Malaysia

PP 7767/09/2010(025354)

Corporate Highlights
Com pany Upda te

RHB Research2010 9 July Institute Sdn Bhd A member of the RHB Banking Group
Company No: 233327 -M

MARKET DATELINE

9 July 2010 Share Price Fair Value Recom : : : RM3.79 RM5.32 Outperform (Maintained)
Bloomberg: ALLZ MK FD EPS Growth (%) Na Na 20.0 PER (x) 8.3 4.9 11.9 C.EPS* (sen) 59.0 68.0 P/NTA (x) 1.5 1.2 0.9 0.8 ROE (%) 20.0 16.8 15.2 Net Gearing (%) 1.3 Net Cash Net Cash GDY (%) 0.4 0.4 3.2

Allianz Malaysia
ICPS Rights To Commence Trading

Table 1 : Investment Statistics (Allianz; Code: 1163) Net FYE Dec 2009 2010f 2011f Turnover (RMm) 2222.7 2460.8 2720.0 profit (RMm) 118.8 110.6 132.6 EPS (sen) 77.2 71.9 86.2 FD EPS (sen) Na 32.0 38.3

2012f 2933.5 153.5 99.7 44.3 15.8 9.9 Main Market Listing / Non-Trustee Stock / Non-Syariah-Approved Stock By The SC

14.5 Net Cash 3.7 * Consensus Based On IBES 153.8 584.4 0.4 3.79-5.56 75% FY11 26.8 FY12 -

Rights to be traded. The rights to purchase Allianz’ Irredeemable Convertible Preference Shares (ICPS) will start trading on 9 Jul, and will cease trading at 5pm 16 Jul. Allianz’ share price has already been adjusted ex-rights as at 6 Jul, to RM3.83. Every 100 Allianz shares held will be entitled to rights to purchase 125 ICPS. The rights will thus be priced at 61 sen, i.e. the difference between the share price and the ICPS issue price. Sensitivity analysis. We estimate based on the current share price of RM3.79, and an overall combined FY11 dividend payout of 35% (for ordinary shares and ICPS), and bearing in mind the 1.2x dividend payout for the ICPS, Allianz’ ordinary dividend yield would be around 3.2% while the ICPS should theoretically enjoy a dividend yield of 3.8% assuming the ICPS are worth the same as the ordinary shares. Assuming the yield impact is neutralised for both the ordinary shares and the ICPS, this implies the ICPS should be trading 20% higher than the ordinary shares, or at RM4.55. And working backwards, after deducting the ICPS issue price of RM3.18, the implied ICPS rights price should be RM1.37 (see Table 4). Risks. The risks to our forecast for Allianz include: 1) lower-than-expected premium growth; 2) jump in claims ratio; 3) change in BNM policy that would require Allianz to further strengthen its Internal Capital Adequacy Ratio (ICAR); and 4) the changing competitive landscape in the insurance industry due to liberalisation. Forecasts. We maintain our premium growth and earnings forecasts but we are adjusting our SOP valuations to account for: 1) the fully-diluted EPS after adjusting for ICPS; and 2) the rollover of our base valuation year to FY11 from FY10 previously. Our new SOP fair value is RM5.32, which implies an upside of 40% from its current share price. We continue to be positive on the company. Notwithstanding the change in capital structure, we reiterate our positive view on Allianz, based on: 1) its above-industry average premium growth and below-industry average claims ratio; 2) its bancassurance tie-up with CIMB; 3) the strong growth potential of the life insurance industry in Malaysia;and 4) strong backing by its parent. Furthermore, the proceeds from the ICPS issue will strengthen its capital base, giving Allianz room to take on more business while also reducing its earnings retention ratio so that it can pay more dividends. Maintain Outperform with a new ex-rights fair value of RM5.32.
Please read important disclosures at the end of this report.

Issued Capital (m shares) Market Cap (RMm) Daily Trading Vol (m shs) 52wk Price Range (RM) Major Shareholders: Allianz SE FYE Dec EPS chg (%) Var to Cons (%) PE Band Chart FY10 21.9

PER = 8x PER = 7x PER = 6x

Relative Performance To FBM KLCI
Allianz Malaysia

FBM KLCI

Yap Huey Chiang (603) 92802641 yap.huey.chiang@rhb.com.my

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9 July 2010

Rights to be traded. The rights to buy new Allianz ICPS will start trading on 9 Jul and will cease trading at 5pm on 16 Jul. The rights will enable the holder to purchase the ICPS at its issue price of RM3.18. The other relevant dates for the ICPS are stated in Table 2. We estimate the rights to be worth RM0.61 each based on the difference between the share price and the ICPS issue price of RM3.18.

