2011 04 15 (rhb) drb

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Table 1: Investment Statistics (DRBHCOM; Code: 1619) Bloomberg: DRB MK

Net Net

FYE Turnover Profit EPS Growth PER C.EPS* P/NTA P/CF Gearing ROE GDY

Mar (RMm) (RMm) (sen)# (%) (x) (sen) (x) (x) (%) (%) (%) 2010 6,314.1 472.3 13.5 102.1 17.0 1.0 1.2 Net Cash 10.8 1.7 2011F 6,442.3 531.5 23.8 76.4 9.7 27.9 0.9 NM Net Cash 11.0 1.7 2012F 6,963.8 575.3 29.8 25.0 7.7 31.5 0.8 4.3 Net Cash 10.8 1.7 2013F 8,556.5 672.7 34.8 16.9 6.6 35.5 0.7 3.7 Net Cash 11.4 1.7 Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC # Normalised excluding E.I. * Consensus Based On IBES

Unfairly overlooked. DRB-HICOM (DRB) has largely flown under investors’ radar since its acquisition by Etika Strategi and induction into the Albukhary Group of companies in 2005. The ensuing years saw a makeover of the Group’s businesses that included the acquisition of Bank Muamalat and Rangkai Positif and the disposal of non-core assets. DRB is today an expansive industrial conglomerate with a dazzling array of assets grouped under three operating divisions that offer strong growth potential as well as a high degree of earnings resilience. We believe DRB is ready to raise its profile and proactively engage the investment community. An improved understanding of the Group’s businesses and strategy will see DRB’s valuation discount narrow.

Significant dealflow potential. With a respectable controlling shareholder, a solid track record in the automotive industry and a strong niche in the production of defence equipment, we believe DRB has significant dealflow potential that could continue to yield new business contracts going forward. DRB has solid financials with significant capacity on its balance sheet to fund new businesses.

Risks. 1) A weakening of domestic consumer and business sentiment that could affect demand for vehicles, properties and loans; 2) Unfavourable foreign exchange movements; 3) Higher interest rates; 4) Prolonged disruption to global automotive supply chains; and 5) An intensification of competition amongst banks could crimp margins.

Forecasts and assumptions. DRB is well positioned to grow earnings strongly. Contributions from the Services Division will remain steady, anchored by banking and concession businesses, while the Automotive Division will see resurgence from vehicle assembly and defence equipment contracting. DRB’s proposed 1,517 acre township development project within the Iskandar Development Region promises multi-year recurring profits. Our FY3/11-FY13 net profit estimates are RM531.5m, RM575.3m and RM672.7m respectively.

Investment case. We initiate coverage on DRB with an Outperform recommendation. Our sum-of-parts derived valuation of its various businesses amounts to RM4.20/share. After ascribing a 25% holding company discount, we arrive at our fair value for the stock of RM3.15/share. PER valuations of 7.7x and 6.6x FY12 and FY13 respectively are undemanding, considering the implied 3-year FY10-FY13 recurring net profit CAGR of 37.1%.

Corporate Highlights Initiating Coverage

DRB-HICOM Slumbering Giant

Mal

aysia

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T D

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ELIN

E P

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15 April 2011

Share Price : RM2.30 Fair Value : RM3.15 Recom : Outperform

(New Coverage)

Issued Capital (m shares) 1,933.2 Market Cap (RMm) 4,446.4 Daily Trading Vol (m shs) 7.06 52wk Price Range (RM) 0.95 – 2.48 Major Shareholders: (%) Etika Strategi Sdn Bhd 55.9 Employees Provident Fund Board

9.1

Khazanah Nasional Bhd 5.1

FYE Mar FY11 FY12 FY13 EPS chg (%) - - - Var to Cons (%)* (1.4) (5.5) (1.9) *variance based on reported net profit

PE Band Chart

Relative Performance To FBM KLCI

Alexander Chia (603) 9280 2175

[email protected]

Please read important disclosures at the end of this report.

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

DRB- HICOM

FBM KLCI

PER = 10x PER = 8x PER = 7x

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Earnings Outlook

DRB has been a business in transition since the entrance of Etika Strategi (ES) as its controlling shareholder in 2005. Plans to rebalance the Group’s various businesses and deleverage its balance sheet were delayed by the onset of the Global Financial Crisis. Significant changes in recent years include the disposal of a 20.2% stake in EON Capital to Primus Pacific Partners for RM1.34bn cash in June 2008 and disposal of its non-core estate properties in 2009. New additions to the Group include IPP O&M specialist Rangkai Positif and Bank Muamalat in December 2008, 1,517 acres of development land in Johor in December 2009 as well as the privatisation of EON Bhd in Jun 2010. These structural changes have improved the Group’s focus, strengthened its balance sheet, rebalanced its earnings profile (stronger Services Division) and provided a platform for future long-term growth at its Property and Infrastructure Division. The acquisition of Rangkai Positif and the bank, both for shares also helped to take ES’ stake in DRB to the present 55.9%.

DRB’s earnings in its last two financial years were significantly boosted by exceptional gains that helped to pad up the Group’s bottomline. In FY09, a gain of RM567.5m was recorded from the disposal of EON Capital. Another gain of RM211.4m was recognised in FY10 from the sale of estate assets. The Automotive Division was the largest component of consolidated revenue in FY10 contributing 57%, followed by 40.5% by the Services Division. Relative to the other businesses, the Property and Infrastructure Division remains sub-scale especially after the termination of the 175km Ipoh-Rawang electrified double tracking rail project in FY05. In the intervening years, the Division’s focus has been to develop the Group’s remaining pockets of land while the pace of development at Proton City has been relatively slow.

