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PP12260/6/2006 20 December 2005 Buy Minimum 15% expected total return Hold 0 - 15% expected total return Sell Negative expected total return Note: Total return = price appreciation plus gross yield RECOMMENDATION (WITHIN 12-MONTH PERIOD) TOP 5 GAINERS TOP 5 LOSERS Closing (%) Price (RM) PMIND-WA 0.015 50.0 TWSCORP-WB 0.020 33.3 TIME-WA 0.020 33.3 KPOWER 0.400 33.3 GFB-WB 0.045 28.6 ASIAPAC-WA 0.005 -50.0 NAKA 0.235 -45.4 FOUTAIN-LA 0.215 -41.9 MOL 0.430 -40.3 HARVEST 0.290 -32.6 MARKET INFORMATION KLCI 895.86 (+2.49) 52-Week Range 858.84 - 953.88 Mkt Cap (RMb) 690.87 Volume (m shares) 244.95 Value (RMm) 384.38 BLR (Maybank) 6.0% Closing (%) Price (RM) ❑ Insurance Neutral May not be so boring in 2006 SECTOR UPDATE NEWS HIGHLIGHTS ECONOMIC HIGHLIGHTS ❑ Asia: Emerging Asia tipped to grow 7.2% in 2006: ADB ❑ UMW Holdings Buy Sales target attainable ❑ Banking Sector Neutral New Collective Agreement to be signed tomorrow (Gan Kim Khoon) ❑ Telecommunications Sector Neutral Govt targets 15% broadband penetration by 2010 (Fiona Leong) ❑ Telekom Malaysia Hold Celcom to up 3G content services to 50 by 31 Dec ❑ Kumpulan Guthrie Hold Minamas expects better yields for 2005 Opens Riau RM10m research centre ❑ Automobile Sector Neutral Alado Bumi brings in China-made cars 20 December 2005 AmWatch 2 AmResearch Sdn Bhd INSURANCE SECTOR NEUTRAL May not be so boring in 2006 Sector Update We have a Neutral rating for the insurance sector mainly because we foresee net profit growth for both life and general insurers to average at single digit levels in 2006. We do not expect life insurers to significantly increase surplus transferred from life fund while underwriting margin of general insurers is forecast to hover at single digit levels . The lacklustre net earnings outlook is also due to our believe that investment income, which can have a significant impact of insurers' bottomline, would be flat to slightly positive in the coming year. A re-rating of the sector could happen when the highly-anticipated backdoor listing of Great Eastern Life Assurance (Malaysia) ("GELM") and Overseas Assurance Corp (M) Bhd ("OAC") via PacificMas Bhd ("PM") takes place. Notwithstanding the new investment opportunity, corporate exercises within the insurance industry in 2005 point to a more competitive environment in 2006, this is especially so with more partnerships involving foreign insurers. Bancassurance network will strengthen and banking groups with insurance arm would be winners given its edge in providing one-stop financial services to customers in a more cost efficient manner. Our coverage include largest life insurer in terms of asset base, MAA (Hold) and largest general insurer, Kurnia (Buy). We have a Hold recommendation on MAA as it is fairly valued at 12.0x PER, a premium to average PER of Manulife and MNI. As for Kurnia, we have a Buy recommendation due to its inexpensive valuations and sustainable earnings growth from motor insurance. Outlook Gross premium of life insurance business to grow by 16.5% in 2006. We hold on to our earlier projection that the life insurance industry would continue to chalk up healthy premium growth in 2006. This is given the still low penetration rate and growing awareness (more insurance educated) among Malaysians of the benefits and need for life insurance protection. Only 37.9% (end-2004) Malaysian citizens have a life insurance policy. In fact, the penetration rate could be lower than 37.9% as the middle-to-affluent population class has more than 1 policy per person. Higher disposable income and steady economic growth will also fuel demand for life insurance. Gross national product per capita grew at compounded annual rate ("CAGR") of 6.0% for 5 years ended 2004. Life insurance business’ premium income has been on an uptrend, with CAGR at 17.6% for the last 17 years ended 2004. New business premium for 1H2005 was up 10.5% YoY to RM3.5bn. General insurance premium income underpinned by economic growth. Historical trend clearly shows a close correlation between growth in general insurance gross premium and real gross domestic product (GDP). On average, premiums for the last 19 years grew at a higher rate compared to economic growth. We are forecasting gross premium for the general insurance industry to grow by 8.0% in 2006, slightly higher than our GDP growth forecast of 6.0% for 2006. Growth in gross premium is expected to come from motor and personal insurance. Motor vehicle sales is forecast to increase by 5.0% to 575k units in 2006, driver to higher motor premium in 2006. Underwriting policies for personal medical and fire insurance is estimated to churn in sound growth given the vast untap market and rising demand for these area of protection. We are also maintaining our single-digit underwriting margin forecast for 2006. We believe margins for the general insurance business would continue to come under pressure from claims incurred, management expense and commission. We do not foresee these costs to vary very much from levels seen in 2005 and 2004. Although general insurers continue with efforts to reduce costs, it is no easy task especially for claims incurred. The industry would likely chalk in single digit growth in bottomline. 