Initiating Coverage

PP7766/03/2013 (032116)

Oldtown Berhad
Consumer

Buy
Bloomberg Ticker: OTB MK | Bursa Code: 5201

20 April 2012
Analyst Ian Wan ianwwk@alliancefg.com +603 2717 6694

The white coffee champion

1.69 1.51 11.9 4.0 15.9

12-month upside potential Target price Current price (as at 19 Apr) Capital upside (%) Net dividends (%) Total return (%)

We initiate coverage on Oldtown with a Buy recommendation and a target price of RM1.69 based on its 12-month forward P/E of 13x. We like Oldtown based on, (1) strong 3-year earnings CAGR of 25.8% driven by its aggressive expansion plan, especially its FMCG segment, (2) extremely scarce investment alternatives to ride on the rising coffee consumption in China, and (3) tremendous earnings potential from the untapped coffee market in China. Furthermore, Oldtown is also a good yield play, offering attractive FY12FY14 yields of 4.0%-6.6%!

that could ride on the rising coffee consumption in China

Key stock information Syariah-compliant? Market cap (RM m) Issued shares (m) Free float (%) 52-week high / low (RM) 3-mth avg volume (000) 3-mth avg turnover (RM m) Share price performance 1M Absolute (%) 18.0 Relative (%) 16.0 3M 17.1 10.9

No 498.3 330 36.4 1.51 / 0.89 1,235.9 1.6 6M 38.5 26.6

Share price chart

Oldtown is a strong regional caf operator and an established beverage (mainly white coffee) manufacturer in Malaysia. The group floated its shares on Bursa Malaysia on 13 July 2011 to raise RM79.2m to fund its ambitious regional expansion plan, underpinned by its 5-fold increase in its beverage manufacturing capacity! Given its strong brand name and market leadership in the white coffee segment, we view Oldtown as one of the key beneficiaries to rising coffee consumption in China. According to the International Coffee Organization (ICO), Chinas coffee consumption is only 35g per capita as compared to 300g per capita in Asia. Over the past 2 years, we have seen the proliferation of coffee drinking culture in China as the countrys coffee import grew by 38.3% and 41.9% in 2010 and 2011 respectively. In FY12, Oldtown plans to expand its caf chain aggressively by opening 35-50 new outlets in four of its key markets, i.e. Malaysia (20-30), Singapore (2-3), Indonesia (5-8) and China (36 by FY15, translating to 9 p.a.). This translates to 18-25% growth from its 196 caf outlets in FY11. However, given the slow progress in 1Q12 (6 outlets added), we take a conservative stance by only assuming 26 new outlets to be opened p.a. over the next 3 FY. Based on our estimates, this could generate 8.0% and 11.6% revenue growth for its F&B business in FY12 and FY13 respectively. As for the fast moving consumable goods (FMCG) segment, we are even more positive as a 5-fold capacity expansion plan would be completed in 4Q12. Currently, the existing plant which has an annual capacity of 9.2m tonnes is running at 90-95% utilisation rate. The group aims to achieve an overall utilisation rate of 30% for its enlarged capacity of 45.8m tonnes in FY13, this translates to a strong volume growth of 17.3% and 66.7% in FY12 and FY13 respectively.

3-year earnings CAGR of 25.8%

Major shareholders Oldtown International Neobalano Carpus % 53.1 7.2

As such, we project the groups earnings to grow by a 3-year CAGR of 25.8%. In addition, we anticipate its net margin to improve from 11.6% in FY11 to 13.1% in FY14 due to the better economies of scales as the group grow bigger. Our forecasts are 8.8% lower than Bloomberg consensus forecasts in FY12, but 8.8% higher than Bloomberg consensus forecasts in FY13. In contrarian to the consensus view, we believe Oldtowns earnings growth would only take off strongly in FY13, once its new manufacturing plant start commissioning in Jan/Feb 2013.