In FY10, Automotive EBIT barely broke-even following the 2% yoy contraction in TIV during 2009. Nonetheless, FY10 Group EBIT (before exceptional items) doubled to RM354.5m, helped by the full year’s contributions from Bank Muamalat and Rangkai Positif, making the Services Division the largest contributor to Group earnings. We note that the bulk of equity accounted profits from jointly controlled companies and associates relate to automotive businesses. The effective tax rate in FY10 of 36.1% after excluding exceptional items and associate earnings is likely due to the absence of group tax relief.

In FY11, we expect the Services Division to continue contributing the bulk (53%) of group pre-tax profit helped by resilient earnings from the bank and Rangkai Positif. DRB will recognise another exceptional gain of RM71.2m for negative goodwill arising from the increase in its stake in EON. We expect core earnings from the automotive businesses to be relatively stable in FY11 and FY12. Automotive revenue and earnings will only accelerate in FY13 as the Volkswagen and DEFTECH Armoured Wheeled Vehicle contracts are ramped higher respectively. Earnings from the Services Division are forecast to be steady given that the bulk of the businesses are concession-based. Our forecasts for Bank Muamalat imply a FY10-FY13 pre-tax profit CAGR of 22%. Nonetheless, Bank Negara Malaysia’s requirement for DRB to dilute its stake in Bank Muamalat to 40% may mean that it will be unable to consolidate the bank’s earnings in the future. DRB’s property development activities in the next two years will continue to centre on the development of its remaining land parcels in the Glenmarie, Shah Alam area including Glenmarie Gardens and Glenpark 1 and 2 in addition to some launches at Glenmarie Cove in Klang. However, beyond FY13, contributions from property will become more significant when the Tebrau township project is launched. We have not yet factored in any revenues from this property project pending further clarity on the timing and scale of launches.

Figure 1: Quarterly Revenue And Operating Profit Quarterly Revenue By Division

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Figure 2: Revenue By Division

F Y10

Property & Infrastructure2%

Concession Services17%

Insurance6%

Banking12%Other services

5%

Automotive58%

F Y11


Concession Services18%

Insurance6%

Other services5%

Automotive56%

Banking13%

Source: RHBRI, Company data

Figure 3: Pre-Tax Profit By Division

F Y10

Automotive19%


Services55%

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Automotive47%


Services53%


Figure 4: Revenue Trend EPS Trend

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Valuation and Investment case

Table 2: Sum-of-Parts Valuation

Segment Effective Interest (%) Valuation Method Value (RMm) Per Share (RM)

Automotive 100 FY12 PER 11.5x 3,375.5 1.75

Services

Puspakom 100 DCF 147.0

Alam Flora 60.53 DCF 165.7

KLAS 100 DCF 57.7

Rangkai Positif 100 DCF 680.4

Bank Muamalat 70 FY12 Price to Book 1.1x 1,248.6

Scott & English 70 FY12 PER 7x 57.0

Uni.Asia Life 51 FY10 Price to Book 1.5x 96.8

Uni.Asia General 34.73 FY10 Price to Book 1.0x 72.7

2,525.8 1.31

Property & Infrastructure

Tebrau land - 1,517 acres, development land 100 MV RM13 psf 859.0

Proton City - LH 2095 development land 772 ha 60 MV RM8 psf 398.7

Hicom Peguh Ind Park - FH 644 acres mixed development 100 MV RM12 psf 336.6

Lot 77170 District of Klang - development land 89.5 BV 112.9

The Verge, Singapore - retail mall 83.21 BV 262.0

Glenmarie Resort - hotel and golf course 100 BV 191.9

Rebak Island Resort, Langkawi 60 BV 49.8

2,211.0 1.14

Total 8,112.3 4.20

Net Valuation after 25% holding company discount 6,084.3 3.15

Source: Company data, RHBRI estimates

Figure 5: Sum-of-Parts Valuation by Division

Automotive42%

Services31%


Source: RHBRI, MAA, Company data

Due to the varied divisions and variety of businesses in each division, we believe a sum-of-parts (SOP) approach best encapsulates the total value of the Group.

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Sum-of Parts Valuation Assumptions

Automotive Division – We value the automotive businesses using an FY12 PER of 11.5x that is higher than the sector average for CY11 of 10x but at a discount to the 12.5x PER used to value UMW’s auto division on account of the strong brand positioning of Toyota and Perodua in the market.

Services Division – DRB’s concessions Puspakom, Alam Flora, KLAS and Rangkai Positif are valued using a discounted cash flow approach as the businesses have a finite life. Our DCF valuation is based on explicit free cash flow forecasts through 2020, utilising a WACC of 13.06% and 0% terminal growth. The WACC is derived using cost of equity of 15.2% (risk free rate 4.07%, beta 1.53 and equity risk premium of 7.3%) and cost of debt of 6%. Scott & English is valued using a 7x PER typical for trading type companies listed on Bursa Malaysia. Bank Muamalat is valued at 1.2x P/B compared to the commercial banking system average of about 2x. We believe the discount is fair considering Bank Muamalat’s smaller asset size and reach as well as its unlisted status. Uni.Asia’s life and general businesses are valued using P/B of 1.5x and 1.0x respectively, reflecting the less favourable business conditions for general insurance. This compares to industry average valuations of about 2x and 1.5x respectively.

Property & Infrastructure – Its development land in Johor, Perak, and Melaka is valued at the market rate while its Klang development land, Singapore mall and resort assets valued at book value.

Our SOP computation suggests a gross valuation of RM4.20 per DRB share. However, we would argue that a higher-than-average holding company discount of 25% is appropriate given the relative opacity on details of the myriad of companies and businesses within the Group. This compares to the typical 5 - 20% holding company discounts applied to holding companies in RHBRI’s coverage universe. We believe the standard of financial disclosure and transparency has room for improvement. Improved clarity on the financial performance of group businesses going forward would increase the level of investor understanding and reduce the applied discount over time.

