up in
PER = 6x
PER = 4x
PER = 2x
the construction sector; (2) Rising prices of crude oil, and hence
geosynthetics, making geosynthetics less attractive as alternative building
materials.
♦ We are Neutral on the construction sector. On one hand, we foresee
improved investors’ risk appetite for construction stocks following: (1) The
massive underperformance of the sector vis-à-vis the market in 4Q2009 and Relative Performance To FBM KLCI
1Q2010; and (2) A better sector news flow and new expectations leading up
to the announcement of the 10th Malaysia Plan (10MP) in June 2010. On the Emas Kiara
other hand, certain negative elements remain such as: (1) The still slow pace
of the roll-out of public projects, shrinking margins and declining dominance
FBM KLCI
of established players in large-scale projects locally; and (2) The not-so-rosy
outlook and increased operating risks in key overseas markets.
♦ Maintain Outperform. However, Emas Kiara is an exception due to: (1)
The rising acceptance of geosynthetics; (2) The rising awareness towards
environment protection; and (3) Emas Kiara’s commanding market position
in Malaysia. Indicative fair value is RM1.31 based on 10x FY12/10 EPS, in
Joshua CY Ng
line with our 1-year forward target PER for the construction sector of 10-14x.
(603) 92802151
joshuang@rhb.com.my

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Table 2: Earnings Review (YoY Cumulative)

FYE Dec 2009 2009 YoY Observations/Comments
(RMm) 3M 3M Chg
Turnover 28.9 57.3 99% Driven largely by lumpy billings from the Brahmaputra Dyke project in Assam,
India.
EBIT 3.3 3.9 18% Grew at a slow pace due to weaker margins.
Net inc/(exp) (1.2) (1.3) 9%
Pretax profit 2.1 2.6 24% Strong topline growth, partially eroded by weaker margins.
Taxation (0.2) (0.1) (42%)
Minority interest 0.2 0.0 (97%)
Net profit 2.0 2.5 23% Strong topline growth, partially eroded by weaker margins.
EPS (sen) 2.4 2.9 23%

EBIT margin 11.5% 6.9% (4.7% pts) Largely due to additional costs incurred under unfavourable weather conditions in
India during the quarter.
Pretax margin 7.3% 4.5% (2.7% pts)
Effective tax rate 11.8% 5.5% (6.3% pts)

Table 3: Earnings Review (QoQ)

FYE Dec 2009 2010 QoQ Observations/Comments
(RMm) 4Q 1Q Chg
Turnover 56.9 57.3 1% Sustained by the Brahmaputra Dyke project in Assam, India.
EBIT 5.0 3.9 (21%) Hurt by weaker margins.
Net inc/(exp) (1.2) (1.3) 8%
Pretax profit 3.8 2.6 (31%)
Taxation (1.6) (0.1) (91%)
Minority interest 0.9 0.0 nm
Net profit 3.1 2.5 (20%) Hurt by weaker margins.
EPS (sen) 3.7 2.9 (21%)

EBIT margin 8.8% 6.9% (1.9% pts) Largely due to additional costs incurred under unfavourable weather conditions
in India during the quarter.
Pretax margin 6.6% 4.5% (2.1% pts)
Effective tax rate 43.6% 5.5% (38.0% pts)

Table 4: Earnings Forecasts Table 5: Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 137.5 175.0 164.0 173.9 EBIT margin (%) 11.2 13.0 12.8
Turnover growth (%) -8.5 27.3 -6.3 6.0

EBITDA 22.0 26.3 28.7 30.4

EBITDA margin (%) 16.0 15.0 17.5 17.5

Depreciation -6.1 -6.7 -7.4 -8.1

Net Interest -4.8 -4.9 -4.2 -3.3
Associates 0.0 0.0 0.0 0.0
EI 0.0 0.0 0.0 0.0

Pretax Profit 11.1 14.6 17.1 19.0

Tax -2.6 -3.7 -4.3 -4.7
PAT 8.5 11.0 12.8 14.2
Minorities 1.4 0.0 0.0 0.0
Net Profit 9.8 11.0 12.8 14.2
Source: Company data, RHBRI estimates

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Appendix 1: Background

♦ Geosynthetics are basically synthetic building materials. Geosynthetics (see Table 6) are essentially
synthetic products in the form of sheet, strip, panel and tube etc, mostly made from synthetic polymers such as
polypropylene, polyester, polyethylene and polyamide etc., used in civil engineering to serve various purposes
such as drainage, reinforcement, filtration, separation, sealing and erosion control etc. First took off in Europe in
the 1960s with the advent of polymers, the roots of this building technology based on geosynthetics can actually
be traced back to ancient times. In Roman days, natural fibres, fabrics and vegetation mixed with soil, were used
to stablise roads and their edges. Similarly, the same method was widely used in ancient Egypt to build steep
slopes, walls and even several pyramids. The shortcoming was biodegradation of the natural materials. This is
addressed by substituting natural materials with less biodegradable synthetic materials, giving birth to
geosynthetics.

