malaysia malaysia strategy conclusion impact -...

Please refer to page 11 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

MALAYSIA

1Q17 results: by-sector round-up

Sectors Beat In-line Miss

Banks/Financials 2 4 2

Telcos 0 5 0

Utilities 1 2 0

Oil & Gas 1 1 0

Plantation 0 3 1

Gloves 0 1 0

Consumer 0 1 2

Transportation 0 1 5

Construction 0 2 1

Property / REITs 1 3 2

Healthcare 0 2 0

Media 0 0 1

Technology & IT 0 2 0

Gaming 0 0 1

Insurance 0 0 1

Total 5 27 16

Source: Macquarie Research, June 2017

Malaysia: earnings growth by sector

Sector Net profit growth (m-cap weighted average)

2016A 2017E 2018E

Banks/Financials 1% 9% 9%

Telcos -15% 8% 5%

Utilities 18% 1% 1%

Oil & Gas -73% -1% 57%

Plantation 13% 24% 11%

Gloves 13% 6% 8%

Consumer 0% -15% -4%

Transportation 80% -5% 6%

Construction 10% 10% 16%

Property/REITs -2% 4% -4%

Healthcare -32% 79% 24%

Media -12% 28% 16%

Technology & IT 40% 35% 21%

Gaming 12% -4% 27%

Insurance 16% -7% 13%

Market 3.2% 8.5%* 8.8%

*After adjustments for Tenaga and Axiata.

Source: Company data, Macquarie Research, June 2017

KLCI consensus EPS growth trend

Source: Bloomberg, Macquarie Research, June 2017

Analyst(s) Anand Pathmakanthan +603 2059 8993 [email protected]

6 June 2017 Macquarie Capital Securities (Malaysia) Sdn. Bhd.

Malaysia Strategy 1Q17 results wrap: hesitant start Conclusion

Contrary to earlier expectations that 4Q16 kitchen-sinking and commodity price

recovery would see market earnings recovery gain traction, 1Q17 reporting

proved disappointing. While the number of companies meeting expectations

rose to 27 (4Q: 21), the number that missed inched higher to 16 (4Q: 15), and

only 5 beat. Guidance outside of banks, tech/exporters and construction

remained uninspiring, with expectations of market earnings acceleration intact

as underscored by unchanged 2017 KLCI consensus EPS growth forecast.

Impact

Consensus unfazed: also reflecting to some extent the general reluctance to

adjust earnings early in the year notwithstanding the weak start, consensus

has not materially adjusted 2017 KLCI EPS growth expectations, i.e., still at

the post-4Q 6%, with 2018 forecast at a faster 12.7%. For Macquarie

coverage, earnings upgrades post-4Q results, especially for banks and oil &

gas, and our above-consensus earnings estimates for heavyweights like

Tenaga, Sime Darby and IHH (as well as new coverage POS(M) and HL

Bank) have our 2017/2018 one-offs-adjusted earnings growth at 8.5%/8.8%.

Banks the biggest beat…: per improving operating trends in 4Q, particularly

in support of net interest margin (NIM) recovery, the bigger banks delivered a

convincing earnings recovery, underpinned by positive jaws (i.e. higher NIM,

contained operating expenses) and lower credit costs. These drivers appear

sustainable against a backdrop of accelerating GDP growth, with restructuring

activity (CIMB’s broking arm sale, AMMB-RHB merger talks) also picking up.

…with plantations, telcos in-line: in line with a much higher 1Q CPO price

(+29% YoY), plantation companies delivered on expectations of sharp recovery

(only IOI missed due to lower CPO production). Telcos also met expectations,

with Maxis performing best among the pressured mobile operators (DiGi the

worst) while preferred fixed-line players Telekom and Time were resilient.

Transport/logistics, consumer, GENM disappoint: the mixed bag that is

transport/logistics missed for a variety of reasons, from kitchen-sinking (POS)

to higher taxes (MAHB), to negative yield-cost dynamics (AAX, downgraded

to Neutral). Karex and BAT were big misses re consumer, underscoring our

negative view on both, while GENM’s sluggish core Malaysian visitorship and

earnings have us reiterating the share price has run ahead of fundamentals.

KLCI upside anchored by big-cap picks: TP upsides for big-caps – Tenaga,

Telekom, Sime Darby and IHH (vs. downsides for PetGas, PetDag and Digi) –

underpin MQ bottom-up 12mth KLCI target of 1,836, or +2.7% upside.

Outlook

GLC Reform is our key market theme for 2017, top picks being Tenaga, Sime

Darby and POS(M). With scope for debt-funded fiscal stimulus and trade

expansion constrained, necessity of internally-generated, debt-neutral growth

means rising pressure for domestic reforms, particularly re GLCs where we

are already seeing momentum re management changes, rising GLIC activism.

Other big cap picks (Fig 2) include Telekom, IHH, Gamuda, CIMB, SP Setia

and AirAsia. Mid-caps with resilient yield and core franchises are Bursa(M),

Gas(M) and TimedotCom; we also like HLBK, Bumi Armada and Econpile.

