Malaysia Equity Strategy

Bottoming Out; Setting Our Year-end Index Target at 1,449

Bottoming-Out, Start Buying — In discounting the global equities meltdown, the market was hit by the shocking 12th General Election results where the ruling coalition parties lost the two third majority. A lot of the bad news is already in the price. In an illiquid market like Malaysia, we urge investors to start positioning.

Index Can't Fall Much More — Instead, we now expect the KLCI is set to hit 1,449 points by end-2008. Our bottom-up index target suggests 15% upside. Leading the pack is the banking sector, which accounts for 23% of the index weighting followed by plantations, telcos, utilities and gaming.

Limited Downside to 7.1% EPS Growth — Fundamentally, after three rounds of cutting, we see little downside to our 7.1% EPS growth estimates for 2008. While the worst is yet over for consensus, a few stocks have already fallen ahead of street downgrades. 2009 is set to be a better year with 11.6% EPS growth. GDP growth will be decent at 5.3% supported by strong domestic factors.

Valuation Looking Attractive — Malaysia is now trading at discounts relative to the region and its historical valuation benchmarks.

Imminent Catalysts — 1) Sentiment is too negative, partly caused by over-reaction to the spate of downgrades by the streets. 2) Some local institutions are seeing their cash levels rising to over 20%. We see buying activities picking up
imminently. 3) The upcoming 2009 budget could stir buying interest as investors
expect an expansionary budget to shore consumer confidence.

Upgrading Property as Value Emerges — Property stocks fell ahead of consensus
downgrades. After a 30-40% fall, we see value emerging. We have upgraded SP
Setia to Buy from Sell with a target price of RM4.90/share. We have also added
KLCC Property to our Top Buy list after falling 40% with a market cap of RM2.6b
against its RNAV of RM6b. We also upgraded UEM World from Hold to Buy.

Strategy: Add Beta and be Less Defensive — We are adding beta to our stock
selections by adding SP Setia, KLCC Property and UEM World to the list. We
continue to like IOI Corp, KL Kepong and IJM Plantations in the plantation space
but are dropping Sime Darby. Telcos is always on our Buy list. Small/mid stocks
like SapuraCrest and TA Enterprise should deliver str