♦ Emas Kiara a trader-turned-maker of geosynthetics. First started as an importer/trader of geosynthetics in

1992, Emas Kiara Industries Bhd (Emas Kiara) has over the last 18 years grown into the largest and the only
integrated manufacturer of geosynthetics in Malaysia with an estimated market share of 60%. Emas Kiara caught
our attention when it won a RM50m sub-contract from WCT in Dec 09 for the supply and installation of
geosynthetic products for the new permanent LCCT project. This sub-contract is part of the RM363m Earth Work
Package 1 (EW1) of the new permanent LCCT awarded to WCT by Malaysia Airports in the same month. Among
the high-profile jobs Emas Kiara was involved in during recent years include:
1. The Ipoh-Rawang double tracking project (strengthening of the rail track ballast);
2. Remedial works for the Bukit Lanjan stretch of the New Klang Valley Expressway (NKVE) (after the rockfall
incident in Nov 03);
3. Reclamation works for North Butterworth Container Terminal, two man-made islands off the coast of
Langkawi and Pasir Panjang Terminal (Phases 3 & 4) in Singapore;
4. Beach rehabilitation/coastal protection projects in Terengganu and Penang;
5. Various road and flood mitigation projects in Malaysia; and
6. Strengthening of the Brahmaputra Dyke in Assam, India.

Table 6 : Key Geosynthetics

Type Functions
Geotextiles Permeable textiles made of geosynthetics used with foundations, soil, rock and earth as an integral part of structure and
system. They can be used as filters to prevent soil migration, drains to allow transmission of water through low
permeability materials, separators to prevent mixing of subgrade and gravel in unpaved roads, and reinforcement to add
strength to the soil.
Geodykes Long geotextile or geocomposite tubes, hydraulically filled with mud, soil or sand slurry to be used as marine and hydraulic
structures. The main applications include reclamation, coastal erosion control including preservation of mangrove areas, as
the inner core of wave-breakers (substituting the conventional rock core), to protect river mouths at the estuary and
shorelines.
Geogrids Net-shaped or grid-like structures with large open space call “apertures” between “ribs” that allow contact with the
surrounding soils. The applications include slope stability, construction of embankment, bunds for noise pollution control
and basal reinforcement in road and highway construction.
Geocomposites In the form of sheets or strips, they combine the high tensile strength properties of the woven geotextile with the high
filtration capacity of the nonwoven geotextile, enabling them to be used as reinforcement for slopes where they can
provide high drainage capacity in addition to providing the reinforcement function.
Geodrains A type of geocomposite comprising a sheet of non-woven geotextiles wrapped around a polymer core. Their main function
is to remove ground water through capillary action to consolidate the ground prior to any construction work.
Source: company, MARC & various reports

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Appendix 2: Investment Case

♦ The investment case. The bases of our investment case for Emas Kiara are:

1. The rising acceptance of geosynthetic products as substitutes to, or to be used along with, conventional
building materials;
2. The rising awareness towards environment protection, and in Malaysia, particularly coastal erosion control
and preservation of mangrove areas that are niche areas to geosynthetics; and
3. Emas Kiara’s commanding market position in Malaysia with an estimated market share of 60%, with an edge
over its local competitors by virtue of its vertically-integrated operation and a wide product range, and over
the operations of foreign players in Malaysia by virtue of its comparatively low cost structure.