20 December 2005 AmWatch 3 AmResearch Sdn Bhd LIMIT OF ASSET PERMITTED AS ADMITTED ASSETS Class of asset As a ratio of the Margin of Solvency (“MOS”) for that class of aggregate Low risk assets No maximum limit Cash and deposits 5% or no limit Immovable properties 20% Policy loans 20% Secured and unsecured credit facilities 50% Equity instruments 30% Unit trust schemes 10% Source: Bank Negara Still waiting for motor tariff revisions. Certainly, a key event for general insurers would be the proposed revision in motor tariff structure. If approved, the new motor tariff structure would have an overall positive impact on motor premium. The proposed new motor tariff structure takes into consideration additional factors when computing insurance premium such as make of vehicle, engine capacity, age of vehicle, number of drivers, geographical location, and gender of driver. Although some motor vehicle owners would enjoy lower premiums, general insurers expect the new rating structure to result in a net increase of 10%-20% in overall motor premium. This would substantially flow down to the bottomline and boost general insurers’ earnings given that motor business is the largest class of business, contributing 72.0% of total industry net premiums. The new motor tariff structure was first submitted to Bank Negara in February 2001 and is now pending Cabinet’s approval. Industry players are confident the new motor tariff structure would be approved as the last revision to motor insurance premium was 26 years ago in 1978. Furthermore, the revision is justified by declining underwriting margins due to rising claims ratio and arguments that it more accurately reflects risk exposure of the insured and his vehicle. However, the waiting period has been long and there has been no leads on the timeline for approval and announcement. Issues and Concerns Investment income, key risk factor. It has to be stressed that investment income can either boost or drag down the profits of both life and general insurers. And the impact at most times can be material. The risk of investment losses is high especially for insurers that adopt aggressive and high-risk investment policies. Although insurers' core business is underwriting of insurance policies, they invest their large insurance fund for additional income. Given the potential impact on insurers' bottomline, investment management has increased in importance over the years. Besides sound management, outlook of the investment landscape is also a key factor driving investment income. Insurance companies are to abide by maximum limits of different classes permitted as admitted assets (refer table below). Overall, we do not expect significant improvement in investment yield of insurers' investment funds in 2006. Insurers are likely to record flattish or mid-single digit improvement in investment income YoY. We foresee the KLCI of 895.9 points as at 19 Dec 2005 to rise by a modest 8.3% to 970 points by end-2006 as we expect investors to adopt a cautious stance given the forecast rise in interest rates (3.0 basis points or more in 2006) and the prevailing high crude oil prices. As for fixed income or bond investments, our house has the view that short term yields would increase (negative as prices of bonds would decline) while medium-to-long term bonds should see declining yields (positive). We opine that insurance companies with higher holdings of fixed and call deposits in 3Q2005 would be in a good position to accumulate stocks at depressed prices in 4Q2005. 20 December 2005 AmWatch 4 AmResearch Sdn Bhd TOP 5 LIFE INSURERS Year ended Total premiums Market share New premiums^ Growth in new Total assets Market share (RM m) (%) (RM m) premiums (%) (RM m) (%) Great Eastern 31/12/2003 3459.9 26.5 806.4 -11.4 20642.7 33.2 AIA 30/11/2003 1868.3 14.3 549.8 7.9 12043.5 23.3 Prudential 31/12/2003 1286.9 9.9 447.1 4.0 3531.7 6.8 ING 31/12/2003 1148.4 8.8 385.3 28.9 5167.6 10.0 MAA* 31/12/2003 1081.9 8.3 678.4 61.9 4336.1 8.4 ^ For both individual and group life, excluding annuity * listed on Bursa Malaysia Source: Bank Negara Insurance Annual Report 2004 Excitement in the Sector Great Eastern, if listed in Malaysia, would bring excitement to a Neutral sector. Completion of the impending backdoor listing of Great Eastern Life Assurance (Malaysia) ("GELM") and Overseas Assurance Corp (M) ("OAC") Bhd via PacificMas Bhd ("PM") would spice up this quiet sector. Listing of GELM, Malaysia's largest life insurer, offers investors a new and attractive investment opportunity within the insurance industry. GELM was ranked first among Malaysian life insurers in terms of new premiums, new business premiums and total assets for FYE Dec 2003. For FY04, the Company registered RM3.7bn in gross premium while total assets as at Dec 2004 amounted to RM24.1bn. GELM's net profit grew at an annual compounded rate of 45.6% for 3 years ended 2004 while gross premium CAGR was at 7.0%. Net profit for FYE 2004 amounted to RM328.5m. Return on life policyholders' fund (RM21.2bn) for FY04 amounted to 14.9%. Besides being the biggest, GELM's more established set up and backing from a large foreign shareholder are attraction points as well. The GELM-OAC-PM merger, which was first announced in 2003, is targeted to be finalised by 1Q2006. PM and GELM have completed their financial, tax and legal due diligence exercise. Upon finalisation of the valuation exercise, pricing and final scheme of restructuring, submission for approval will be made to the relevant authorities by both parties. Great Eastern Holdings Ltd, the ultimate holding company of GELM and OAC, will have 51% equity stake in the enlarged PM as part consideration for the proposed acquisition. PM is currently