Valuation and recommendation

We initiate coverage on Oldtown with a BUY recommendation and target price of RM1.69, based on its 12-month forward P/E of 13x. Furthermore, Oldtown is also a good yield play, offering attractive FY12-FY14 yields of 4.0%-6.6%, based on the companys dividend policy of 50% payout ratio. Key risks include (1) threat of the new entrants who could imitate Oldtown's recipe and restaurant concept at a much competitive price, (2) higher costs pressure due to labour wages, rent and coffee bean, and (3) global economic slowdown which could hurt the F&B industry as a whole.

All required disclosure and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission

Initiating Coverage | Oldtown | 20 April 2012

SNAPSHOT OF FINANCIAL AND VALUATION METRICS

Figure 1 : Key financial data FYE 31 Dec Revenue (RM m) EBITDA (RM m) EBIT (RM m) Pretax profit (RM) Net profit (RM m) Adj net profit (RM m) EPS (sen) Adj EPS (sen) Alliance / Consensus (%) Adj EPS growth (%) Adj P/E (x) EV/EBITDA (x) ROE (%) Net DPS (sen) Net dividend yield (%) BV/share (RM) P/B (x) 2010P* 255.1 59.5 46.7 43.4 31.7 32.8 9.6 9.9 -13.2 15.2 5.5 14.4 0.57 2.7 2011A 285.5 58.0 44.2 51.9 40.2 33.1 12.2 10.0 0.9 15.1 4.6 16.3 6.5 4.3 0.66 2.3 2012F 318.4 69.3 49.9 50.7 38.0 38.0 11.5 11.5 91.2 14.9 13.1 4.1 16.8 6.0 4.0 0.71 2.1 2013F 425.3 89.9 68.9 70.0 52.5 52.5 15.9 15.9 108.9 38.1 9.5 3.0 21.1 8.0 5.3 0.79 1.9 2014F 503.0 103.4 85.9 88.0 65.9 65.9 20.0 20.0 N/A 25.6 7.6 2.3 23.7 10.0 6.6 0.89 1.7

* FY10 is a pro-forma account which includes the contribution from the 8 subsidiaries which are not owned by Oldtown from Jan to May 2011. Source: Alliance Research, Bloomberg

Figure 2 : Forward P/E trend

PE BAND

Figure 3 : Forward P/B trend

PB BAND

Price
2.00 1.90 1.80 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.70
Oct-11 Jul-11 Apr-12 Jan-12

Price
1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80
Oct-11 Jan-12 Apr-12 Jul-11

Min: PER 6.4 x

-1Std: PER 7.7 x

Avg: PER 9.0 x

+1Std: PER 10.5 x

Max: PER 12.0 x

Min: 1.3

-1Std: 1.5

Avg: 1.7

+1Std: 1.9

Max: 2.1

Source: Alliance Research, Bloomberg

Source: Alliance Research, Bloomberg

Figure 4 : Peer comparison Net Dividend Yield (%) CY12 CY13 4.0 3.0 1.9 1.8 1.4 0.4 6.0 3.4 1.9 1.8 1.9 0.5

Company OldTown Super Group Food Empire Bread Talk Average Starbucks US

Call Buy N/R N/R N/R

Target Currency price RM SGD SGD SGD 1.69 N/R N/R N/R

Share price 1.51 1.91 0.42 0.56

Mkt Cap EPS Growth (%) (m) CY12 CY13 498.3 1,062.5 219.6 157.3 14.9 -0.9 10.7 24.4 8.5 38.1 16.4 12.9 17.6 21.5 25.1

P/E (x) CY12 CY13 13.1 17.3 13.4 11.0 14.7 94.0 9.5 14.9 11.9 9.3 12.1 75.1

P/BV (x) CY12 CY13 2.1 2.7 1.4 1.8 0.8 26.4 1.9 2.5 1.3 1.5 0.8 23.2

ROE (%) CY12 CY13 16.1 16.4 11.0 17.0 6.8 29.7 20.3 17.2 11.2 17.6 7.9 32.2

Note: Super Group, Food Empire, Bread Talk and Starbucks US are based on Bloomberg consensus. Source: Alliance Research, Bloomberg