Our fair value for DRB net of the holding company discount is RM3.15/share and implies an FY12 PER of 10.6x and P/B of 1.09x. While this is somewhat higher than its five-year historical PER and P/B average of 8.1x and 0.52x respectively, we believe it is well justified. DRB’s financial position has never been stronger after the clean up of its balance sheet with non-core assets having been disposed of to pare down debt. Its earnings profile also looks significantly better balanced than before, with the Automotive and Property Divisions providing growth opportunities, anchored by resilient earnings from Services.

Table 3 : Peer Comparison

DRB-HICOM UMW Sime Darby Boustead YTL Corp MMC

Share Price (RM) @ Apr 13, 2011 2.30 7.29 9.09 5.90 7.46 2.63

Bloomberg Code DRB MK UMWH MK SIME MK BOUS MK YTL MK MMC MK

FYE Mar Dec Jun Dec Jun Dec

Mkt. Cap (RMm) 4,446.4 8,496.9 54,626.0 5,547.0 14,189.3 8,008.5

12-mth Av. Daily Vol. ('000) 7,061.5 1,694.6 7,526.3 902.7 655.8 2,392.3

PER 2011 (x) 8.4 11.1 17.3 9.4 13.5 16.4

PER 2012 (x) 7.7 10.4 16.8 8.8 12.7 14.1

5-yr PER band (x) 0.82 - 22.83 9.46 - 21.31 9.30 - 76.19 2.37 - 10.93 9.66 - 21.19 5.71 - 32.05

P/B (x) 0.97 2.22 3.07 1.73 1.38 1.21

5-yr P/B band (x) 0.21 - 0.90 1.50 - 2.86 1.56 - 3.63 0.56 - 1.82 0.98 - 1.91 0.52 - 2.84

Gross Yield (%) 1.7% 4.1% 1.1% 5.3% 1.1% 1.5%

Source: Bloomberg, Company data, RHBRI estimates

DRB’s valuation metrics compare favourably with other listed conglomerates with the stock trading at a discount on both the PER and P/B basis.

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Investment Risks

The main risks to our fair value and recommendation would be a weakening of the economy leading to the curtailment of consumer discretionary spending on motor vehicles and properties while limiting demand for bank financing. This would negatively impact its Automotive and Property Divisions and banking business although its concessions will be less affected. Unfavourable forex trends could also raise import costs and narrow margins at its automotive businesses. Higher interest rates could reduce the affordability of motor vehicles and properties. An intensification of competition in the domestic banking industry could affect margins at Bank Muamalat.

The full impact of the Japan earthquake on domestic auto assemblers is yet to be seen but have clearly amplified risks to the automotive sector. While an increasing proportion of components are supplied from plants within Asean, certain higher value parts could still be sourced ultimately from Japan that could see supply constraints arising from infrastructure-related bottlenecks in addition to physical damage to the parent company’s own plants and that of their suppliers. Secondary effects of the earthquake include Yen volatility and upward pressure on prices of raw materials such as steel, plastics and rubber. In the near term, we expect local assembly and production activities to be unaffected given normal inventories of up to three months in addition to shipments in transit. In a worst case scenario, should the disruption to auto supply chains remain prolonged, DRB’s distribution and assembly businesses for Honda, Proton, Mitsubishi, Isuzu and Suzuki could be adversely affected if existing stocks of CKD kits, parts and components are not fully replenished.

Background and Corporate Profile

DRB is listed on Bursa Malaysia’s Main Board. It was established in 2000 following the merger of Diversified Resources Bhd with Gadek, Gadek Capital and Hicom Holdings. Diversified Resources was founded by the late Tan Sri Ahmad Yahaya. Group companies were synonymous with early efforts to industrialise and develop the country’s manufacturing sector that was centred in the automotive industry. Hicom was the controlling shareholder of the national car company Proton, until it disposed of its 27.2% stake to Petronas in 2000 as part of a rationalisation of the Group’s business.

In the ensuing years following the merger, the Group struggled to manage high debt levels and was slow in monetising non-core assets, hampered by loss-making businesses along with waning influence of the previous controlling shareholders. Subsequently in late-2004, ES acquired a controlling 15.8% block of DRB shares following a brief tussle with a Naza consortium. ES is a company associated with Tan Sri Syed Mokhtar Al-Bukhary. In 2008, ES consolidated its shareholding to the present 55.9%, after injecting Rangkai Positif Sdn Bhd (100%) and Bank Muamalat (70%) into DRB in return for shares.

DRB is led by Chairman Dato’ Syed Mohamad Syed Murtaza and Group Managing Director Dato’ Sri Mohd Khamil Jamil. Dato’ Sri Mohd Khamil was appointed to the Board in July 2005 and is a lawyer by training. He has a 10% share in ES, DRB’s holding company.

The free float in DRB’s shares stands at just under 30% given the substantial shareholdings by ES (55.92%), the Employees Provident Fund Board (9.11%) and Khazanah Nasional (5.13%).