♦ Rising acceptance of geosynthethics. As certain functions of geosynthetics encroach into those of

conventional building materials such as aggregates, rocks, steel bars and concrete etc, geosynthetics can be
substitutes to, or used along with, these conventional building materials. Geosynthetics are preferred to
conventional building materials due to various reasons including:
1. Their high performance, particularly, in beach rehabilitation, coastal erosion control, land reclamation and
flood mitigation (geodykes, for instance, are less likely to be washed away vis-à-vis armour rocks due to their
gigantic size);
2. They can speed up the construction process, particularly, in ground settlement (geodrains driven into the soft
ground drain water out, allowing the ground to settle in 3-6 months, vis-à-vis 2-3 years without geodrains.
They are essential for fast-track projects such as the new permanent LCCT);
3. They are easy to handle and install as they are light-weight materials that translate to cost saving; and
4. They are environmentally friendly in the sense that while geosynthetics are no doubt downstream products of
petroleum, it is believed that the production, transportation and installation of geosynthetic products leave
behind a much smaller carbon footprint as compared with the conventional building materials.

♦ Rising awareness towards environment protection. There have been increased efforts on a global scale to
protect the environment in recent years. This opens up tremendous opportunities for makers of geosynthetics as
geosynthetics have proven to be more effective vis-à-vis conventional building materials in coastal erosion control
(see Diagrams 1-3 for illustration on the use of geodykes in land reclamation, and rehabilitation of beaches and
mangrove areas). In Malaysia, under the Mid-Term Review of the 9MP, “improving environmental management
and conservation” has been identified as one of the ten initiatives that will top the Government’s agenda during
the remaining 9MP period. We expect environment preservation to remain one of the Government’s top priorities
under the 10MP due to be announced in Jun 2010, with serious attention to be given to coastal erosion control
and preservation of mangrove areas. Coastal erosion is a serious problem in Malaysia with 1,415km or 29.4% of
total shoreline of 4,809km under threat (see Chart 1). Likewise, the mangrove areas in Malaysia are fast
shrinking, with total area falling by a whopping 17.2% from 694,700ha to 575,180ha between 1973 and 2004
(see Table 7).

Table 7 : Mangrove Areas In Malaysia

(ha) 1973 2004 Chg (%)
West Malaysia 153,700 99,180 (35.5)
Sabah 366,000 346,000 (5.5)
Sarawak 175,000 130,000 (25.7)

Total 694,700 575,180 (17.2)

Source: Department Of Environment, Malaysia

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Diagram 1 : Geodyke In Land Reclamation

Diagram 2 : Geodyke In Beach Rehabilitation

Diagram 3 : Geodyke In Mangrove Area Rehabilitation

Source: Emas Kiara

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Chart 1: Shoreline Conditions In Malaysia

2,000

1,800

1,600

1,400

km 1,200

1,000

800

600

400

200

0
Johor

Kelantan
P.Pinang

Pahang

Sabah
N. Sembilan &
Perak

Terengganu
Selangor

Sarawak &
Kedah & Perlis

Labuan
Melaka

C ritical Erosion Significant Erosion Acceptable Erosion No Erosion

Source: Department Of Irrigation & Drainage, Malaysia

♦ Emas Kiara is the market leader. Emas Kiara’s market position in Malaysia is strong with an estimated market
share of 60% (see Table 8 for production capacity of Emas Kiara and rivals). It has an edge over its local
competitors by virtue of its vertically-integrated operation and a wide product range. As against operations of
foreign players in Malaysia, Emas Kiara’s edge is its comparatively low cost structure (in the absence of
expatriate professionals). In addition, Emas Kiara provides project management for the installation of
geosynthetics (for instance, geodykes of the Brahmaputra Dyke project in Assam, India, and geodrains of the
new permanent LCCT project), a service we understand its rivals do not normally offer as their key focus is
manufacturing. Emas Kiara’s products adhere to international standards and are competitive in the international
market. Its export sales jumped from 8% in FY12/03 to 30% in FY12/08. At present, its products are sold in
more than 20 countries including those in South East Asia and the Middle-East, as well as Australia, Greece,
Bangladesh, India and Sri Lanka. Emas Kiara’s strong market position puts it in a sweet spot of the construction
sector, i.e. whoever get the large-scale projects, the geosynthetics portions will almost certainly come to Emas
Kiara.

Table 8 : Production Capacity

Emas Kiara Ten Cate* Nylex*
(Operations In Malaysia)
Non-woven 7,000 tonnes/year 8,000 tonnes/year -
Woven 7,000 tonnes/year - -
Geodrains 10m linear m/mth - 8m linear m/mth
Industrial bulk bags 750,000 bags p.a. - -
Source: RHBRI, company
*RHBRI estimate

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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
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
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
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
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

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.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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