involved in underwriting of general insurance, unit trust, asset management, leasing, hire purchase and other related financing activities. The Group recorded revenue of RM155.5m for the nine months ended September 2005 while net profit amounted to RM23.2m. PM is currently valued at 32.6x FY05 annualised EPS of 18.1 sen but only at 1.2x PBV. Besides being supported by its NTA, PM is trading at such high earnings multiple due to expectations of earnings enhancement from proposed acquisition of GELM and OAC. Other Investment Considerations Corporate exercises in 2005. As at end-2004, there were a total of 42 insurers comprising of 7 life insurers, 26 general insurers and 9 composite insurers. The industry, after having gone through a period of consolidation in 2002, continues to evolve in 2005 with proposed acquisitions within listed companies. These are: Proposed disposal by Tahan Insurance Malaysia Bhd ("Tahan") of its life insurance business to Affin Holdings Bhd ("AHB") and National Mutual International Pty Ltd ("NMI") for RM121.0m. Tahan is a wholly owned subsidiary of Idaman Unggul Bhd ("IUB") while NMI is a wholly owned subsidiary of AXA Asia Pacific Holdings Ltd. ("AXA"). Upon completion of the exercise, which is currently pending approval from shareholders, Securities Commission ("SC"), BNM and the High Court, Tahan will focus on its general insurance business. Proceeds from the disposal of its life insurance business would provide Tahan added working capital to 20 December 2005 AmWatch 5 AmResearch Sdn Bhd build its general insurance business. The joint acquisition of Tahan's life insurance business by AHB and NMI would result in a new life insurance entity that has access to experienced life insurance and wealth management via AXA. It can also immediately embark on Bancassurance (via AHB's banking network). AXA is listed in the stock exchanges of Australian and New Zealand. The Company is involved in life insurance and wealth management businesses in Asia Pacific operating in Australia, New Zealand, Hong Kong, China, Indonesia, Philippines, Thailand and Singapore. The deal allows AXA to enter the $5.7bn Malaysian life insurance market which is impossible on their own as BNM no longer issue new license. Mayban Fortis Holdings Bhd (“Mayban-Fortis”) has proposed to acquire a 74.24% equity interest in MNI Holdings Bhd (“MNIH”) at RM4.02 per MNI share in cash. We believe MNIH will benefit from having Maybank Group as its shareholder with synergistic benefits. Southern Bank Bhd ("SBB") had proposal to acquire a 51.6% equity interest in Asia General Holdings Ltd (“AGHL”) and would be making an unconditional mandatory offer ("MO") for the remaining 48.4% equity interest in AGHL at S$12.25 per AGHL share. The acquisition and MO will cost SBB S$918.75m (RM2.07bn) in total (assuming 100% acceptance). However, BNM had recently rejected SBB's planned acquisition of AGHL. SBB is in the midst of seeking clarification from BNM on its next course of action. AMMB Holdings Bhd ("AHB") has entered into share sale agreement with IAG International Pty Ltd ("IAGI") for the proposed sale of a 30% equity interest in AmAssurance. IAGI is a wholly owned subsidiary of IAG Ltd. The proposed acquisition will facilitate the proposed joint venture between AHB and IAG Ltd in the insurance business of AmAssurance. IAG Ltd is the largest general insurance company in Australia with market capitalisation of A$8bn. The Group has been operating for more than 130 years. Increasing competitive landscape and emerging strength of Bancassurance. The above deals would definitely increase the competitive landscape of the insurance industry as the proposed acquisitions would strengthen the business capability of an existing insurer, especially with expertise from new foreign insurers in Malaysian shores. In addition, the corporate exercises once completed would make banks a key distribution network for insurance products (in 2004, bancassurance over took agents as the largest distribution network for life insurance premium underwritten, 48%). Bulk of the proposed acquisitions are carried out by banks. Insurance companies within a banking group is likely to post more threat to existing stand alone insurance establishment. This is because insurance group without the backing of a strong bank may lose out to a bank-plus-insurance group, as the latter would be able to offer total wealth management services consisting of traditional banking products coupled with complimentary insurance products. A bancassurance group that provides one-stop financial services would be able to grow its revenue per customers and reap benefits from economies of scale. Updates on risk based capital framework. In conjunction with the Financial Sector Masterplan and in line with adoption by several developed markets, a proposal to introduce risk based capital framework was issued in December 2004 to the industry for comments. Industry players have since then, submitted their feedbacks to BNM, a second consultation paper, incorporating these changes will be released for further industry comments in 2006. The framework aims to achieve more efficient utilisation of capital and better alignment of solvency regime based on risk profiles of individual insurers. This is expected to increase flexibility among industry players to implement appropriate investment strategies and allow better asset-liability matching of insurance funds. The risk based framework is expected to significantly