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Analysis

Fig 1 Malaysia: 1Q17 reporting snapshot

Sectors Overall quarterly result: Earnings forecast / TP revision: Additional comments:

Market Cap

Rating FYE Quarter Beat In-line Miss Revised Maintained Under Review

Banks / Financials

MAY MK Maybank 98,524 N Dec 1QFY17 1QFY17 net earnings of RM1.7bn (+19% YoY, -28% QoQ) was, on an annualised basis, 4% below consensus FY17 net earnings forecast averaging RM7.1bn. Negative jaws was the key drag, as PPOP growth undershot (+3% YoY, -8.5% QoQ) due primarily to undershooting non-interest income and a 7% YoY increase in operating expenses that took CIR above 50% for the first time since 3QFY14. With gross NPL also inching higher due to smaller oil & gas accounts in Sing and business banking in Malaysia, our RM9.20 TP or 1.4x FY18 book value looks full for now.

PBK MK Public Bank 78,807 OP Dec 1QFY17 1QFY17 net earnings of RM1.25bn (+1.5% YoY, -15.8% QoQ) was, on an annualised basis, 5% below consensus FY17 net earnings forecast averaging RM5.24bn. 1Q is usually the weakest quarter for Public, with key drags being slow start to loan growth (+3.6% annualised, below sector) and uptick in CIR, to 34.3% – positive NIM traction was a positive mitigation, while asset quality remained strong. While some slippage in CIR and NIM is anticipated, sustained operating and qualitative strength means Public remains our top defensive banks pick.

CIMB MK CIMB 61,102 OP Dec 1QFY17 1QFY17 net earnings of RM1.18bn (+45% YoY, +38% QoQ) was a record and, on an annualised basis, 9% ahead of consensus FY17 net earnings forecast averaging RM4.34bn. Operating strength was seen across a broad front, underpinned by accelerating loan growth, higher NIIM, stronger non-interest income as capital market activity / pipelines recovered, and tight operating and credit cost controls. We have raised FY17/18E earnings by 18%/15% (we are 6-7% above consensus) and also raised our TP to RM6.90 (from RM5.50) or 1.2x FY18E book value.

HLBK MK Hong Leong Bank

32,949 OP Jun 3QFY17 3QFY17 YTD net earnings of RM1.66bn (+13% vs. previous corresponding period) was, on an annualised basis, 5% ahead of consensus FY17 net earnings forecast averaging RM2.1bn. Positive jaws was a key driver as operating income growth of 10% outpaced post-MSS operating expenses growth of 5%. Asset quality ratios remain the best in the sector after Public Bank (gap closing), with digital banking emphasis a key differentiator. We resumed coverage of Hong Leong Bank with an OP rating and a TP of RM15.70 or 1.3x CY18 book value.

RHBBANK MK*

RHB Capital 20,812 na Dec 1QFY17 1QFY17 net earnings of 500m (-11.4% YoY) was, on an annualised basis, within consensus expectations. However, underlying drivers did not inspire, with loan growth flat QoQ and NIMs bucking the broader sector trend by declining 1bps QoQ. Additionally, Sing operations were loss-making while CET 1 ratio is set to be eroded by MFRS 9 implementation given sector-trailing loan loss coverage (including regulatory reserve) of 77.8%.

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AMM MK* AMMB 15,191 na Mar 1QFY17 FY17 headline net earnings of RM1.32bn (+1.7% YoY) was within consensus expectations but after adjusting for a one-off RM108m gain from disposal of foreclosed properties, the results were light. The broad franchise remains sluggish, with loan growth flat and CASA incrementally falling, now at 21% (sector: 26%). Key negative surprise was a sharp increase in gross NPL ratio, from 1.54% at end-Dec, to 1.86%, due to soaring real estate exposure.

AFG MK* AFG 6,313 na Mar 1QFY17 FY17 net earnings of RM512m (-2% YoY) was around 7% below consensus expectations, primarily due to a significant increase in credit costs, from 12.8bps in FY16, to 24.3bps, largely attributed to seasoning of the personal loans portfolio. NIM also declined QoQ, bucking the broader sector positive trend and despite CASA ratio improving to 34.2% (FY16: 32.1%). FY18 is guided to see earnings contraction as management invests in transformation initiatives, with CIR to go above 50% (BAU<47%) and ROE to fall below 10% (BAU: c.10.5%).

BURSA MK

Bursa Malaysia

5,870 OP Dec 1QFY17 In 1Q17, Bursa reported net profit of RM56.6m (+13% QoQ and YoY), in line with our estimate of RM56.4m. By excluding the impact from the annually held conference, revenues increased 7% YoY and 14% QoQ. Due to a downward revision of guarantee fee rate from 0.5% to 0.3% imposed on margins, other derivatives revenue – which accounts for 3% of total revenue – decreased ~20% QoQ to RM4.0m. Cost management was slightly better than expected.

* are vs. consensus Telcos

MAXIS MK Maxis 46,415 N Dec 1QFY17 Maxis delivered the best performance among the three mobile operators with 0.3% YoY service revenue growth driving 6% YoY expansion in core profits – largely in line with our expectations. Increased competition in the industry ahead of the spectrum refarm on 1 July remains the key risk to earnings and valuations.