N/R

USD

N/R

58.81

44,307.5

25.3

Share price date:19 Apr 2012

Initiating Coverage | Oldtown | 20 April 2012

A WHITE COFFEE CHAMPION

Introduction
A regional caf chain operator and an established beverages manufacturer in Malaysia Oldtown is a regional caf chain operator and an established beverages manufacturer in Malaysia. As at 31 Dec 2011, the group operates 196 caf outlets in the Asia region, of which 183 in Malaysia, 8 in Singapore, 4 in Indonesia, and 1 in China. These comprise of 96 franchised outlets, 79 fully-owned outlets, 18 partially-owned outlets and 3 licensed outlets. All of the groups caf outlets are supported by 3 centralised food processing centres, which located in Ipoh (2) and Subang (1), Malaysia. In FY11, the group generates 68% and 32% of its revenue from food and beverages (F&B) segment and fast moving consumable goods (FMCG) segment respectively.
Figure 6 : Oldtowns caf outlets by type as at FY11
Licensed 2%

Figure 5 : Oldtowns caf outlets by country as at FY11

Indonesia, 4 Singapore, 8 China, 1

Fully-owned 40%

Franchised 49%

Malaysia, 183

Partially-owned 9%

Source: Company data, Alliance Research

Source: Company data, Alliance Research

Story begins in 1999

The Oldtowns story begins in 1999, when its co-founders and executive directors, Goh Chin Mun and Tan Say Yap, formulated their own blend of 3-in-1 instant white coffee and commercialised the coffee product under the OLDTOWN brand name. Drawing on good customer response, Oldtown commenced its first export of its coffee to Singapore in 2000. In 2001, Oldtown incorporated White Caf Marketing (WCM) as its marketing arm as it starts to penetrate into the Hong Kong market by expanding its product line to include different variations of instant coffee mix. WCM obtained a Halal certification from the Islamic Religious Department of Perak for the groups beverages in 2002. This enables the group to penetrate into the rural areas in Malaysia including East Malaysia via major hypermarkets and supermarkets. Thereafter, the group launches more product lines such as instant milk tea mix, instant chocolate beverages and roasted coffee powder with wider export market coverage of up to 14 countries, including USA, UK, Taiwan and Indonesia. 6 years after the introduction of its white coffee, the group taken a strategic move to capitalise on its brand name by expanding vertically into the food services industry via a chain of caf outlets based on the concept of traditional coffee shop in Ipoh, which offers variety of local foods and beverages. This vertical expansion takes off successfully and helps the group to build a strong brand name within the Malaysia F&B industry. On 13 July 2011, Oldtown floated its shares on Main Market of Bursa Malaysia and raised RM79.2m to fund its set-up of 5 new caf outlets, relocation of 7 fully-owned caf outlets and construction of a new beverage manufacturing and food processing plant in Ipoh. The set-up and the relocation of the caf outlets have now been completed while the new manufacturing plant which is being built on a 9-acre land in Tasek Industrial Estate in Kinta, Perak is expected to be completed in 3 phases. The first phase will involve building a premise for the manufacturing of instant coffee mix and instant milk tea mix while the second phase would involve building an office block. Development plan for the third phase of construction has yet to be determined. Once the first phase is completed by 4Q12, Oldtowns beverage manufacturing capacity would be increased by 5-fold!

Obtained Halal certification for its beverages in 2002

Capitalised on its brand name by expanding vertically into F&B segment in 2005

Raised RM79.2m via IPO on Bursa to fund its regional expansion in 2011

Initiating Coverage | Oldtown | 20 April 2012

Ambitious regional expansion plan

Still plenty of rooms to grow its Malaysia caf chain from 183 outlets to 300-500 outlets Malaysia is by far the largest market for Oldtown, which accounts for 76% of its revenue in FY11. Going forward, we believe Oldtown could continue to grow its domestic business as we believe the saturation point is still far away, although the group has already opened 183 outlets as at 31 Dec 2011. Taking the cue from KFC, Oldtown believes its caf chain in Malaysia could potentially reach 300-500 outlets over the long term. To achieve this target, the group plans to launch the first Oldtowns kiosk by 3Q12, which targets to serve the office crowd with beverage and some easy-prepared food in high traffic places such as train stations and office buildings.
Figure 8 : Oldtowns revenue breakdown by geographical area
US, 0.9% Taiwan, 1.0% Others, 3.6%

