Domestic corporates

Earnings forecasts and target downgraded. We have lowered our expectations based on the dismal 2Q results and in view of protracted soft patch in US and worsening sovereign debt crisis in Europe. Besides lowering our earnings forecasts, we also expect lower PER multiples of 13.6x 2012 from 14.6x due to rising risk aversion. Note that there is a further downside risk to our numbers given that the debt crisis in Europe is fast turning into solvency crisis of states and banks while US could easily slip into a double dip.

On specifics, major earnings disappointments came from MMHE, Bumi Armada, Axiata, Maxis, MISC , Tenaga, CIMB, RHB. Positive surprises came from plantations. Major earnings downgrades were for Tenaga and MISC. Rating upgrades were mainly smaller caps while major downgrades (to SELL) were KNM, MISC and Proton. Despite challenging environment, we maintain loans growth forecast of 12.5% for 2011 but lower 2012 to 10.4% from 11.5%.

We remain defensive at the core. Hold on to domestic focussed stocks in construction and O&G while telcos and M-REITs are still good for yields. We have replaced Axiata with TM in our Top Buy list and incorporated new growth (SOP, TSH) and value stocks (BIMB, MPHB, Hartalega) . Among the big banks, only AMMB make the grade.

Net outflow of funds in August. Net foreign selling in Malaysian equities amounted to RM3.8bn in August, reversing 58% of the net inflow of RM6.6bn in the preceding 4 months. The last time we saw this magnitude of net selling was in February this year (- RM3.4bn). The big targets of selling were those with over 30% foreign shareholdings such as CIMB, Genting Bhd, Genting Malaysia, Gamuda, IJM, AirAsia. We estimate foreign shareholding have tapered off to below 22% (6% of which are strategic holdings).

The risk-off mode so prevalent now means that foreign money is not likely to be a positive contributor to the KLCI at least until global economic visibility becomes clearer.

Global Economics

European debt crisis worsening

Italy backtracked from its earlier commitment on budget cuts due to pressure from its voters. As a result, its 10-year bond yield shot up by 80bp in just about a week to now 5.65% despite ECB intensifying its purchases. The country still faces a possibility of a general strike as the government seek a USD65bn austerity plan.

Germany rejects deals on Greek collateral (in return for further aid) as well as a common bonds for the eurozone. The present government faces dissent within the coalition as well as losing supports from its voters who are opposed to bailing out the troubled PIIGs.

Bank meltdown in Europe cannot be discounted

European banks’ balance sheets are damaged from holding PIIGs debts. The feedback loop between the banking system and sovereign debt is creating fear. The market has punished banking stocks in belated recognition of undeclared liabilities. Meanwhile, the cost of insuring against bank failures have reached levels beyond even those seen at the height of 2008 subprime crisis.

There is a growing recognition that Europe banking fragility could become systemic and cause a second economically-debilitating credit crunch. European banks need to recapitalize but Chinese banks have cut credit lines and American money market funds have shifted away. Private sector recapitalization isn’t possible now that investors can’t be sure if banks are solvent. And public sector recapitalization is extremely hard given the fact that the eurozone economic structure is incoherent.

The reckoning may not be orderly but take a market-imposed chaotic course.

CBBC is another type of structured product, much like a structured warrant and is also known as “knock out”, “turbo” or “stop loss” warrants. CBBC is also likened to Certificates For Difference (CFD). They are issued either as Bull or Bear certificates with a fixed expiry date, allowing investors to take bullish or bearish positions on the underlying instrument. CBBCs track the performance of an underlying instrument without requiring investors to pay the full price required to own the actual underlying instrument. On Bursa, CBBC is allowed to be issued for a tenure of 3 months to 5 years.

During this tenure, a CBBC could be ‘called’ by the issuer when the price of the underlying instrument reaches a level known as the “Call Price” specified in the listing document. If the Call Price is reached before expiry, the CBBC will expire early and the trading of that CBBC will be suspended and terminated. The specified expiry date from the listing document will no longer be valid and the CBBC will be settled in cash only.

Maxis is offering for sale 2.25 billion existing shares, or 30 per cent of the company, in the IPO. Out of this, retail investors, including Maxis customers and staff, are allocated 212.3 million shares, or 2.8 per cent.

The retail offering will close on November 5 and the company is scheduled to list on Bursa Malaysia on November 19.

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TM also allocated new 138 million shares as its proposed employees share option scheme (ESOS).

Today I have added special calculator for TM/TMI esos to be use by TM/TMI staff for the purpose of calculate their profit. However this calculation is applicable for those who trade using CIMB iTrade.

IOICORP-SA: ELS IOI Corporation Bhd (CIMB)

Bull Equity-Linked is an investment-yielding instrument linked to designated shares, and provides investors with returns depending on the closing price of the underlying shares on maturity.If the closing price of the underlying share on maturity is at or above a certain price determined by the issuer (the strike price), the investor will receive a cash amount at the total par value of the ELS (total investment plus premium).