AXIATA MK

Axiata 44,780 N Dec 1QFY17 While Axiata's 1Q17 core profits at 22% of our FY17 estimates, appeared light, we were encouraged by the fact that both revenues and EBITDA were at 24% of our FY17 estimates. Celcom and NCell were weaker than expected while Robi came in ahead of expectations. We expect improvements through the year to drive a catch-up in earnings but acknowledge that earnings risks remain.

DIGI MK DiGi 38,875 UP Dec 1QFY17 DiGi's 6.5% YoY decline in core profits was in line with our estimate but below consensus. Results highlighted the elevated level of competition in the market. Although DiGi did well in the post-paid segment, weakness in its prepaid business resulted in the weakest performance among the three incumbent mobile operators.

T MK Telekom 24,502 OP Dec 1QFY17 Telekom Malaysia's 1Q17 results showed continued growth in demand for broadband products driving overall revenue (+4% YoY) and earnings growth (core profit +13% YoY), which were largely in line with our estimates. Revenue growth of 4% YoY was fuelled by data revenue growth of 6% YoY as demand for its mass market products continued to do well, thanks to latent demand for high-speed broadband.

TDC MK Time dotCom 5,338 OP Dec 1QFY17 Core profit of RM53m (+41% YoY) came in at 24% of our estimate. These results were largely in line, with good growth in its domestic businesses receiving an added boost from IRU sales on its expanded cable capacity (2H16).

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Utilities

TNB MK Tenaga 78,208 OP Dec 2QFY17 Core profit ex-reinvestment allowance of RM2.9bn was in line with expectations but a 17sen/sh interim dividend was better than expected. Despite higher fuel costs from lower coal-based generation and, thus, higher gas consumption, as well as higher thermal coal prices, Tenaga continued to record an over-recovery in fuel costs

PTG MK Petronas Gas

38,467 UP Dec 1QFY17 Mild beat was due to higher gas processing margin and utilities revenue. Post 1Q we expect no meaningful revision to consensus forecast 2% YoY EPS growth and FY DPS of 63 sen (3.4% yield). We have an Underperform rating on PTG due largely to unpriced regulatory risk.

GMB MK Gas Malaysia 3,608 OP Dec 1QFY17 Neutral result. IBR a fundamental positive for GMB.

Oil & Gas

BAB MK Bumi Armada 4,546 OP Dec 1QFY17 1Q17 net profit grew by 105% YoY to RM48m on higher profit from Armada Olombendo FPSO which achieved first oil on 8 Feb 2017. The results were above our expectations. Operationally, the YTD-17 performance is commendable but challenges remain (i.e. achieving first oil for Kraken field by end-Jun17 and assisting clients on productivity challenges in Oyo and Madura fields). Maintain OP. We expect BAB to start receiving charter income for Armada Kraken and Karapan Armada Sterling III by 3Q17, thereby lifting cashflow and re-rate share price.

UMWOG MK

UMW Oil & Gas

1,103 N Dec 1QFY17 UMWOG reported a steeper 1Q17 net loss of RM104m (from RM65m net loss in 1Q16) due to lower charter rates and higher interest expenses. 1Q17 operating cash flow is still negative and its net gearing ratio inched up to 1.5x (from 1.4x as at end-Dec16). The results are broadly within consensus estimates. Maintain Neutral. Although the global jack-up market is still challenging, UMWOG's improving financial standing (post RM1.8bn rights issue) and narrowing losses (higher asset utilisation) should put a floor under the share price.

Plantation

SIME MK Sime Darby 65,152 OP Jun 3QFY17 9M17 clean net profit doubled to RM1.7bn on higher PBIT from plantation (RM1.57bn, +184% YoY) and motor segments (RM392m, +29% YoY) that more than offset weaker industrial (RM188m, -10% YoY) and property (RM249m, -32% YoY) PBIT. The results were broadly within market expectations. Maintain Outperform. Sime is on track to list its plantations and property pure plays by end-17. We expect further newsflow on restructuring, improving quarterly earnings and possible property related M&A to re-rate its share price.

IOI MK IOI 29,207 N Jun 3QFY17 9M17 clean net profit fell by 7% YoY to RM819m on lower downstream manufacturing EBIT (-60% YoY to RM261m), partly offset by higher upstream plantation profits (+48% YoY to RM874m). The results are below our forecasts due to weak 9M17 CPO production (-5% YoY) and lower-than-expected realised CPO selling prices. Maintain Neutral with an unchanged DCF-derived TP of RM4.85.

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KLK MK KLK 26,474 N Sep 2QFY17 6M17 clean net profit grew by 51% to RM650m on higher EBIT contribution from plantations segment (doubled YoY to RM786m) that more than offset lower downstream manufacturing profit (-56% YoY to RM106m). Higher CPO and palm kernel prices have lifted upstream profit but suppressed downstream margin. Overall, the results are within our expectations. Maintain Neutral. KLK is our relative preference among Malaysian-listed pure play planters for its solid operational track record and relatively attractive valuation.