Figure 7 : Oldtowns revenue breakdown by segment

Instant milk tea mix (FMCG), 3% Operation of own caf outlets (F&B), 33%

Singapore, 8.7%

Coffee beverages (FMCG), 35%

HK, 9.4%

Malaysia, 76.3%

Franchising related fees (F&B), 5%

Product sales to franchises (F&B), 24%

Source: Company data, Alliance Research

Source: Company data, Alliance Research

Oldtowns kiosk could be a new earnings driver in future

We view this move positively as we believe the expansion via the kiosk concept would not only yield higher ROE for the group given its low set-up cost, but also help the group to tap into the market which is not served by its existing caf outlets. Hence, any successful launch of its kiosk concept could be seen as a re-rating catalyst for the group in the future. In fact, Oldtowns management has proven its strong implementation and execution track record by opening 183 caf outlets in over 7 years, translating to more than 2 outlets opened per month. Over the near term (FY12), Oldtown targets to add another 20-30 new caf outlets in Malaysia based on the fully-owned (50%) and franchised (50%) concept. According to the management, this could generate additional revenue of about RM15-20m in FY12, translating to 5-7% of total revenue growth from FY11. However, given the slow progress in 1Q12 (only 3 outlets added), we take a conservative stance by projecting only 14 new outlets to be opened in FY12, followed by 10 new outlets p.a. in FY13 and FY14 respectively. Based on our estimates, this could generate 4-6% earnings growth for FY12 and FY13 respectively, assuming the new outlets achieve half of its average revenue per outlet during the first year of operation due to non-full year effect. Presently, Oldtowns average revenue per outlet stands at about RM900k p.a. According to the management, the average spending per customer (ASC) in the local outlets was about RM9.50. Going forward, the group plans to further penetrate into the Malaysia Halal food market by applying for full certification of JAKIM Halal for all of its caf outlets by 3Q12. Once the group procure the full Halal certificate for all its caf outlets, we expect its customer turnover to improve significantly. Furthermore, we also see potential upside on the ASC as management plans to induce higher customer spending per single lunch segment by introducing new set lunches in the near future. This could be an upside surprise to our forecast as we are currently conservatively assuming unchanged revenue per outlet over the next 3 FY, except the 5% price adjustment for all its F&B products in Oct 2011.

Over the near term (FY12), the group plans to add 20-30 new outlets in Malaysia

More upside potential from customer turnover and ASC from halal certification and new set lunches

Initiating Coverage | Oldtown | 20 April 2012

Figure 9 : Oldtowns average revenue per outlet
RM '000 1,200.0 1,000.0 800.0 600.0 400.0 200.0 1.8% 6.8% 1.5% 638.5 36.6% 872.4 888.5 40.0% 948.8 962.5 903.9 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
Average sales per transaction (RM) Average spending per customer (RM) Total # of transaction Total # of customers # of customers per transaction Total # of outlets Average # of customers per outlet (monthly) Customer turnover per hour * * Assuming 16 operating hours per day. Singapore 42.5 20.5 41,797 86,536 2.1 8 10,817 23.3 China 37.3 17.8 2,418 5,054 2.1 1 5,054 10.9 Indonesia 24.3 12.0 20,187 40,719 2.0 5 8,144 17.6 Malaysia 19.9 9.5 1,050,401 2,197,751 2.1 184 11,944 25.7

Figure 10 : Oldtowns key sales statistic in February 2012

Source: Company data, Alliance Research

FY11- Pro-forma

FY11-Reported

FY07

FY08

FY09

FY10

Source: Company data, Alliance Research

Singapore and Indonesia expansion could yield extra 1-4% profit to the group over the next 3 FY