Table 2. Important relevant dates for the ICPS Commencement of trading of the rights Despatch of prospectus and subscription form Cessation of trading of the rights Announcement of final subscription result and basis of allotment of excess rights Listing of the ICPS Last date for sale of provisional allotment of rights Last date for transfer of provisional allotment of rights Acceptance and payment Excess share application and payment Source: Bursa 9-Jul-10 12-Jul-10 16-Jul-10 30-Jul-10 6-Aug-10 15-Jul-10 20-Jul-10 23-Jul-10 23-Jul-10

Sensitivity analysis. We estimate based on the current share price of RM3.80, and an overall combined FY11 dividend payout of 35% (for ordinary shares and ICPS), and bearing in mind the 1.2x dividend payout for the ICPS, Allianz’ ordinary dividend yield would be around 3.2% while the ICPS should theoretically enjoy a dividend yield of 3.8% assuming the ICPS are worth the same as the ordinary shares. However, we believe rights holders may be willing to sell at a higher price to compensate for the higher dividend payout. Assuming the yield impact is neutralised for both the ordinary shares and the ICPS, this implies the ICPS should be trading 20% higher than the ordinary shares, or at RM4.55. And working backwards, after deducting the ICPS issue price of RM3.18, the implied ICPS rights price should be RM1.37 (see Table 4). This would be some RM0.76 higher than the implied rights trading price.
Table 3. Sensitivity Analysis – ICPS Price Allianz ordinary share price (RM) ICPS premium vs. Ordinary Share Price Estimated Div Yield Per Ordinary Share (%) Estimated Div Yield Per ICPS (%) Implied ICPS Price (RM) Less: ICPS Issue Price (RM) Implied ICPS Rights Price (RM) Less: Estimated Rights Entitlement Price (RM) Implied (Loss)/Gain (RM) Source: RHBRI estimates 3.79 +0% 3.2 3.8 3.79 3.18 0.61 0.61 3.79 +5% 3.2 3.6 3.98 3.18 0.80 0.61 0.19 3.79 +10% 3.2 3.5 4.17 3.18 0.99 0.61 0.38 3.79 +15% 3.2 3.3 4.36 3.18 1.18 0.61 0.57 3.79 +20% 3.2 3.2 4.55 3.18 1.37 0.61 0.76

Dividends. As we had previously highlighted, the RM121m leftover proceeds from the ICPS after paying off its RM490m loan will be used to address its RBC requirements. We understand that the stronger capital base would mean that earnings retention could be reduced to make way for higher dividend payments from FY11 onwards. Management previously guided that the dividend payout could be as high as 50-60% of earnings. However, to be more conservative, as there is a risk that BNM might require insurance companies to have a stronger Internal Capital Adequacy Ratio (ICAR), we reduce our payout assumption to 35% (from 50% previously) for FY11. Table 3 shows the dividend payout and yields for FY11. We note that the ICPS pays 1.2x more dividends than the ordinary share.
Table 4. Dividends AMB Share FY11 PAT (RMm) Payout DPS (sen) Yield (%) 12.1 3.2 35% 14.5 3.8 17.2 4.5 AMB ICPS 132.6 50% 20.7 5.4 AMB Share AMB ICPS

*Yield is based on ordinary share's closing price as at 8 Jul and ICPS opening ref price as at 6 Aug
Source: RHBRI estimates

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9 July 2010 Forecast and Valuations.

Forecast maintained, valuation adjusted. We are maintaining our premium growth and earnings forecasts but we are adjusting our SOP valuations to take into account: 1) the fully-diluted EPS after adjusting for ICPS; and 2) the rollover of our base valuation year to FY11 from FY10 previously. Our new fair value for Allianz is RM5.32, which implies an upside of 36% from its current share price. We note that our forecasts are conservative as the ICPS would unlikely be converted due to the favourable dividend payout. Although the ICPS would pay 20% more dividends, we believe this is offset by the lack of voting rights.