GENP MK Genting Plantations

8,917 N Dec 1QFY17 1Q17 net profit tripled YoY to RM80m on stronger palm product selling prices and higher FFB productions. The RM80m clean profit excluded c.RM22-23m unrealised upstream profit hidden in the additional 18,000mt CPO inventory held by its newly commissioned refinery operations. Overall, the results are largely within consensus estimates. Maintain Neutral. GENP's high earnings leverage to CPO prices is not an attractive investment proposition in the current CPO price cycle, we think.

Gloves

HART MK Hartalega 10,604 UP Mar 4QFY17 FY17 net profit of RM283m, making up 102% and 101% of our and consensus estimates. Operating profit margin improved 9% YoY, on the back of an easing price competition that occurred in 1HCY16. Overall sales volume increased 24% YoY, attributed to additional new capacity in NGC as well as stronger sales to its top three customers.

Consumer

PETD MK Petronas Dagangan

24,061 UP Dec 1QFY17 1Q17 net profit of RM253m (+15% YOY) is broadly within consensus and our expectations. Retail EBIT increased by 13% YoY on cost rationalisation and increasing MOPS price trend, partly offset by a 6% decline in sales volume. The commercial segment reported a 2% decline in EBIT following a 3% decline in sales volume. Maintain Underperform. We have pencilled in margin compression starting 2H17 in anticipation of introduction of price competition in Malaysia's retail fuel market. This should, in turn, erode PETD’s profitability and de-rate share prices.

ROTH MK British American Tobacco

12,832 UP Dec 1QFY17 1QFY17 net earnings of RM119m (-32% YoY) was, on an annualised basis, 15% below FY17 consensus average net earnings forecasts. The group suffered a double whammy of declining volumes sold (-20% YoY, as illicit market share surged to a record 57%) and diseconomies of scale. We see a roll-back of the illicit trade as increasingly difficult, especially as economic conditions remain soft - with annualised 1Q17 volumes implying a 15% YoY contraction vs. FY16, we cut FY17/18E earnings by 37% (to 18% below consensus) and rating to UP (from OP).

KAREX MK Karex 1,874 UP Jun 3QFY17 9MFY17 core earnings of RM26.6m, excluding a corporate exercise of RM1.6m, makes up 55% and 47% of our and consensus' FY17 forecasts. This miss was mainly due to higher-than-expected distribution and marketing expenses (+36% YoY) as well as higher depreciation cost at its newly-built factory in Hatyai, Thailand. We expect net profit margin to decline to 9-10% (vs. FY16: 18%) due to i) persistent price competition in the tender market; ii) higher SG&A costs on OBM development; and, iii) risk of tender volume recovery due to Trump's proposed budget cut. Cut rating from Neutral to Underperform.

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Transportation / Logistics

MAHB MK Malaysian Airports

15,596 N Dec 1QFY17 Results were in line with consensus (1Q16 26% of FY) but missed ours due to higher-than-expected finance expenses and taxes. We are 23% above consensus.

WPRTS MK

Westports Holdings

13,333 N Dec 1QFY17 We retain our Neutral recommendation on the shares of Westports Holdings albeit with a lower target price of RM3.81 (-2% TSR) (RM4.00 previously), as we are lowered our container volume trajectory in light of weak 1Q17 volumes/results.

AIRA MK AirAsia 10,928 OP Dec 1QFY17 AirAsia’s core profit of RM298m was down 29% YoY. The accounts consolidation does make it tough to compare like-for-like. As we had forecast core profit to fall 36% YoY in 1Q17, we would consider the results as in-line. But given our FY17E PAT is 21% below consensus, we believe the street will treat the results as a miss. We welcome AirAsia’s decision to consolidate accounts. Our earnings model is under review due to the change in account consolidation.

MMC MK MMC 7,460 OP Dec 1QFY17 Adjusted profit of RM55m, down 21% YoY, represented only 12% of our and 11% of consensus FY17E PAT. In-line (though not great) performance of its ports business was offset by the miss in its energy & utilities, and engineering & construction divisions.

POSM MK Pos Malaysia 4,055 OP Mar 4QFY17 Results miss was due to one-off items (kitchen-sinking at logistics arm and tax-related). If we exclude one-off items, revenue, EBIT, EBITDA, PBT and PAT for FY17 would have beaten consensus estimates by 7%, 16%, 11%, 6% and 2%, respectively. Post the analyst briefing, we mildly reduced our TP from RM7.40 to RM7.30 mainly to account for the higher tax rate. We reiterate Outperform as we believe its long-term story remains intact.

AAX MK AirAsiaX 1,763 N Dec 1QFY17 1Q17 missed our expectations significantly. The miss was due mainly to the lower pax yield and higher staff cost (increased 40% YoY). We downgrade AirAsia X to Neutral from Outperform albeit with a higher target price of RM0.54 (from RM0.49) after the stock outperformed. Our FY18E EPS has been increased significantly due to a significant reduction in fuel price expectations.

Construction

IJM MK IJM 12,772 N Mar 4QFY17 FY17 earnings missed our estimates at RM639m (+35% YoY), tracking 88% of our FY17 adjusted PAT estimates. We forecasted better earnings from the concession businesses, which had caused the miss. Lowered FY18E estimates by 29% and changed TP from RM3.87 down to RM3.55 on the back of IJM's ability to win new orders in FY18-20E.