Oldtown also plans to expand its caf chain network in its international market. Currently, Singapore and Indonesia are the second and third largest markets for its caf chain operation with 8 outlets and 4 outlets respectively. Going forward, the group plans to add another 2-3 fully-owned outlets in Singapore and 5-8 sub-licensed outlets in Indonesia. Based on our estimates, if the group continue to expand its Singapore and Indonesias caf chain by 2 and 5 outlets p.a., it could potentially contribute about 1-4% extra profit for the group over the next 3 FY.
Figure 12 : Oldtown Indonesia caf outlets

Figure 11 : Oldtown Singapores new design

Source: Company data

Source: Company data

But still, China would be the main driver in future

While Oldtown continues to expand its caf chain in Malaysia, Singapore and Indonesia, we believe the key earnings growth for the group would be coming from the China market over the next 3 years. Over the years, mainland Chinese has always been perceived as non-coffee drinkers, but rather tea-drinkers. This was evidenced by the countrys low coffee consumption of just 35g per capita, as compared to 4200g, 3710g, and 300g of coffee consumption per capita in USA, Europe and Asia respectively. According to International Coffee Organization (ICO), Europe and USA together consume more than 85% of the world coffee supply in 2011.
Figure 13 : Coffee consumption per capita by country/ region
Gramme per capita 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Europe US South Korea Malaysia Vietnam Asia 900 700 300 35 China 1,800 3,710 4,200

Source: ICO, Alliance Research

Initiating Coverage | Oldtown | 20 April 2012 as we have started to witness the proliferation of coffee-drinking culture in the country However, over the past 2 years, we have started to witness the proliferation of coffeedrinking culture in China as the countrys coffee import grew strongly by 38.3% and 41.9% in 2010 and 2011 respectively. We believe this was mainly driven by the countrys fast-growing middle-class, who had increasingly be adapting to the American/European coffee-drinking lifestyle due to rising affluence. Given the promising outlook on the China coffee market, Starbucks announced its aggressive expansion plan in 2011, to triple its China outlets from 470 to 1,500 by 2015, translating to a 4-year CAGR of 34%!
Figure 14 : Coffee imported by China
metric tonnes 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2006 2007 2008 2009 2010 2011 -4.3% -10% 8.2% 0.9% 0% Coffee Imported by China yoy growth 50% 38.3% 41.9% 40% 30% 20% 10%

Source: Bloomberg (China Custom), Alliance Research

Hence, Oldtown started its China venture in Nov 2011

To ride on the rising trend of coffee consumption in China, Oldtown had started to penetrate into the huge untapped coffee market in China by launching its first caf outlet in Guangzhou city in Nov 2011. The China venture is based on a 10-year master-license agreement with one strong local partner which allow it to operate OLDTOWN WHITE COFFEE caf chain in Guangdong and Macau, China. Guangdong is one of the richest provinces in China with a population of 96m, which is 3.4x bigger than Malaysias population. Guangdong generates the highest GDP in China and contributes approximately 12% of the China national economic output. In 2010, the provinces GDP per capita grew by 10% y-o-y, reaching RMB 41,166 p.a.
Figure 15 : Guangdong GDP per capita
Guangdong GDP per capita yuan 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2003 2004 2005 2006 2007 2008 2009 2010 15,030 17,213 19,707 28,077 24,435 33,151 37,589 yoy growth 41,166 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

Source: Bloomberg, Alliance Research

So far, the responses from Chinese consumers are overwhelming

Drawing on good customers response on its first outlet, Oldtown opened its second caf outlet in Guangzhou city on 2 March 2012. Based on our channel check via the Chinese Twitter, Weibo, there are more than 3,300 comments posted on OLDTOWN WHITE COFFEE as at 17 April 2012, of which 90% are positive! In fact, we arent surprised by the overwhelming response from the Chinese consumers, given that many of them have actually known and tried Oldtowns white coffee in Hong Kong before, which accounts for 40% of its export revenue in 2011. Anecdotally, we have also heard that many Chinese tourists like to buy Oldtowns white coffee as a souvenir when they visit Malaysia.