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Figure 6: Group structure chart

Source: Company data

DRB-Hicom Group

- 100% Edaran AutoMobile

- 100% Euromobil

- 48% Mitsubishi Motors Malaysia

- 100% Automotive Conversion Engineering

- 100% DRB-Hicom Auto Solutions

- 70% Modenas

- 100% Deftech

- 34% Honda Malaysia

- 49% Isuzu Malaysia

- 40% Suzuki Malaysia

- 100% USF-Hicom

- 62.5% PHN Industry

- 51% Hicom-Teck See

- 70% Oriental Summit Industries

- 100% Automotive Corporation (M)

- 48% Hicom-Honda Manufacturing

- 45% Hicom-Yamaha

- 29% Suzuki Motorcycle

- 49% Isuzu Hicom

- 70% Comtrac

- 60% Proton City Development Corporation

-100% Hicom Bhd

- 89.5% Glenmarie Cove Development

- 100% Glenmarie Properties

- 83.21% Corwin Holdings

- 70.6% Horsedale Development

- 35.3% Hicom-Gamuda Development

- 100% Kenyir Splendour

- 60% Rebak Island Marina

- 22.25% Niro Ceramic

- 100% PUSPAKOM

- 60.53% Alam Flora

-100% KL Airport Services

- 100% Rangkai Positif

- 70% Bank Muamalat

- 51% Uni.Asia Capital

- 70% Scott & English

Property & Infrastructure ServicesAutomotive

DRB-Hicom Group

- 100% Edaran AutoMobile

- 100% Euromobil

- 48% Mitsubishi Motors Malaysia

- 100% Automotive Conversion Engineering

- 100% DRB-Hicom Auto Solutions

- 70% Modenas

- 100% Deftech

- 34% Honda Malaysia

- 49% Isuzu Malaysia

- 40% Suzuki Malaysia

- 100% USF-Hicom

- 62.5% PHN Industry

- 51% Hicom-Teck See

- 70% Oriental Summit Industries

- 100% Automotive Corporation (M)

- 48% Hicom-Honda Manufacturing

- 45% Hicom-Yamaha

- 29% Suzuki Motorcycle

- 49% Isuzu Hicom

- 70% Comtrac

- 60% Proton City Development Corporation

-100% Hicom Bhd

- 89.5% Glenmarie Cove Development

- 100% Glenmarie Properties

- 83.21% Corwin Holdings

- 70.6% Horsedale Development

- 35.3% Hicom-Gamuda Development

- 100% Kenyir Splendour

- 60% Rebak Island Marina

- 22.25% Niro Ceramic

- 100% PUSPAKOM

- 60.53% Alam Flora

-100% KL Airport Services

- 100% Rangkai Positif

- 70% Bank Muamalat

- 51% Uni.Asia Capital

- 70% Scott & English

Property & Infrastructure ServicesAutomotive

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Automotive

Table 4: Automotive Division Principal Operating Companies Group Interest (%) Company Principal activities

100 Automotive Corporation (Malaysia) Sale of motor vehicles and related spare parts

100 DRB-HICOM Auto Solutions Vehicle importation, vehicle pre-delivery inspection and value added services for logistics and related services

100 DRB-HICOM Defence Technologies Manufacturing, supply, maintenance, marketing, refurbishment or retrofitting of military and commercial vehicles, equipment and spares

100 Edaran Otomobil Nasional Marketing or Proton vehicles, spare parts and servicing

100 Euromobil Motor vehicle distributor

93 HICOM Automotive Manufacturers (Malaysia) Contract assembly of passenger and commercial vehicles

48 HICOM-HONDA Manufacturing Manufacture and assembly of motorcycle engines and components

51 HICOM-Teck See Manufacturing Manufacturer of thermoplastics and thermo setting products for the automobile industry

45 HICOM-YAMAHA Manufacturing Manufacture and assembly of motorcycle engines and components

34 Honda Malaysia Assembly and sale of motor vehicles

49 ISUZU HICOM Malaysia Manufacturing, assembly and sale of commercial vehicles

49 Isuzu Malaysia Importation, assembly and distribution of motor vehicles and components

30 Johnson Controls Automotive Manufacturing of automotive parts and components

48 Mitsubishi Motors Malaysia Motor vehicle distributor

70 Motosikal dan Enjin Nasional (Modenas) Manufacture, assemble and distribute motorcycles, spare parts and accessories

70 Oriental Summit Industries Contract manufacturing of motorcyle and automobile parts

100 HICOM Diecastings Manufacturing diecast parts for motorcycles, automobiles and other applications

62.5 PHN Industry Manufacturing of stamped metal parts, sub-assembly of automotive components

46.3 Proton Parts Centre Warehousing and distribution of motor vehicles

40 Suzuki Malaysia Automobile Assembly and sale of motor vehicles

29 Suzuki Motorcycle Malaysia Manufacture and assembly of motorcycle engines and components

20 TRW Steering and Suspension Manufacturing and sale of suspension components and steering systems

100 USF-Hicom (Malaysia) Motor vehicle distributor

30 ZF Steerings (Malaysia) Manufacturing, assembly and sale of steering systems


The domestic auto industry is dominated by sales of passenger vehicles comprising 89.8% of total industry volumes (TIV) in 2010 and is the largest passenger vehicle market in Asean. Proton and Perodua continue to lead the sales charts owing to their unchallenged domination of the mass market 1.0L to 1.6L, A and B segment vehicles. The national car manufacturers enjoyed a combined 57.2% share of TIV in 2010 although this is significantly lower than their 80% market share in 2002. The automotive industry is a cornerstone of Malaysia’s industrialisation program and has generally grown in line with the pace of economic growth fuelled by rising personal disposable incomes and a burgeoning middle class. Between 1991 and 2010, TIV expanded at a CAGR of 6.5%. Following record sales in 2010 (TIV +12.7% yoy), we expect demand growth to moderate in 2011. Nonetheless, we believe that the macro-economic environment continues to be supportive of domestic consumption. Positive consumer sentiment and accommodative interest rates will help to fuel demand for new vehicles. RHBRI is forecasting total industry volume (TIV) growth of +4.0% and +2.1%.

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Figure 7: Annual TIV and yoy Growth 1991-2012

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DRB has probably the largest and most comprehensive suite of automotive businesses in Malaysia. The division is vertically integrated and its reach extends to every sub-segment of the industry, including autoparts manufacturing, vehicle assembly, vehicle distribution and after sales, vehicle importation, motorcycle manufacturing and distribution as well as defence equipment.