SCGB MK Sunway Construction

2,663 OP Dec 1QFY17 1Q17 earnings of RM35m (+19% YoY) were in line with our estimates tracking 22% of FY17E earnings estimates. Margins recovery is on the cards as we saw both divisions, construction and precast, showing 1% to 2% expansion in margins.

ECON MK Econpile 1,305 OP Jun 3QFY17 3Q17 results showed a record quarterly profit for Econpile with cumulative adjusted PAT of RM59.9m (+22.4% YoY), in line with our FY17E earnings estimates tracking at 70%. Adj. PAT margins shrunk by 1% due mainly to higher steel prices.

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Property / REITs

KLCCSS MK

KLCCSS 14,082 N Dec 1QFY17 KLCCSS distributable income of RM166m (3.5% YoY) is in line with our estimate tracking 23% of our FY17E estimates. We raised our distributable income estimate from RM725m to RM735m as we believe lease renewals in the retail segment will bring stronger rental revenue in the coming quarters. TP revised to RM7.95 from RM7.10.

SPSB MK SP Setia 11,048 OP Dec 1QFY17 Seasonal factors have led SP Setia into a weak 1Q17. Adjusted PAT came at RM105m (-15% YoY) tracking our FY17 estimates at 14%. We believe as the year progresses, earnings will be stronger given the delivery of Battersea Phase 1 project. However, we had previously flagged that SPSB margins may contract in FY17 but will be offset by the delivery of the Battersea project. SP Setia recorded total sales of RM427m, tracking behind MQ and SP Setia FY17E sales target of 14% each.

UEMS MK UEM Sunrise 5,944 N Dec 1QFY17 UEM Sunrise beat the seasonal factor and registered strong 1Q17 earnings of RM62m (+1969% YoY). The adj. PAT was tracking in line with our FY17E estimates. Sales were RM169.4m, tracking behind UEM Sunrise's FY17E sales target at 14%. We rolled forward our estimates post results and adjusted our FY17E earnings higher by 11.3% as we expect a stronger year for UEM Sunrise in FY17. TP moved to RM1.25 from RM1.02.

MSGB MK Mah Sing 3,735 N Dec 1QFY17 Overall 1Q17 results were flattish YoY with adj. PAT at RM90m (-5% YoY) tracking in line with MQ/consensus FY17E earnings estimates at 26%. Sales recorded were RM410m, tracking in line with MQ and Mah Sing FY17E estimates at 23%.

MRC MK MRCB 3,102 OP Dec 1QFY17 MRCB reported weak 1Q17 earnings with adj PAT of RM10.5m (+139% YoY), tracking behind MQ estimates at 7% of our FY17 earnings estimates. Operationally EBIT was weaker in 1Q17 at RM59m vs. RM62m in 1Q16. The higher adjusted PAT was due mainly to lower financing cost which saw a drop of -25% (RM12m) in 1Q17. Construction remains the weakest contributor with EBIT margins of less than 2%. MRCB managed to secure total sales of RM513m, tracking at 43% of its FY17E sales target.

EAST MK Eastern & Oriental

2,412 OP Mar 4QFY17 E&O reported a strong 4Q17 to cap FY17 with a bang - good sales number + KWAP land sale. FY17 adjusted PAT came at RM63m (+72% YoY) mainly coming from the recognition of Tamarind project and profit realisation from inventory sales. The earnings beat MQ estimates by 12%. Going forward E&O's earnings are secured as long as the land reclamation goes according to schedule as the KWAP land payment is tied to the land reclamation progress. E&O recorded total sales of c.RM380m in FY17.

Healthcare

IHH MK IHH Healthcare

49,335 OP Dec 1QFY17 1QFY7 headline net earnings were RM470m – after adjusting for a RM313m disposal gain (sale of 10.8% stake in Apollo Hospitals) and a RM94.1m foreign exchange loss on its non-Lira debt, adjusted net profit is RM202m or 19% of consensus FY17 net earnings forecast of c.RM1.09bn. Slow earnings start to the year despite broad operating recovery for its home markets (Sing, Malay, Turkey, India) is not unexpected given well-flagged start-up losses for the 500-bed Gleneagles (HK) and the 350-bed Acibadem Altunizade, both of which started operations in March 2017. IHH's share price has underperformed on concerns about Turkey / weak Lira, pre-operating expenses drag for Hong Kong and softness in the Malaysia operations. All these concerns are showing resolution, i.e., current earnings headwinds are transient in nature and underlying fundamentals remain attractive.

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KPJ MK KPJ Healthcare

4,475 N Dec 1QFY17 1QFY17 net earnings of RM38.3m (+12% YoY, -27% QoQ) was, on an annualised basis, within consensus FY17 forecast of RM152m. Core Malaysian hospitals 1Q EBITDA (98% of group EBITDA) was flat YoY and contracted 4.4% vs. 4Q16. Operational data points indicate sluggish volume drivers, with both number of outpatients and inpatients contracting YoY, by 2.1% and 1.2%, respectively. KPJ will continue to be dogged by a broadly-pressured core middle income customer base and margin softness due to continuing start-up costs related to new, sub-scale hospital openings which impact ROI and pressure the balance sheet, dividend sustainability. We prefer IHH.