raise the profile of the investment management function and the need for insurers to attract, develop and 20 December 2005 AmWatch 6 AmResearch Sdn Bhd COMPARISON OF LISTED GENERAL INSURERS Jerneh Asia Kurnia Asia LPI Capital Pacific & Orient PacificMas PanGlobal (Spd) Year End Dec-04 Jun-05 Dec-04 Sep-04 Dec-04 Dec-04 Share Price (RM) @ 19/12/05 2.10 1.22 8.35 1.77 5.80 1.89 No. of shares (m) 108.7 1,500.0 137.4 110.1 170.9 140.1 Market Cap (RMm) 228.3 1,830.0 1,147.3 194.9 991.5 264.8 Gross premium (RMm) (1) 185.1 1,322.3 459.5 352.2 207.2 294.1 EPS (sen) (2) 10.9 10.6 56.5 (0.3) 18.1 (73.3) NTA (RM) (4) 2.6 0.3 2.7 2.1 5.1 (2.2) PER (x) 19.3 11.5 14.8 n.a. 32.1 n.a. P/NTA (x) 0.8 3.7 3.1 0.8 1.1 (0.9) MC-to-Premium (x) 1.2 1.4 2.5 0.6 4.8 0.9 CAGR (%) - Operating revenue -3.6% 15.9% 12.6% 24.0% 11.6% n/a - Net profit -19.9% 19.7% 11.0% -55.4% -20.3% -ve %-change YoY * - Gross Premium 4.0% n/a 20.6% 15.5% 1.9% 17.7% - Underwriting Profit n/a n/a 51.8% n/a n/a n/a - Net Profit -24.3% n/a 104.8% -96.5% -15.3% -68.5% * %-change YoY between 9M2004 versus 9M2005 (1) = Extract from latest quarterly results statement and annualise. If not available, extract from latest annual report. Based on calendar year. (2) = Extract from latest quarterly results statement and annualise. Based on calendar year. (3) = Extract from latest annual report or full year results statement (4) = Extract from latest quarterly results statement spd - suspended Source: Quarterly results, Bloomberg & AmResearch retain the right human capital resources. Insurers are also required to set supervisory target capital levels. How has the listed insurance companies fared thus far? For 9M2005, results for listed insurance companies have been mixed. Nevertheless, we can fairly conclude most insurers had no problems expanding their topline compared to 9M2004. However, its a different story for net profit. At least 67% or 6 out of 9 listed insurers in Malaysia registered a YoY decline in net profit for 9M2005. We believe besides weaker underwriting profit the other main contributing factor was lower investment income and higher provision for diminution in value of investment during the period. The few outperformers that registered a growth in net profit for the nine-month period ended September 2005 were general insurer, LPI Capital and composite insurers, MNI Holdings and Manulife. Over a longer historical track record, Kurnia Asia and LPI Capital posted the best CAGR for net profit. Kurnia Asia's net profit grew at compounded annual rate of 19.7% for 5 years ended 2004 while LPI Capital CAGR was at 11.0%. (Please refer to table below and on Page 6 ) 20 December 2005 AmWatch 7 AmResearch Sdn Bhd COMPARISON OF LISTED COMPOSITE OR LIFE INSURERS Allianz (Spd) MAA Holdings Manulife MNI Holdings Idaman Unggul Year End Jun-05 Dec-04 Sep-04 Dec-04 Dec-04 Share Price (RM) @ 19/12/05 3.33 3.16 2.15 3.98 0.21 No. of shares (m) 153.8 152.2 201.9 283.4 386.7 Market Cap (RMm) 511.3 480.9 434.1 1,127.9 79.3 Gross premium (RMm) (1) 1,005.7 1,958.7 437.8 2,728.0 120.0 EPS (sen) (2) 0.2 22.4 20.2 33.6 (3.6) Life Policyholders’ Fund (RMm) (3) 857.4 4,447.1 1,587.1 3,849.9 177.4 NTA (RM) (4) 2.0 2.0 1.6 4.2 0.1 PER (x) 1,466.9 14.1 10.7 11.9 (5.7) P/NTA (x) 1.7 0.2 0.1 0.0 (0.1) MC-to-Premium (x) 0.5 0.2 1.0 0.4 0.7 CAGR (%) - Operating revenue 23.5% 15.8% 9.0% 29.9% n/a - Net profit -10.6% -15.9% -6.7% -16.5% n/a %-change YoY * - Gross Premium -7.1% 23.0% 5.6% -1.5% n/a - Underwriting Profit n/a -3.4% 9.0% -17.2% n/a - Net Profit -99.2% -132.0% 10.1% 80.2% n/a * %-change YoY between 9M2004 versus 9M2005 (1) = Extract from latest quarterly results statement and annualise. If not available, extract from latest annual report. Based on calendar year. (2) = Extract from latest quarterly results statement and annualise. Based on calendar year. (3) = Extract from latest annual report or full year results statement (4) = Extract from latest quarterly results statement spd - suspended Source: Quarterly results, Bloomberg & AmResearch Conclusion and Stock Recommendation We are maintaining our Neutral recommendation on the insurance sector. This is given our expectations of stable surplus transfer from life insurance account to income statement and projections of single digit growth in general insurers' bottomline in 2006. Investment income, a key contributor to insurers' net earnings, is forecast to be flattish to slightly better in 2006. With the proposed insurance merger and acquisitions unveiled in 2005, competition is likely to heat up. This would see lower premium rates for consumers but tougher business environment for insurers. Banking groups with insurance arms could be winners in growing its insurance policies, gross premium and earnings base. Our coverage includes the largest composite insurer (in terms of asset base), MAA and largest general insurer, Kurnia Asia. Within the life or composite insurance business, there are only 2 investible companies namely MAA and Manulife. This is because Allianz is suspended while Idaman Unggul only started operations last year and is in the midst of disposing its life insurance business. While proposed acquisition of MNI by Mayban-Fortis is in progress. Manulife, which is involved in life insurance business, is a smaller establishment compared to other life and composite insurers and its shares are tightly held. We maintain our Hold recommendation on MAA, as we believe the Group is trading near its fair valuation of 12.0x FY06 EPS. Valuation