DRB’s manufacturing and engineering segment is geared toward supporting Malaysia’s ambition to be a major regional automotive hub. Component manufacturing companies in the Group include specialists in metal forming and assembly, plastic moulding, aluminium and iron casting, motorcycle assembly, machining, modular component assembly, tools, jigs and dies manufacturing. Its strategy also includes partnerships with technology partners such as Akashi Kikai, Futaba, Hiruta Kogyo, Honda, Imasen, Kikuchi Press, Mitsubishi Engineering, Plakor, Shiroki, Suryo Plastics, Thai Summit, TRW Steering, Yamaha and ZF Steerings, as well as original equipment manufacturers like Toyota, Honda, ZF Steerings, TRW, Brose, Volvo, Ford, Nissan and Yamaha.

DRB has a 70%-stake in Modenas that manufactures motorcycles and scooters that commenced operations in 1996. The company was established in partnership with Kawazaki Heavy Industries (19%) and Sojitz Corporation (11% and formerly known as Nisho Iwai Corporation). Its manufacturing plant is located in Gurun, Kedah with a 240,000 unit capacity p.a.. Modenas has a 14% share of the domestic market and exports about 10% of its annual production. Modenas completes DRB’s stranglehold on the domestic motorcycle market given its stakes in the local manufacturing businesses for Honda, Yamaha and Suzuki motorcycles.

Figure 8: DRB-HICOM Related Auto Marques Monthly TIV

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Its automotive distribution business includes the retailing of marques including Audi, Honda, Mahindra, Mitsubishi, Proton, Suzuki, Isuzu and Hicom Perkasa trucks. Edaran Otomobil Nasional (EON) was privatised by DRB in June 2010 and is a leading distributor and after sale service provider for Proton vehicles. EON is a Master Dealer for Proton operating a nationwide network of 32 sales and service centres with a 21% share of Proton sales. The distributorship for Audi and Mitsubishi vehicles are held under the EON Group. Mitsubishi recorded stellar sales growth of 70.4% yoy in 2010 to 11,899 units. Audi sales also rose 70.3% yoy in 2010 to 741 units. While Audi has just a small share of the domestic luxury vehicle market, the recent launch of two new sales and service centres in Kuala Lumpur and Penang as well as the introduction of the latest award winning Audi models sets the stage for improved sales in 2011. Honda Malaysia is also a significant component of DRB’s automotive business. Honda sales expanded 14.7% yoy in 2010 to 44,483 units with a 7.4% share in 2010 TIV. Honda Malaysia was established in 2000 as a joint venture between Honda Motor Company (51%), DRB (34%) and Oriental Holdings (15%). It has a manufacturing plant located on an 80 acre site in Alor Gajah, Melaka for the local assembly of popular models as well as a constant velocity joint plant for exports. DRB-HICOM Auto Solutions (DHAS) is a recipient of Approved Permits (APs) and facilitates the importation of vehicles for six brands within the Group including Suzuki, Honda, Mitsubishi, Isuzu, Audi and Mahindra. DHAS also recently began importing Volkswagen vehicles on behalf of Volkswagen Group Malaysia and also provides vehicle pre-delivery inspections, logistical and storage services.

DRB’s automotive assembly business is centred at its integrated assembly complex located in Pekan, Pahang. The complex includes three assembly plants for the assembly of passenger, commercial and defence-related vehicles. Considered the crown jewel of DRB’s assembly operations, the passenger vehicle assembly plant is operated by HICOM Automotive Manufacturers with multi-modal assembly lines located on a 57 ha facility and production capacity of about 13,000 units p.a.. The plant has a strong track record and conducts vehicle assembly for Suzuki and Mercedes Benz including the C, E and S Class. Notably, the plant is the first outside Germany to assemble the luxury S Class limousine attesting to its strong reputation for quality. ISUZU HICOM Malaysia (previously known as Malaysia Truck & Bus) is a joint venture with Isuzu Motors Ltd (51%) and specialises in contract assembly of commercial vehicles. The plant assembles Hicom Perkasa light trucks and a range of Isuzu trucks for the local and export markets.

In December 2010, DRB signed an exclusive collaboration and license agreement with Volkswagen AG and Volkswagen Group Malaysia to assemble completely knocked down (CKD) Volkswagen vehicles for the domestic and Asean markets. The agreement will see DRB procure the CKD kits, manufacture and supply components and assembly of vehicles. DRB will then sell the assembled vehicles to Volkswagen for onward distribution and sales. The collaboration is expected to kick off with the Passat model with production beginning by 4Q11. The Jetta and Polo models could follow in 2012 with 50,000 units p.a. targeted by 2015. The deal has been a significant coup for DRB for securing a major assembly contract with a global auto manufacturer that could have secondary benefits for DRB’s auto component businesses opening doors to supply Volkswagen operations globally.

Figure 9: DEFTECH’s Armoured Personnel Carrier


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Wholly-owned DRB-HICOM Defence Technologies (DEFTECH) supplies land-based military vehicles in addition to maintenance and refurbishment services. Its business model involves the establishment of strategic alliances with international manufacturers of defence equipment to enhance its product range and to acquire new technologies. DEFTECH announced in March 2011 a contract award from the government to design, develop, manufacture, commission, supply and deliver 257 units of the 8 x 8 Armoured Wheeled Vehicles (AWV). The Contract is valued at RM7.55bn is for a period of 7 years commencing from 2011. In addition to the supply of hardware, the contract is also believed to include training, maintenance and parts. Hardware deliveries are expected to commence in 2012 contributing to FY13 earnings.