Table 5. Sum of Parts General Business (10x) (RMm) Life Business (DCF) (RMm) Net Cash (RMm) Fully diluted share capital (million) Fair value (RM/share) Source: RHBRI estimates 1257.3 461.4 121 346.1 5.32

Risks.

Risks. The risks to our forecasts include: 1) lower-than-expected premium growth; 2) jump in claims ratio; 3) change in BNM policy that would require Allianz to further strengthen its Internal Capital Adequacy Ratio (ICAR); and 4) the changing competitive landscape in the insurance industry due to liberalisation. Case in point: as highlighted in our quarterly strategy report, Hong Leong Assurance’s general insurance arm merged with MSIG will provide the latter with a higher distribution channel through Hong Leong Bank’s 185 branches. Mitigating factors. We believe that the threat posed by MSIG due to its merger with HLA will be mitigated by Allianz’s bancassurance tie-up with CIMB to sell its general insurance products. In terms of distribution channels, Allianz continues to leverage on its tie-up with CIMB, which currently has 323 branches nationwide.

Recommendation.

We continue to be positive on the company. Despite the change in capital structure and dilution to the ordinary share’s value, we are maintaining our positive stance on the outlook of Allianz. We continue to like the company due to: 1) its above industry average premium growth and below industry average claims ratio for its general insurance; 2) its bancassurance tie-up with CIMB; 3) the positive growth outlook of the Malaysian life insurance industry as highlighted in our recent sector report; and 4) strong backing from its parent, Allianz SE, which we note will undertake all the ICPS not taken up by shareholders. Maintain Outperform with a new exrights fair value of RM5.32.

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9 July 2010
Table 6. Earnings Forecasts FYE Dec (RMm) Life premium General premium Other revenues Total Turnover Profit from s/holders funds Transfer from general Transfer from life Finance cost FY09 868.7 1,202.4 151.6 2,222.7 (6.5) 161.0 12.0 0.0 FY10F 973.0 1,322.6 165.2 2,460.8 (6.3) 163.3 13.4 (12.5) FY11F 1,089.7 1,454.9 175.4 2,720.0 (6.2) 179.6 16.0 0.0 FY12F 1,176.9 1,600.4 156.3 2,933.5 (5.2) 197.5 26.9 0.0 Table 7. Forecast Assumptions FYE Dec (%) General Premium growth Retention ratio Claims ratio Commission ratio Mgmt exp ratio Combined ratio Invt return Life Premium growth Retention ratio Claims ratio Commission ratio Mgmt exp ratio Combined ratio Invt return FY10F FY11F FY12F

10.0 64.0 60.0 10.0 18.0 88.0 4.0

10.0 64.0 60.0 10.0 18.0 88.0 4.0

10.0 64.0 60.0 10.0 18.0 88.0 4.0

12.0 93.0 7.0 25.0 10.0 42.0 5.0

12.0 93.0 7.0 25.0 10.0 42.0 5.0

8.0 93.0 7.0 25.0 10.0 42.0 5.0

Pretax Profit Tax Net profit

166.5 (47.7) 118.8

158.0 (47.4) 110.6

189.4 (56.8) 132.6

219.2 (65.8) 153.5

Chart 1: Allianz Technical View Point

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The uptrend of Allianz hit a strong resistance in Oct 2009 near RM4.04, before experiencing a pullback to the support at RM3.37. However, as the 10-day SMA rebounded to above the 40-day SMA, the stock resumed its uptrend, and surpassed the RM4.04 tough hurdle in Mar 2010. The recovery led the stock to a fresh year high of RM4.58 in Apr, near a resistance level of RM4.55. Since then, the stock has succumbed to strong profit-taking pressure and caused another retracement on its share price. The 10-day SMA cut below the 40-day SMA again to trigger another round of consolidation in May. Yesterday, it closed at RM3.79, below the RM4.04 support level with four negative candles in the last five trading days. This suggests a possible further retreat ahead. Given that both the SMAs were also facing south, the stock is poised to revisit the RM3.37 support level soon, if it fails to rebound to above the RM4.04 level in the near term. As such, investors should expect further weakness on the stock in the coming week, based on the technical analysis.

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9 July 2010
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. securities, subject to the duties of confidentiality, will be made available upon request. Additional information on recommended

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