is at a premium to average PER of Manulife and MNI, given MAA's larger establishment, but below target market PER of 15.0x in FY06. The discount we opine takes into account the uncertainty surrounding MAA's results going forward given its lower-than-expected earnings over the last 2 quarters. In line with our forecast on industry gross premium, MAA's gross premium is estimated to grow by 10% in FY06. While MAA's net profit is projected to improve by 26.3% to RM43.1m from its estimated low net profit base of RM34.2m in FY05. This is on the back of higher transfer from general insurance business in FY06 with expectations of improved underwriting profit and investment income. Despite increasing threats from bank-plus-insurance groups, we believe MAA would be able to sustain its transfer from life insurance business due to large surplus each year. 20 December 2005 AmWatch 8 AmResearch Sdn Bhd For the general insurance business, we maintain our Buy recommendation on Kurnia Asia given its inexpensive valuation and sustainable earnings. The Group is trading at 11.1x PER CY06 EPS and re-incurring income from stable motor business which contributed up to 93.2% of the Group's gross premium in FY05. Besides its dominant position in the motor business, Kurnia's decent track record in terms of gross premium and net profit growth (as shown in table on Page 5 and below) and lower than industry claims incurred ratio are factors supporting our Buy call. Its medium-to-long term growth momentum is expected to be maintained by its expansion into non-motor business and possibility into Indonesia. Our target price of RM1.50 is based on 14.0x PER which is slightly lower than our target market PER of 15.0x and average PER of LPI Capital and Jerneh Asia. Other general insurers such as PanGlobal is suspended while the rest, except for LPI Capital, registered lower earnings YoY and negative CAGR. LPI Capital's main customer is Public Bank, which contributed up to 30% of LPI's net premium in 2004. We are awaiting the impending backdoor listing of GELM and OAC via PacMas to spice up the sector. COMPARATIVE VALUATIONS Share Price Calenderised EPS (sen) 3 - Year PER (x) Target Upside Rec (RM) 2004 2005F 2006F CAGR (%) 2004 2005F 2006F Price (RM) (%) MAA 3.16 28.1 22.4 28.4 -48.2 11.2 14.1 11.1 3.41 7.8 Hold Kurnia 1.22 7.9 10.4 10.9 17.2 15.4 11.7 11.2 1.50 23.0 Buy Source: AmResearch 20 December 2005 AmWatch 9 AmResearch Sdn Bhd UMW Holdings (RM6.00) Buy Sales target attainable UMW Toyota Motor Sdn Bhd is confident that it can reach this year’s target of selling 92,500 vehicles, thus capturing 18% of the market share, its chairman Tan Sri Asmat Kamaluddin said yesterday. He said with 92 outlets consisting of 36 branches throughout the country, the company is hopeful that it can sell the remaining 7,000 units to enable it to reach its targeted market share and number of vehicles. (NST) Comment: Between January and October 2005, UMW has sold 74,657 units of vehicles or 81% of its sales target of 92,500 units for 2005. Bulk of the sales volume was driven by Toyota Vios (23%) and Toyota Avanza (42%). Our Toyota sales volume assumptions are more conservative at 87,500 units in FY05. Thus, we believe our sales volume assumption is achievable. We maintain Buy on UMW with a target price of RM6.90. This is based on PER of 12.5x its CY06 EPS of 51.3 sen. At current price, the stock is trading at 11.7x its CY06 EPS. Banking Sector Neutral New Collective Agreement to be signed tomorrow More than 36,000 bank employees will get a RM200m bonanza following the conclusion of a collective agreement (“CA”) that had been delayed three years. The staff members from 24 banks will get arrears of between RM4,000 and RM10,000 each. The CA would be signed tomorrow. (The Star) Comment: This would mean that, on the average, each of the 24 banking institutions would incur approximately RM6m (net of tax) in back-pay adjustment costs. However, larger banks such as Malayan Banking could see as much as RM40m (gross, before tax) in back-pay adjustments. But this is still only a fraction (< 5%) of its total staff costs of about RM1.45bn for FY06 (our forecast). Given that the CA will be signed tomorrow, it is very likely the back-pay will be recognised in banks’ P&L in 4Q05 (even though the actual payment date may be in Jan 06). But more significantly, the signing of a new CA with the National Union of Bank Employees (“NUBE”) would mean a further increase in staff costs for banking institutions. Typically, an average increase would be in the region of around 10% for the next 3 years. That said, we have already factored in staff cost increases in all our banks’ earnings forecasts. (Gan Kim Khoon) Telecommunications Sector Neutral Govt targets 15% broadband penetration by 2010 The government has unveiled ambitious targets to boost the global competitiveness of the country by having more Malaysians benefiting from the digital age. By 2010, it wants broadband penetration to grow to at least 15% of the population compared with 5% now and to boost 3G coverage to five million subscribers. Over the same period, the government also wants industry players to roll out mobile TV to at least 90% of mobile users and digital multimedia broadcasting to 95% of households. The targets are contained in the Energy, Water and Communications Ministry’s blueprint known as the Malaysian Information, Communications and Multimedia Services strategy - MyICMS 886 - which involves eight services