Property & Infrastructure

Table 5: Property & Infrastructure Division Principal Operating Companies Group Interest (%) Company Principal activities

60 Proton City Development Corporation Property development, civil and building construction

89.5 Glenmarie Cove Development Property development

100 Glenmarie Properties Investment holding

35.3 HICOM-Gamuda Development Property development

70.6 Horsedale Development Property & golf resort development and management

70 Comtrac Construction works and provision of project and development management services

83.21 Corwin Holding Owner and operator of shopping mall

100 Kenyir Splendour Resort management

60 Rebak Island Marina Development, construction, management and operation of marina and tourist resort

22.25 Niro Ceramic Manufacturing and trading of ceramic tiles


The property and infrastructure division includes a mixed bag of residential, commercial, industrial, township developments as well as the operation of several leisure resorts.

Table 6 : DRB-HICOM Property Portfolio

Residential Commercial Industrial Township Hospitality

Glenmarie Court, Selangor Kelana Jaya Urban Centre, Selangor

HICOM-Glenmarie Industrial Park, Selangor Proton City, Perak

Taj Rebak Island Resort, Langkawi

Glenmarie Residences, Selangor

HICOM Office Park, Selangor

Pekan Industrial Park, Pahang Kota Kemuning, Selangor

Lake Kenyir Resort, Terengganu

Glenmarie Gardens, Selangor

HICOM Town Centre, Selangor

HICOM Industrial Park, Selangor

HICOM Peguh Industrial Park, Melaka

Holiday Inn Glenmarie, Kuala Lumpur

Glenhill Saujana Shah Alam, Selangor

Accentra Glenmarie, Selangor

MODENAS Industrial Complex, Gurun

Tebrau Township, Johor (proposed)

Glenmarie Golf & Country Club

Glenmarie Cove, Klang The Verge, Singapore Mak Mandin Industrial Park, Penang

Taman Seri Puchong, Selangor

Bandar Indera Mahkota, Pahang

Taman Bukit Sagar, Selangor

Section 26, Shah Alam

Glenview Apartments, Cheras

Mutiara Tropicana, Shah Alam

Glenpark, Selangor Source: Company data

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Figure 10: Proton City Site Map

Source: www.proton-city.com

Proton City is its largest property development by acreage and is a joint venture with Proton (40%). It is a 4,000-acre township development being built around Proton’s Tanjung Malim assembly plant in Perak. The development also encompasses the Universiti Pendidikan Sultan Idris campus sited on 800 acres, as well as a 300-acre vendor park. The rate of development in Proton City is believed to be relatively slow due to the relative under-utilisation of the Proton plant. It was hoped that the consolidation of Proton’s manufacturing facilities to Tanjung Malim from Shah Alam would have spurred the pace of development. However recent news flow on the proposed plant consolidation exercise has been limited. While the master plan calls for the full development of the township by 2020, the reality is that the rate of development will be dictated by Proton’s success and its ability to attract more vendors the relocate to the area. However, we think this could take time to achieve given the limited size of the domestic auto market and limited success in breaking into export markets.

Other ongoing projects include the development of its landbank in Glenmarie, Shah Alam. This includes Glenmarie Gardens (a low density development of 70 luxury bungalows on a 32-acre freehold site), Glenpark 1 (shop offices) and Glenpark 2 (384 units of double story link houses). Glenmarie Cove is a 210-acre riverfront residential property development adjacent to the Langat River in Selangor. Kota Kemuning is a mature township in the final development phase located in Shah Alam that is undertaken by HICOM-Gamuda in which DRB has an effective 35.3% interest.

In December 2009, DRB completed a significant move to replenish its landbank by acquiring 1,517 acres of development land in Johor for RM772.5m or RM10.93 psf. The purchase consideration was partly satisfied by the swap of 6,882 acres of estate land located in Selangor, Kedah and Melaka that yielded an exceptional gain of RM211.4m in FY10. The Johor development land is located within Economic Zone E Senai-Skudai of the Iskandar Development Region, neighbouring matured developments like Setia Indah, JP Perdana, Bandar Baru Seri Austin and Bandar Dato’ Onn with established surrounding infrastructure. DRB is planning a township development with the maiden launch scheduled in FY13 that will propel the Group into a major property player within the IDR.

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Figure 11: Flagship Zones in the South Johor Economic Region

Source: SJER CDP 2025

Services

Table 7: Services Division Principal Operating Companies

Group Interest (%) Company Principal activities

60.53 Alam Flora Management of integrated solid waste

100 KL Airport Services Airport ground services, inflight catering, cargo handling and warehousing services

100 PUSPAKOM Vehicle inspection services

100 Rangkai Positif Operations & Maintenance services for Tanjung Bin power plant

70 Bank Muamalat Islamic banking

51 Uni.Asia Capital Life & general insurer

70 Scott & English Importation, distribution and servicing industrial, marine and engineering products


DRB’s services division comprise of non-financial and financial businesses. Its non-financial businesses are predominantly concession-based and include solid waste management, vehicle inspections, airport services and power plant operations.

Alam Flora – Solid waste management. Alam Flora is one of three waste management companies in Malaysia (E-Idaman Sdn Bhd is responsible for the Northern Region and Southern Waste Management Sdn Bhd the Southern Region). Alam Flora’s concession covers the Central Region and Eastern Region which includes Kuala Lumpur, Putrajaya, Selangor, Pahang, Kelantan and Terengganu, serving a population of over 8m people. Its services include solid waste management collection and disposal, environmental management consultation, recycling activities, sale of waste storage containers, environmental awareness programmes, environmental impact studies and cleaning services. Alam Flora has been operating on an interim concession since 1997 that is renewable annually, pending the formalisation of concession agreements. The signing of a permanent concession under the Solid Waste and Urban Cleansing Management Act was supposed to have been implemented on April 30. However recent press reports (Bernama) have confirmed the postponement due to technical reasons. This could be related to opposition to the Act from several state governments including Penang and Selangor.

