Top Down Strategy and Large Cap Stock Picks - the DBS Vickers ...

Regional Equity Strategy Q4 2007
Country Assessment
INVESTMENT STRATEGY
Although there could be re-emerging evidence of global systemic risks such as a sharp US
economic slowdown or geopolitical risks resulting in intermittent profit-taking activities, we
are reassured by the growing strength of the country’s domestic economy. In our view, the
underlying factors supporting our key sector calls (domestic-driven sectors such as banking,
construction, steel, property, oil & gas) and stock calls remain intact.
Since the August meltdown, we believe there is a window of opportunity for longer-term
investors to accumulate those big cap stocks that provide attractive dividends and could
offer positive surprises in earnings.
Banking on high yields... Specifically, Maybank and Public Bank are turning out to be
dividend plays with net dividend yield in excess of 6%. Upon completion of the sale of its
insurance unit, which could result in net dividend yield of more than 3.1%, BCHB may
surprise investors with impressive dividend payout.
…and high beta for market recovery. Banks such as AMMB, RHB Capital and BCHB may
unveil positive surprises on earnings upon completion of the recently announced
restructurings. They are also good high beta plays to ride a further market rebound.
Anticipation of greater capital market activities to help fund the pump-priming in 2008
could provide further support. In terms of M&A, there could be more news flow on the
potential takeover of EON Capital.
Construction to gather momentum. We maintain our Overweight rating on the
construction and steel sectors on the potential of 9MP. In 2Q07, construction activities grew
4.8%, the highest quarterly growth in four years. The momentum should continue in the
coming quarters. Year-to-date, construction loans approved grew 99% y-o-y.
More private-sector-funded mega projects. In the coming few months, we expect
increased news flow in terms of mega project implementation. In particular, the expected
launch of the Eastern Corridor Economic Region (ECER) could provide some excitement to
the market. Our top picks in the construction sector are IJM, Gamuda and WCT
Engineering, which are also poised to benefit from the construction boom in the Middle
East. In the steel sector, we like Kinsteel and Southern Steel.
Given the overall market correction, we would focus on the more liquid large caps ahead of
the small-mid caps. Apart from the above, other picks include PPB Group, KNM Group,
PLUS Expressways, Tenaga, MISC and Digi. Our top GLC pick is Malaysia Airports. The
approval of a long-overdue restructuring, which could entail hikes in passenger service
charges and landing and parking fees, would be a share price catalyst. Other favourites
include Evergreen Fibreboard, YTL Land, Sunrise and Eastern & Oriental.
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