upgrade, eight infrastructure upgrade and six growth areas. Under MyICMS 886, which was launched on 19 December, the government is targeting 300,000 3G subscribers next year. Maxis Communications Bhd chief executive officer Datuk Jamaludin Ibrahim believes that is achievable. (theedgedaily.com) News Highlights 20 December 2005 AmWatch 10 AmResearch Sdn Bhd Comment: The government’s blueprint for fixed and mobile broadband penetration is perhaps an indication of the high likelihood that a fourth 3G licence would be issued when the MCMC announces the outcome of the bid in February 2006. It is generally envisaged that competition would drive down prices and this would make 3G services more affordable for the masses. The industry regulator, MCMC, has also in its Public Inquiry on Access Pricing included various proposals on domestic roaming, mobile number portability and infrastructure sharing that would facilitate the entry of new players. Should a fourth 3G licence be issued, the telecommunications industry would have to brace itself for very intense competition from 2007. (Fiona Leong) Telekom Malaysia (RM9.45) Hold Celcom to up 3G content services to 50 by 31 Dec Celcom (Malaysia) Bhd wants to increase its third-generation (3G) content services to 50 by Dec 31 from 30 currently as it seeks to attract more subscribers and also expand its services nationwide. Chief executive officer Datuk Shazalli Ramly said on Dec 19 that as part of Celcom’s strategy to become the largest content provider by March 2006, it had partnered with feng shui expert Lillian Too. Celcom hopes to increase its number of 3G subscribers from 20,000 now to 40,000 by Dec 31 this year. On coverage, Shazalli said Celcom had extended the service to some state capitals and “by the first quarter of next year, we hope the 3G services can reach all the capitals.” (theedgedaily.com) In a separate development, Shazalli said Celcom is awaiting government approval to auction off a “lucky” cellular telephone number via a special short messaging service (SMS) tender to the public to promote its 3G network. “Hopefully, before Christmas we will announce a tender for a special number, a best-of-luck number for next year, which is 013-888-8888. We hope to trigger more excitement for our customers to subscribe to 3G,” he added. (theedgedaily.com) Kumpulan Guthrie (RM2.30) Hold Minamas expects better yields for 2005 Backed by improving yield and oil extraction rates (“OER”), Kumpulan Guthrie Bhd’s Minamas Plantation is expected to turn in a significant increase in its revenue and pre- tax profit for 2005 compared to that of 2004. Group head for plantation in Indonesia Md Tahir Mohammed is confident of a significant increase in the revenue and pre-tax profit of Minamas for the current year. He said the drivers for growth are the improving yield, increasing OER and lower cost of production. (NST) Kumpulan Guthrie (RM2.30) Hold Opens Riau RM10m research centre Kumpulan Guthrie Bhd’s Minamas Plantation opened its RM10m research centre in Teluk Siak in Riau, Indonesia on Dec 19 to focus on improving production efficiency. Guthrie said the Minamas Research Centre reflects its commitment towards research and development and the potential of its Indonesian operations. “It (the centre) places great emphasis on market-driven oil palm R&D efforts in order to meet the global changing needs of the industry and consumers through the improvement of production efficiency at various levels,” it said. (theedgedaily.com) Automobile Sector Neutral Alado Bumi brings in China-made cars The first made-in-China car has entered the shores of Malaysia, imported by its exclusive distributor, Alado Bumi Automobile Sdn Bhd. “This marks the first entry of China-made cars into Malaysia. By virtue of the National Automotive Policy framework, Alado Bumi is recognised with the relevant numbers of approval permit to bring these passenger cars,” Alado Bumi executive chairman Datuk Cam Soh Thiam Hong said. 20 December 2005 AmWatch 11 AmResearch Sdn Bhd Selling from RM59,444.30 to RM61,496.30, the 1.6-litre manual transmission Chery A160 made by Chery Automobile Co Ltd of China promises to blow away the pricing of its competitors. (NST) Ann Joo Resources (RM0.975) Malayawata (RM1.44) Malayawata deal to expand exports and products Ann Joo Resources Bhd is studying new export markets and further diversifying its product range. Executive director Datuk Lim Hong Thye said the move would be realized with the completion of Ann Joo’s proposed acquisition of associate Malayawata Steel Bhd, slated by the first quarter next year. Ann Joo’s voluntary general offer for the balance 67.94% stake that it does not own in Malayawata, at RM1.50 a share, was unanimously approved by the company’s shareholders at an EGM in Subang yesterday. (The Star) Scientex Packaging (RM2.70) Stretch film market share rising Scientex Packaging Bhd’s share of the global market for stretch film is expected to rise to 4% by 2007 from 2% now on increased demand for packaging materials, said managing director Lim Peng Jin. He said markets like United States, Eastern Europe, and East Asia, such as Japan, South Korea and Taiwan are expected to be growth markets. Currently, the company exports its stretch film to about 60 countries and accounted for 70% of the group’s revenue for the year ended July 31. (The Star) Padiberas Nasional (RM1.33) Proposes internal reorganization Padiberas Nasional Bhd (“BERNAS”) is proposing to undertake an internal