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KL Airport Services. KLAS serves both budget and full service commercial airlines operating through airports in Malaysia including KLIA, KL LCCT, Penang, Kuching, Langkawi Kota Kinabalu and Subang. Its services include check-in, baggage handling, in-flight catering, cargo handling, aircraft maintenance and engineering services. It serves over 40 airlines including Singapore Airlines, Cathay Pacific and Air Asia. The continued growth of the budget airline industry combined with the new low cost carrier terminal scheduled to be commissioned in 2012 with a capacity to handle 45m passengers p.a. should help to drive KLAS’ business.

Puspakom – National vehicle inspection. Incorporated in 1994, Puspakom was awarded a 15-year concession to undertake computerized vehicle inspections for all commercial vehicles. Puspakom operates a nationwide network of 72 branches including two mobile units performing over three million inspections annually. The Road Transport Act 1987 requires mandatory inspections for commercial vehicles. In addition Puspakom also carries out inspections for private vehicles prior to financing and auction as well as valuation and voluntary inspections. Its concession was renewed for another 15 years beginning 1 September 2009.

Rangkai Positif. The company provides operations and maintenance services to Tanjung Bin power station under a 25-year concession till 2031. Tanjung Bin is a 2,100MW coal-fired plant located in Pontian, Johor. Future business opportunities include the provision of O&M services to other power plants. Rangkai Positif was acquired in October 2008 for RM292.2m satisfied by the issuance of 376.96m shares to Etika Strategi.

DRB’s financial services portfolio includes Bank Muamalat and insurance through Uni.Asia General Insurance and Uni.Asia Life Assurance.

Bank Muamalat. DRB has a 70% stake in Bank Muamalat which it acquired from Etika Strategi in October 2008 for RM425.2m satisfied by an issuance of 548.7m new shares. Khazanah Nasional owns the remaining 30%. Bank Muamalat is an Islamic bank with 56 branches and service centres nationwide. It has wholesale (corporate, investment and commercial banking) and consumer banking services with total assets of RM15.9bn at December 2010. For comparison purposes, Malaysia’s largest Islamic bank Maybank Islamic reported total assets of RM48.3bn at end-December 2010. For the nine months to December 2010, the bank reported net profit of RM99.3m, up 30.9% yoy, achieved on the back of significantly lower impairment charges. The acquisition of Bank Muamalat was conditional upon DRB selling down its stake to 40%. Efforts to find a strategic partner are ongoing and are tied into the bank’s regional ambitions.

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Table 8 : Bank Muamalat Earnings Forecasts

FYE Mar (RMm) Dec-08 15 mths to

Mar 2010 FY11F FY12F FY13F Income from investment of depositors funds 718.3 865.2 792.6 876.5 962.2 Income from investment of shareholders' funds 72.3 77.5 59.7 55.9 61.4 Allowance for impairment of financing (166.1) (161.2) (41.4) (35.7) (36.0) Provision for commitments & contingencies 1.0 0.1 (30.0) 0.0 0.0 Impairment writeback / MTM (19.8) (42.3) 20.0 0.0 0.0 Islamic profit rate swap 0.0 0.0 0.0 0.0 0.0 Other expenses (22.7) (29.6) (21.3) (23.0) (24.7) Total Distributable Income 583.1 709.7 779.5 873.7 962.9 Income attributable to depositors (318.9) (270.0) (303.9) (343.5) (386.7) Total Net Income 264.2 439.7 475.6 530.2 576.2 Personnel expenses (100.3) (152.1) (164.3) (177.4) (191.6) Other overheads (104.3) (126.0) (91.4) (100.5) (111.4) Finance cost (15.6) (19.5) (15.5) (15.5) (15.5) Profit Before Zakat and Tax 44.1 142.1 204.5 236.8 257.7 Zakat (0.2) (0.2) (5.0) (4.0) (3.0) Tax (11.9) (43.0) (60.4) (69.4) (74.3) Net Profit 32.0 98.8 139.0 163.4 180.4 Source: Company data, RHBRI estimates

Table 9 : Bank Muamalat Balance Sheet

FYE Mar (RMm) Dec-08 15 mths to

Mar 2010 FY11F FY12F FY13F Assets Cash and ST funds 5,067.3 5,775.4 5,000.0 5,400.0 5,778.0 Financial investments HTM 30.9 28.2 30.5 32.9 35.2 Financial investments AFS 2,871.0 4,012.8 4,012.8 4,333.8 4,637.2 Islamic derivative assets 0.0 18.1 10.0 10.0 10.0 Financing of customers 6,027.5 6,630.2 7,160.6 7,733.4 8,274.8 Statutory deposits 251.8 87.8 175.6 175.6 175.6 Other assets 70.5 68.7 100.0 100.0 100.0 Deferred tax 35.6 27.9 50.0 50.0 50.0 PPE 43.8 84.3 100.0 110.0 121.0 Prepaid land lease payment 0.3 0.0 0.0 0.0 0.0 14,398.6 16,733.4 16,639.5 17,945.8 19,181.8 Liabilities Deposits from customers 12,448.0 14,920.9 13,876.4 14,570.2 15,298.7 Deposits from banks and FIs 250.4 16.4 80.0 80.0 80.0 Islamic derivatives financial liabilities 0.0 19.2 15.0 15.0 15.0 Bills and acceptances payable 651.9 92.2 500.0 600.0 720.0 Other liabilities 95.9 96.4 440.7 789.8 996.9 Provision for zakat & tax 0.2 19.2 19.2 19.2 19.2 Subordinated bonds 250.0 250.0 250.0 250.0 250.0 13,696.4 15,414.3 15,181.3 16,324.2 17,379.8 Shareholders' Equity Share capital 500.0 1,000.0 1,000.0 1,000.0 1,000.0 Reserves 202.2 319.1 458.2 621.6 802.0 702.2 1,319.1 1,458.2 1,621.6 1,802.0 14,398.6 16,733.4 16,639.5 17,945.8 19,181.8 Source: Company data, RHBRI estimates