On the other hand, if the closing price of the underlying share on maturity falls below the strike price, the holder will either receive a cash settlement amount equal to the closing price of the share on maturity or a predetermined quantity of the underlying share.

HKEX-C7: CW Hong Kong Exchanges and Clearing Ltd (CIMB)

HWL-C4: CW Hutchison Whampoa Ltd (CIMB)

CHMOBIL-CA: CW China Mobile Ltd (CIMB)

GENTING-CK: CW Genting Bhd (CIMB)

PETROCH-C7: CW Petrochina Company Ltd (CIMB)

BOC-C2: CW Bank of China Ltd (CIMB)

Company Profile

As a famous gold mining enterprise and one of the Top 500 Enterprises Top 500 Enterprises in China, Zijin Mining Group Company Limited is an H-share company listed at the Hong Kong Stock Exchange (Stock name: Zijin Mining; stock code: 2899).

Zijin Mining was included in the FTSE Mining sector Indexes on 20 December 2004; it was added to the Dow Jones China

Offshore 50 Index on 20 March 2006; and on 20 October 2006, it entered into the FTSE/Xinhua China 25 Index. According to FORBES, Zijin Mining Group ranked 17th among the name list of China Top Enterprises and 16th among the list of China ‘s Overseas Listed Companies with the Most Investment Value (1st of all mining enterprises) in 2006.

Centering upon non-ferrous metals such as gold and copper, Zijinshan Gold Mine, the core enterprise of Zijin Group, has been developed into a gold mine that boasts the largest utilizable and ensured reserves of monomer mines, the biggest scale of ore mining & mineral processing, the greatest amount of gold production, the lowest beneficiation feed grade of ores, the lowest unit cost of ore processing and the best economic performance in China.Its composite cost for the gold produced from mining is RMB 58.53 Yuan/g and its cost control level is at the leading place in the country. The Gold Smelting Plant of Zijin Mining Group has been added to the directory of gold suppliers by the London Bullion Metal Association (LBMA). Standard gold produced by Zijin is marketable all over the world. And its gold products are authorized to adopt ISO Standards of Product Markings.

According to the statistics of China Gold Association, total gold production of China was 240.078 tons in 2006, 179.848 tons of which were produced from mining with an increase of 0.72% over the previous year. Zijin Group had 49.28 tons of gold output and the gold produced from mining reached 20.70 tons in 2006, respectively accounting for 20.53% of China ‘s total gold production and 11.51% of the gold produced from mining in China during the same year. Total profits of the gold mining industry of China amounted to RMB 6.1085 billion Yuan in 2006, and Zijin Group made the profit of RMB 1.705 billion Yuan (profits excluding gold itself) or 27.91% of those of whole China .

The Company has established 88 subsidiaries in more than 20 provinces across China including Fujian where its head office is located, Xinjiang , Guizhou , Inner Mogolia, Jilin , Qinghai , Tibet , Heilongjiang , Henan , etc as well as in 7 overseas countries. The Company has successfully invested in Nari Tolgoi Gold Mine of Mongolia, Tai-Pan Lead-zinc Mine of Vietnam and its neighboring Iron Mine with the transfer of those companies’ shareholding rights. Besides, it has become the largest shareholder of Ridge Mining, a listed company on the London Stock Exchange, and has made via tender offer the successful acquisition of Monterrico, another listed company on the London Stock Exchange. At the end of 2006, according to the calculation of equity interests, the ensured metal (ore) resources/reserves of the Group Company were as follows: about 455 tons of gold (57 tons of which were associated gold), 151 tons of platinum & palladium, 6.7 million tons of copper, 2.38 million tons of zinc, 544,600 tons of nickel, 400,000 tons of lead, 260,000 tons of molybdenum (30,000 tons of which were associated molybdenum), 100,000 tons of tin, 188 million tons of iron ore, and 300 million tons of coal. By the end of 2006, the Group Company had obtained 179 prospecting rights covering a total area of 5,972 square kilometers and 27 mining rights covering a total area of 41.3 square kilometers.

The Company has undertaken a number of national key projects in scientific and technological research, an industry-leading position in the utilization of low-grade gold mine as well as in the technical study and application of hydrometallurgy. With the approval of the Ministry of Personnel, Zijin established the first Postdoctoral Scientific Research Station of China’s gold industry in 2001. In 2006, the Company was qualified as a state-certified technology center.

With the aim of “benefiting people and contributing to the motherland by developing the enterprise with emphasis on the mining industry” and “becoming a major manufacturer of gold and non-ferrous metals in the world”, the Company is striving to “help promote the economic growth of both China and the world at large with its high-quality mineral materials”. The Company advocates the value of “coordinated development of the enterprise, staff and society”. Zijin’s spirit of “pioneer with painstaking efforts and exploit with innovative spirit” has come into being throughout the years. Based on the operation concept of “human orientation and pursuance of excellence”, Zijin has put forward the three-step development strategy of “leading in domestic gold industry, leading in domestic mining industry, and finally ranking top in international mining industry”. The overall objective of the Company is to build Zijin into a super high-tech international mining group with good economic performance.

Source: Zijin’s website