reorganization. In conjunction, BERNAS had on 19 December 2005, signed the following agreements with United Rice Wholesalers Sdn Bhd ("URW"): (i) A share sale agreement for the acquisition by BERNAS of 3.9m shares of RM1.00 each representing the remaining 50% equity interest in CBUD held by URW; (ii) A share sale agreement for the divestment by BERNAS of its 8.3m shares of RM1.00 each representing 20% equity interest held in Edaran Bernas Nasional Sdn Bhd ("Edaran") to URW ("Edaran Divestment"); (iii) A shareholders agreement to regulate the relationships of BERNAS and URW as the new shareholders of Edaran (BMSB Announcement) Central Industrial Corporation (RM1.01) Completes proposed private placement of 5m shares Central Industrial Corporation Bhd (“CIC”) has completed the group’s private placement of 5m shares at an issue price of RM1.00/share. (BMSB Announcement) Kejurutaan Samudera Timur (RM1.00) Award of oilfield fishing contracts Kejurutaan Samudera Timur Bhd (“KSTB”) had on 19 December 2005 accepted Letters of Award of contract from Petronas Carigali Sdn Bhd ("PCSB"), Sarawak Shell Bhd ("SSB"), Sabah Shell Petroleum Company Ltd. ("SSPC") and Nippon Oil Exploration (M) Ltd. ("NOEM") for the provision of (oilfield) fishing equipment and services. The contract from PCSB will serve for a period of 3 years and 9 months from 1 May 2006 to 31 January 2010 with an option of extension for 2 years. The contract from SSB and SSPC (jointly) will serve for a period of 4 years from 1 February 2006 to 31 January 2010. (BMSB Announcement) 20 December 2005 AmWatch 12 AmResearch Sdn Bhd Stock Quantity Price Turnover (‘000) (RM) (RM’000) BAHVEST 165 0.240 40 COMMERZ 50 5.700 285 FARLIM 150 0.470 71 FARMBES 2,000 1.750 3,500 JOHAN 747 0.095 71 KEURO 539 0.255 138 KWANTAS 160 3.800 608 KZEN 80 0.685 55 MTOUCHE 1,000 2.820 2,820 NICORP 500 0.170 85 PATIMAS 1,000 1.050 1,050 QL 1,210 2.350 2,844 QUEST 1,036 0.205 212 SBANK 95 4.030 383 SUGAR 292 0.730 213 DIRECT BUSINESS TRANSACTIONS ON THE KLSE CHANGES IN SUBSTANTIAL SHAREHOLDINGS (AmResearch Coverage Only) Acquired / Date of No. of Total No. of Shares Name of Company Name of Substantial Shareholder (Disposed) Transaction Shares (‘000) After Change (‘000) Tan Chong Motors Dato’ Tan Heng Chew Acquired 12-Dec-05 40.0 Dato’ Tan Heng Chew Acquired 15-Dec-05 27.0 317,648.1 Public Bank EPF & Portfolio Managers Acquired 12-Dec-05 506.1 EPF & Portfolio Managers Acquired 13-Dec-05 230.0 237,140.6 LBS Bina Intelrich Sdn Bhd Acquired 14-Dec-05 5.8 Intelrich Sdn Bhd Acquired 15-Dec-05 1,435.5 Intelrich Sdn Bhd Acquired 16-Dec-05 23.0 169,328.5 YTL Corp EPF & Portfolio Managers Disposed 12-Dec-05 (266.1) EPF & Portfolio Managers Disposed 13-Dec-05 (7.3) 177,657.7 YTL Power International EPF & Portfolio Managers Acquired 12-Dec-05 500.0 449,953.3 PLUS Expressways EPF Acquired 30-Nov-05 800.0 EPF Acquired 1-Dec-05 444.0 EPF Acquired 2-Dec-05 670.0 EPF Acquired 5-Dec-05 400.0 EPF Acquired 6-Dec-05 512.0 514,524.5 Hiap Teck Venture Tan Sri Dato’ Alwi bin Jantan Acquired 12-Dec-05 5.0 1,410.0 Hiap Teck Venture HSBC Holdings Disposed 12-Dec-05 (150.0) 25,512.0 Star Publications EPF & Portfolio Managers Acquired 12-Dec-05 300.0 42,077.2 Star Publications Great Eastern Holdings Disposed 28-Nov-05 (408.0) 18,585.9 Media Prima Harris Associates Acquired 12-Dec-05 250.0 Harris Associates Acquired 13-Dec-05 30.0 Harris Associates Acquired 14-Dec-05 64.0 Harris Associates Acquired 15-Dec-05 110.0 49,747.2 Golden Hope Plantations EPF & Portfolio Managers Acquired 2-Dec-05 246.3 EPF & Portfolio Managers Acquired 5-Dec-05 100.0 65,424.5 20 December 2005 AmWatch 13 AmResearch Sdn Bhd Economic Highlights Asia Emerging Asia tipped to grow 7.2% in 2006: ADB East Asia, excluding Japan, will grow 7.2% next year, up from 7.1% in 2005 on the back of a rise in demand for electronics products, the Asian Development Bank said. The ADB said individual performances are likely to vary significantly, with China to slow to slightly below 9.0% after estimated 9.3% growth in 2005. Excluding China, emerging East Asia is expected to post average growth of 5.3% in 2006, up from 4.6% this year. South Korea will likely accelerate to 5.0% from 4.0% in 2005, with Singapore rising to 6.0% from 5.2%. “With (China) a major trading partner for many countries in emerging East Asia, increasing (Chinese) imports should provide additional impetus for these economies,” the ADB said. China’s growth is likely to continue to be driven by strong gains in private consumption while investment will slow but to still robust levels. The ADB said the forecasts are subject to four major risks — a disorderly adjustment of growing global payment imbalances, a sharp upturn in the global interest rate cycle, higher oil prices and a possible bird flu pandemic. It noted that a continued tightening of monetary policy and fiscal consolidation were needed to sustain strong growth and at the same time keep inflation in check. “Greater exchange rate flexibility could be utilized more to help contain inflation and at the same time rebalance the sources of growth away from exports to domestic demand,” said Masahiro Kawai, head of the ADB’s economic monitoring unit. (AFP) Japan It predicts an end to deflation, slowing growth Japan’s government forecast a rise in consumer prices next year, joining the central bank in predicting an end to more than seven years of deflation as increased demand enables companies to raise prices. Consumer prices will rise 0.5% in the year