Media

MPR MK Media Prima 1,087 UP Dec 1QFY17 Weak 1Q17 results continued to highlight dire industry conditions. MPR delivered its first negative EBITDA since its listing in 2002 as investments in its new digital strategy overwhelmed weak traditional advertising earnings.

Technology & IT

MYEG MK MyEG 7,862 N Jun 3QFY17 3Q17 net profit of RM54m (+63% YOY, +13% QOQ) is a record high, but largely expected. The stronger earnings are due to higher transaction volume and foreign workers insurance from the rehiring programme. We raise our FY17-19E EPS by 2-17% to account for improving foreign workers-related business prospects. Maintain Neutral. We believe its positive earnings outlook is largely priced in, while the business risks (competition in foreign workers permit business) and earnings risks (GST EMS revenue collection) are often overlooked.

INRI MK Inari Amertron

4,292 OP Jun 3QFY17 3QFY17 net earnings of RM51.2m (+139% YoY) took YTD 3QFY17 earnings to RM162.2m (+49.7% YoY), which is 82% of Macquarie and consensus FY17 earnings forecast. 3QFY17 dividend proposed is a generous 2.2sen which, given enlarged share capital base post-completion of the 1-for-1 bonus issue in Jan 2017, is more than 4x higher than the 1sen dividend declared in the previous corresponding period and is an 84% earnings payout. The big operational development in 3Q is that Osram's maiden Iris Scanning production line started following certification in Feb, with 2.8m units produced. There will be an additional 5m-unit capacity installed by July, with a further 5m by 4Q. While YTD 3QFY17 earnings are ahead of expectations, we note the strengthening Ringgit is likely to be a drag on 4Q earnings and also that the effective tax rate is set to potentially double, from 4-6% currently to c.12% in 4Q, as Inari's core operating subsidiary Inari Technology's tax exemption expired in March.

Gaming

GENM MK Genting Malaysia

34,559 N Dec 1QFY17 1QFY17 net earnings of RM324m (+100% YoY, -81% QoQ) was, on an annualised basis, 20% below consensus F17 forecast averaging RM1.68bn. Core Malaysian operations performed below expectations while strength in the UK mitigated for continued undershooting at the US operations. Despite the opening of a new cable car system and Sky Avenue, 1Q visitors were down 3% YoY, to 4.8m, with a single-digit drop in the non-VIP business. Mainland Chinese visitation actually declined 9% YoY despite tourism statistics showing strong growth in Chinese arrivals into Malaysia over 1Q. The market appears overly bullish in expecting the ongoing expensive capex ramp-up to seamless deliver a parallel surge in profitability - our FY17 forecasts are 10% below consensus.

Insurance

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TIH MK Tune Protect 34,559 N Dec 1QFY17 1QFY17 net earnings of RM11.9m (-47% YoY, -28% QoQ) was, on an annualised basis, 45% below consensus FY17 forecasts averaging RM89.5m. Both the global travel business and the general insurance business underperformed sharply, the former due to weak insurance take-up rates and the latter due to broad cost pressures. We see little relief in sight for either division and, as such, have cut FY17/18E earnings by 20% (we are now 9% below consensus) and also reduced our TP to RM1.35 (from RM1.84). Rating cut from OP to Neutral.

TOTAL: 1,030,899 5 27 16 17 25 3

Source: Company data, Macquarie Research, June 2017

Macquarie Research Malaysia Strategy

6 June 2017 10

Fig 2 Macquarie's top picks

Ticker Company Price (RM)

TP (RM) Upside

(%) Rec.

Mkt cap (US$m)

EPS growth PER (x) ROE (%) P/BV (x) Div yield

(%)

FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17

Big caps TNB MK Tenaga

Nasional 13.82 19.00 37% OP 18,236 33.6 -25.7 7.9 10.7 17.4 11.7 1.3 1.2 3.9

PBK MK Public Bank 20.30 22.00 8% OP 18,376 2.1 5.9 15.5 14.6 14.3 14.2 2.1 2.0 3.0 SIME MK Sime Darby 9.58 10.40 9% OP 15,192 58.4 1.1 23.9 23.6 7.4 6.9 1.6 1.6 2.4 IHH MK IHH Healthcare 5.99 6.70 12% OP 11,504 80.5 24.1 40.0 32.3 5.5 6.6 2.2 2.1 0.7 CIMB MK CIMB 6.75 6.90 2% OP 14,247 33.9 8.9 13.0 12.0 9.8 10.3 1.2 1.2 3.9 HLBK MK Hong Leong

Bank 15.20 15.70 3% OP 7,683 1.9 3.9 14.0 13.5 10.2 10.0 1.4 1.3 2.8

T MK Telekom Malaysia

6.52 8.10 24% OP 5,713 -6.8 19.8 30.9 25.7 10.3 12.2 3.2 3.1 2.9

SPSB MK SP Setia 3.87 3.85 -1% OP 2,576 -6.2 -17.7 14.3 17.4 8.3 6.7 1.2 1.2 4.8 GAM MK Gamuda 5.41 5.60 4% OP 3,075 11.2 17.8 18.8 16.0 9.8 10.9 1.8 1.7 2.2 AIRA MK AirAsia 3.27 4.00 22% OP 2,548 -39.3 -10.4 10.6 11.8 13.6 11.1 1.4 1.3 1.9 Small/mid caps TDC MK Time dotCom 9.23 10.00 8% OP 1,245 -9.4 17.9 23.6 20.0 10.1 11.0 2.3 2.1 0.9 BURSA MK