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Table 10 : Bank Muamalat Summary of Ratios

FYE Mar (%) 15 mths to

Mar 2010 FY11F FY12F FY13F ROAA 0.6 0.8 0.9 1.0 ROAE 9.8 10.0 10.6 10.5 Net Financing Margin 5.5 5.0 5.1 5.1 Cost to Income ratio 29.5 30.0 29.8 29.6 Effective Tax Rate 30.4 32.0 31.0 30.0 Credit Cost 2.5 0.6 0.5 0.5 Financing Growth 10.0 8.0 8.0 7.0 Deposit Growth 19.9 (7.0) 5.0 5.0 Financing to Deposit Ratio 44.4 51.6 53.1 54.1 Core Capital Ratio 13.9 14.9 15.4 16.0 Risk Weighted Capital ratio 17.6 18.7 19.0 19.5 Source: Company data, RHBRI estimates

DRB’s insurance businesses are held through 51%-owned Uni.Asia Capital in partnership with Singapore’s UOB Group. The insurance arm leverages off DRB’s automotive and property businesses with cross-selling and product bundling offered to buyers of vehicles and properties from Group companies. DRB announced in October 2007 that it had secured Bank Negara approval to enter into talks to dispose of its 51% stake in Uni.Asia Capital to OSK Holdings. However, the negotiations were unsuccessful and ceased in June 2008.

Uni.Asia Life Assurance. The company was formerly known as EON CMG Life with DRB having an effective 51% stake. Bancassurance products accounts for 90% of sales. For the year to March 2010, the company reported gross premiums of RM411.1m (+84.7% yoy).

Uni.Asia General Insurance. DRB has an effective 34.73% stake in Uni.Asia General. Motor insurance is its main premium generator accounting for 76.4% of gross premiums. The company reported a net loss of RM27.1m in FY10.

Table 11 : DRB-HICOM Earnings Forecasts FYE Mar (RMm) FY10 FY11F FY12F FY13F Turnover 6,314.1 6,442.3 6,963.8 8,556.5 Turnover growth (%) 3.5 2.0 8.1 22.9 EBITDA 754.6 737.2 826.9 988.4 EBITDA Margin (%) 12.0 11.4 11.9 11.6 Depreciation (157.0) (168.5) (175.8) (179.2) Net Interest (36.8) (30.2) (28.9) (26.5) Associates 128.8 220.0 250.0 260.0 Exceptional items 211.4 71.2 0.0 0.0 Pretax Profit 657.9 718.4 828.3 993.8 Tax (114.6) (102.5) (138.8) (176.1) Effective tax rate (36.1) (24.0) (24.0) (24.0) Minorities (71.0) (84.4) (114.3) (145.0) Net Profit 472.3 531.5 575.3 672.7 Source: Company data, RHBRI estimates

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Table 12 : DRB-HICOM Earnings Forecasts By Division FYE Mar (RMm) FY10 FY11F FY12F FY13F Turnover Automotive 3,601.8 3,652.0 3,931.2 5,250.8 Property & infrastructure 152.4 105.0 230.0 375.0 Services 2,560.0 2,685.4 2,802.6 2,930.7 6,314.1 6,442.3 6,963.8 8,556.5 EBIT Automotive 0.7 67.2 130.8 217.2 Property & infrastructure (38.0) (14.0) 30.7 64.1 Services 391.7 404.2 445.7 479.0 354.5 457.4 607.2 760.3 Net interest (36.8) (30.2) (28.9) (26.5) Exceptional items 211.4 71.2 0.0 0.0 Jointly controlled Co and associates Automotive 121.1 206.7 234.9 244.3 Property & infrastructure 7.2 12.3 14.0 14.6 Services 0.5 0.9 1.0 1.1 128.8 220.0 250.0 260.0 PBT Automotive 121.7 337.2 359.5 453.9 Property & infrastructure 169.4 (0.8) 43.3 76.5 Services 366.8 382.1 425.6 463.4 657.9 718.4 828.3 993.8 Source: Company data, RHBRI estimates

Table 13 : DRB-HICOM Cash Flow Estimates FYE Mar (RMm) FY10 FY11F FY12F FY13F Profit before tax 657.9 718.4 828.3 993.8 Adjustment for non-cash items (26.4) (112.8) (64.2) (70.8) Changes in working capital 2,980.6 (1,106.2) 231.6 266.1 Other 34.1 35.4 47.5 11.2 Net cash from operating activities 3,646.1 (465.1) 1,043.1 1,200.2 Net cash from investing activities (1,015.0) (194.2) (200.0) (150.0) Net cash from financing activities (134.4) (115.1) (215.1) (215.1) Changes in cash and cash equivalent 2,496.7 (774.4) 628.1 835.2 Opening cash and equivalent 4,634.8 7,131.5 6,357.1 6,985.2 Closing cash and equivalent 7,131.5 6,357.1 6,985.2 7,820.4 Total debt (1,527.8) (1,527.8) (1,527.8) (1,527.8) Net Cash/(Debt) 5,603.7 4,829.3 5,457.4 6,292.6 Net Cash/(Debt) - ex-bank 273.2 377.6 445.4 616.9 Source: Company data, RHBRI estimates

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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. 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. This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions of third parties in this respect.

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