starting April 1, the government said yesterday in an annual forecast used to plan its budget. The economy will expand 1.9% in fiscal 2006, its fifth year of growth, after increasing 2.7% this year, the Cabinet Office said. The government’s prediction of price rises may ease its conflict with the Bank of Japan about when to reduce the amount of cash it pumps into the economy, a precursor to raising interest rates. An end to deflation may encourage consumers and companies to spend, helping to sustain growth in a country that’s suffered three recessions since 1991. Bank of Japan Governor Toshihiko Fukui said last week the bank’s Tankan survey published on Dec. 14 confirmed that Japan’s economic recovery would be moderate and lasting, satisfying a condition that must be met before the bank changes its policy. Fukui said on Dec. 8 that deflation is easing and the bank is “close” to end its policy. The central bank has forecast core prices, which exclude fresh food, will rise 0.5% next fiscal year. The government’s prediction includes fresh food. Ruling party legislators have urged the Bank of Japan to maintain its five-year-old policy of pumping cash into the economy and holding interest rates near zero, saying deflation persists. The government has said it’s concerned the economy’s recovery from recession will be derailed if the Bank of Japan raises interest rates too soon. (Bloomberg) EU French, Italian business confidence probably rose, surveys show French and Italian business confidence probably climbed in December as export growth spurred the European economy, surveys of economists show. An index gauging sentiment among manufacturers in France may have risen to a 10-month high of 104, from 103 in November, according to the median of 28 estimates in a Bloomberg survey. In Italy, a similar index probably climbed to a 14-month high, a 20 December 2005 AmWatch 14 AmResearch Sdn Bhd Contact Persons Email Address Direct Line Sectors Gan Kim Khoon gan-kim-khoon@ambg.com.my 2034 1360 Strategy, Banks Fiona Leong fiona-leong@ambg.com.my 2030 3019 Telecommunication, Latex Gloves, Manufacturing Ng Yong Yin ng-yong-yin@ambg.com.my 2030 3860 Power, Semiconductor, IT Services Chong Tjen San chong-tjen-san@ambg.com.my 2030 3042 Property, Media Sharifah Farah sharifah-farah@ambg.com.my 2030 3023 Automobiles Gan Huey Ling gan-huey-ling@ambg.com.my 2030 3037 Gaming, Plantations Mak Hoy Ken mak-hoy-ken@ambg.com.my 2030 3076 Construction, Building Materials Tai Jen Nee tai-jen-nee@ambg.com.my 2030 3839 Oil & Gas, Insurance Muhamad Khair muhamad-khair@ambg.com.my 2030 3922 Consumer Published by: AmResearch Sdn Bhd(335015-P) A member of the AmInvestment Group 15th Floor, Bangunan AmBank Group 55 Jalan Raja Chulan, 50200 Kuala Lumpur Tel : General : 03-2078 2788/99 Facsimile : 03-2078 3162 Dealing : 03-2072 1866/99 Telex : MA 31796AMSEC Research : 03-2070 2444 The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Gan Kim Khoon Executive Director separate survey shows. The two nations together account for more than one-third of the euro region’s economy, and increasing optimism there would follow an Ifo institute report last week showing German business sentiment at a five-year high. Signs of a reviving economy prompted the European Central Bank to raise its benchmark interest rate Dec. 1 to 2.25% from a six-decade low of 2%. The Frankfurt- based central bank last raised borrowing costs in October 2000. Economic expansion of about 1.9% in the euro region forecast by the ECB will still lag that of the US for the 14th year in the past 15. European companies are counting on foreign sales for profit growth. The Italian business confidence index probably climbed to 90.4 from 90.1 in November, the seventh straight gain, according to the median of 16 estimates in a Bloomberg survey. Italy’s $1.7 trillion economy, which slipped into recession twice in the past two years, grew 0.3% in the third quarter. Consumer spending in France probably rose in November for the first month in three, climbing 0.5%, according to the median of 27 forecasts in another Bloomberg survey. In Italy, consumer confidence may have held near a three-year high. That sentiment index probably slipped to 108.5 this month from 108.8 in November, according to the median of 13 forecasts in a separate survey. (Bloomberg) EU UK inflation expectations close to BOE target, survey shows UK consumers expect inflation to stay close to the Bank of England’s 2% target next year even as oil prices remain around $60 a barrel, a quarterly survey for the central bank showed. The rate of inflation will be 2.2% over the next 12 months, according to the median response in a poll by market research company NOP Ltd. of 2,132 people aged at least 15. That was unchanged from the bank’s August survey. Inflation has stayed above the target for five months and the Bank of England is monitoring expectations for any sign that higher oil costs may spark a wage-price spiral. Inflation slowed to 2.1% in November, after a surge in oil prices pushed the rate to the highest in eight years. The price of crude retreated 17% since reaching a record $70.85 a barrel on Aug. 30. The survey found 57% of respondents said the bank’s 2 target for inflation was “about right,” with 20% saying it was too high and 10% saying it was too low. These figures have been little changed in recent years, the bank said. The bank reduced its benchmark rate for the first time in two years in August by a quarter point to 4.5%. (Bloomberg)