Bursa Malaysia 10.94 10.50 -4% OP 1,369 16.4 -1.1 26.1 26.4 27.3 28.3 7.5 7.4 5.3

BAB MK Bumi Armada 0.78 1.00 29% OP 1,060 -221.3 191.5 44.7 15.3 1.8 5.0 0.8 0.8 1.3 GMB MK Gas Malaysia 2.81 3.10 10% OP 841 -6.9 10.3 23.4 21.3 15.6 18.0 3.8 3.8 4.3 POSM MK Pos Malaysia 5.22 7.30 40% OP 945 22.2 49.9 36.1 24.1 6.0 8.3 2.1 2.0 2.1 ECON MK Econpile

Holdings 2.44 2.50 2% OP 304 25.6 19.0 15.4 12.9 30.6 29.4 4.2 3.4 1.8

Source: Company data, Macquarie Research, June 2017. Closing prices as of 5 June 2017


6 June 2017 11

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 March 2017

AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for global coverage by Macquarie, 8.20% of stocks followed are investment banking clients)

Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for global coverage by Macquarie, 8.25% of stocks followed are investment banking clients)

Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for global coverage by Macquarie, 8.00% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Limited and Macquarie Capital Limited, Taiwan Securities Branch; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; Macquarie Equities South Africa (Pty) Ltd; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities (Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. 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6 June 2017 12

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Asia Research Head of Equity Research

Peter Redhead (Global – Head) (852) 3922 4836

Jake Lynch (Asia – Head) (852) 3922 3583

David Gibson (Japan – Head) (813) 3512 7880

Conrad Werner (ASEAN – Head) (65) 6601 0182

Automobiles/Auto Parts

Janet Lewis (China, Japan) (813) 3512 7856

James Hong (Korea) (822) 3705 8661

Amit Mishra (India) (9122) 6720 4084

Financials

Scott Russell (Asia) (852) 3922 3567

Dexter Hsu (China, Taiwan) (8862) 2734 7530

Keisuke Moriyama (Japan) (813) 3512 7476

Chan Hwang (Korea) (822) 3705 8643

Suresh Ganapathy (India) (9122) 6720 4078

Sameer Bhise (India) (9122) 6720 4099

Gilbert Lopez (Philippines) (632) 857 0892

Ken Ang (Singapore) (65) 6601 0836

Passakorn Linmaneechote (Thailand) (662) 694 7728

Conglomerates

David Ng (China, Hong Kong) (852) 3922 1291

Conrad Werner (Singapore) (65) 6601 0182


Consumer and Gaming

Linda Huang (Asia, China, Hong Kong) (852) 3922 4068

Zibo Chen (China, Hong Kong) (852) 3922 1130

Terence Chang (China, Hong Kong) (852) 3922 3581

Sunny Chow (China, Hong Kong) (852) 3922 3768

Satsuki Kawasaki (Japan) (813) 3512 7870

Kwang Cho (Korea) (822) 3705 4953

KJ Lee (Korea) (822) 3705 9935

Stella Li (Taiwan) (8862) 2734 7514

Amit Sinha (India) (9122) 6720 4085

Fransisca Widjaja (65) 6601 0847 (Indonesia, Singapore)

Karisa Magpayo (Philippines) (632) 857 0899

Chalinee Congmuang (Thailand) (662) 694 7993

Emerging Leaders

Jake Lynch (Asia) (852) 3922 3583

Aditya Suresh (Asia) (852) 3922 1265

Timothy Lam (China, Hong Kong) (852) 3922 1086

Kwang Cho (Korea) (822) 3705 4953

Corinne Jian (Taiwan) (8862) 2734 7522

Marcus Yang (Taiwan) (8862) 2734 7532

Conrad Werner (ASEAN) (65) 6601 0182

Industrials

Janet Lewis (Asia) (813) 3512 7856

Patrick Dai (China) (8621) 2412 9082

Kunio Sakaida (Japan) (813) 3512 7873

William Montgomery (Japan) (813) 3512 7864

James Hong (Korea) (822) 3705 8661

Benson Pan (Taiwan) (8862) 2734 7527

Inderjeetsingh Bhatia (India) (9122) 6720 4087

Justin Chiam (Singapore) (65) 6601 0560

Internet, Media and Software

Wendy Huang (Asia, China) (852) 3922 3378

David Gibson (Asia, Japan) (813) 3512 7880

Hillman Chan (China, Hong Kong) (852) 3922 3716

Soyun Shin (Korea) (822) 3705 8659

Abhishek Bhandari (India) (9122) 6720 4088

Oil, Gas and Petrochemicals

Polina Diyachkina (Asia, Japan) (813) 3512 7886

Aditya Suresh (Asia, China, India) (852) 3922 1265

Anna Park (Korea) (822) 3705 8669

Isaac Chow (Malaysia) (603) 2059 8982

Pharmaceuticals and Healthcare

Abhishek Singhal (India) (9122) 6720 4086

Wei Li (China, Hong Kong) (852) 3922 5494

Property

Tuck Yin Soong (Asia, Singapore) (65) 6601 0838


Raymond Liu (China, Hong Kong) (852) 3922 3629

Wilson Ho (China) (852) 3922 3248

William Montgomery (Japan) (813) 3512 7864


Abhishek Bhandari (India) (9122) 6720 4088

Aiman Mohamad (Malaysia) (603) 2059 8986

Kervin Sisayan (Philippines) (632) 857 0893

Patti Tomaitrichitr (Thailand) (662) 694 7727

Resources / Metals and Mining

Polina Diyachkina (Asia, Japan) (813) 3512 7886

Coria Chow (China) (852) 3922 1181

Anna Park (Korea) (822) 3705 8669

Sumangal Nevatia (India) (9122) 6720 4093

Technology

Damian Thong (Asia, Japan) (813) 3512 7877

George Chang (Japan) (813) 3512 7854

Daniel Kim (Korea) (822) 3705 8641

Allen Chang (Greater China) (852) 3922 1136

Jeffrey Ohlweiler (Greater China) (8862) 2734 7512

Patrick Liao (Greater China) (8862) 2734 7515

Louis Cheng (Greater China) (8862) 2734 7526

Kaylin Tsai (Greater China) (8862) 2734 7523

Telecoms

Soyun Shin (Korea) (822) 3705 8659

Prem Jearajasingam (ASEAN) (603) 2059 8989

Kervin Sisayan (Philippines) (632) 857 0893

Transport & Infrastructure

Janet Lewis (Asia) (852) 3922 5417


Azita Nazrene (ASEAN) (603) 2059 8980

Utilities & Renewables

Patrick Dai (China) (8621) 2412 9082

Candice Chen (China) (8621) 2412 9087

Alan Hon (Hong Kong) (852) 3922 3589


Prem Jearajasingam (Malaysia) (603) 2059 8989

Karisa Magpayo (Philippines) (632) 857 0899

Commodities

Colin Hamilton (Global) (44 20) 3037 4061

Ian Roper (65) 6601 0698

Jim Lennon (44 20) 3037 4271

Lynn Zhao (8621) 2412 9035

Matthew Turner (44 20) 3037 4340

Economics

Peter Eadon-Clarke (Global) (813) 3512 7850

Larry Hu (China, Hong Kong) (852) 3922 3778

Quantitative / CPG

Gurvinder Brar (Global) (44 20) 3037 4036

Woei Chan (Asia) (852) 3922 1421

Danny Deng (Asia) (852) 3922 4646

Per Gullberg (Asia) (852) 3922 1478

Strategy/Country

Viktor Shvets (Asia, Global) (852) 3922 3883

Chetan Seth (Asia) (852) 3922 4769


Peter Eadon-Clarke (Japan) (813) 3512 7850

Chan Hwang (Korea) (822) 3705 8643

Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512


Jayden Vantarakis (Indonesia) (6221) 2598 8310

Anand Pathmakanthan (Malaysia) (603) 2059 8833


Conrad Werner (Singapore) (65) 6601 0182

Passakorn Linmaneechote (Thailand) (662) 694 7728

Find our research at Macquarie: www.macquarieresearch.com/ideas/ Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales

Miki Edelman (Global) (1 212) 231 6121

Jeff Evans (Boston) (1 617) 598 2508

Jeffrey Shiu (China, Hong Kong) (852) 3922 2061

Sandeep Bhatia (India) (9122) 6720 4101

Thomas Renz (Geneva) (41 22) 818 7712

Riaz Hyder (Indonesia) (6221) 2598 8486

Nick Cant (Japan) (65) 6601 0210

John Jay Lee (Korea) (822) 3705 9988

Nik Hadi (Malaysia) (603) 2059 8888

Gino C Rojas (Philippines) (632) 857 0861

Regional Heads of Sales cont’d

Paul Colaco (San Francisco) (1 415) 762 5003

Amelia Mehta (Singapore) (65) 6601 0211

Angus Kent (Thailand) (662) 694 7601

Ben Musgrave (UK/Europe) (44 20) 3037 4882

Christina Lee (UK/Europe) (44 20) 3037 4873

Sales Trading

Adam Zaki (Asia) (852) 3922 2002

Stanley Dunda (Indonesia) (6221) 515 1555

Sales Trading cont’d

Suhaida Samsudin (Malaysia) (603) 2059 8888

Michael Santos (Philippines) (632) 857 0813

Chris Reale (New York) (1 212) 231 2555

Marc Rosa (New York) (1 212) 231 2555

Justin Morrison (Singapore) (65) 6601 0288

Daniel Clarke (Taiwan) (8862) 2734 7580

Brendan Rake (Thailand) (662) 694 7707

Mike Keen (UK/Europe) (44 20) 3037 4905

This publication was disseminated on 06 June 2017 at 12:08 UTC.

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