Initiating Coverage | Oldtown | 20 April 2012

Figure 16 : Oldtowns first 2 caf outlets in Guangdong, China

Source: Company data

Targets to reach 36 outlets in China by 2015

Going forward, Oldtown plans to expand its caf chain in China from 2 outlets to 36 outlets by 2015, translating to 9 new outlets p.a. However, given the slow progress in 1Q12, we project only 5 additional new outlets to be opened in FY12, including the second outlet opened in March 2012. Based on our estimates, this could contribute 1-2% earnings growth in FY12 and FY13. Furthermore, the group also plans to set up and start operating a new food processing centre in Guangzhou by the end of 2012, to support its further penetration into the rest of China market. Currently, Oldtown is still looking for the potential new licensees to expand its caf chain in other provinces in China. Together with the caf chain expansion in the other 3 countries, F&B business could generate additional 6% and 10% earnings to the group in FY12 and FY13 respectively, based on our estimates. Meanwhile, on the FMCG segment, we expect earnings to grow stronger than the F&B segment, given its 5-fold capacity expansion in FY12. Presently, Oldtown has a total of 18 distributors to cover 12 FMCG markets in the world. The groups beverage products could be reached in more than 11k retail outlets in 3 of its key markets, of which 7768 are in Malaysia, 2,870 in Hong Kong, and 752 in Singapore. In China, the group has appointed 3 distributors, which have strong distribution network of about 1,000 retail outlets in the country. This enables the group to expand its reach in the China retail market, once its manufacturing plant is up and running by Jan/Feb 2013.
Figure 18 : Key retail outlets that carry Oldtowns products

FMCG would be the key earnings driver from FY13 onwards

Figure 17 : Oldtowns number of distributors by country

Source: Company data, Alliance Research

Source: Company data, Alliance Research

Management targets to achieve 9095% and 30% utilisation rate for existing and new manufacturing capacity

Based on management guidance, the groups utilisation rate of its existing beverage manufacturing capacity is likely to reach 90-95% in FY12, improving sharply from the 76% and 64% achieved in FY11 and FY10 respectively. With the new plant coming on stream in FY13, the management aims to achieve an overall utilisation rate of 30% for its enlarged capacity (45.8m tonnes) via the penetration into Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang and Guangdong provinces.

Initiating Coverage | Oldtown | 20 April 2012 Plans to venture into South Korea and Vietnams FMCG market too Furthermore, it also plans to venture into South Korea and Vietnams FMCG market in FY12, which could potentially yield higher take-up rate for its new capacity. According to ICO, coffee consumption per capita in South Korea is about 1,800g, which is the second highest in Asia, after Japan (3,300g per capita). Therefore, we are bullish on Oldtowns FMCG earnings growth over the next 3 years, especially in the China market. Based on our estimates, FMCG sales volume is set to grow by 17.3%, 66.7% and 26.7% in FY12, FY13 and FY14 respectively. As a result, the revenue contribution from the FMCG segment is projected to make up 40%, 50% and 53% of its total revenue in FY12, FY13 and FY14 respectively.
Figure 20 : Oldtowns FMCG sales volume growth vs utilisation rate
Utilisation rate (LHS) 100% 90% Sales volume growth (RHS) 66.7% 70.0% 60.0% 50.0% 26.7% 40.0% 30.0% 20.0% 20.9% 17.3% 30% FY13F 38% 10.0% 0.0% FY10 FY11 FY12F FY14F

FMCG business would overtake F&B business as the largest contributor by FY14

Figure 19 : Oldtowns revenue breakdown by segment

Operation of Caf Chain 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY07 FY08 FY09 FY10 FY11 FY12F FY13F FY14F 60% 67% 67% 65% 62% 60% 40% 33% 33% 35% 38% 40% Manufacturing of Beverages

50%

53%

80% 70% 60% 50% 40% 30% 63% 77% 90%

50%

47%

20% 10% 0%

Source: Company data, Alliance Research

Source: Company data, Alliance Research

Figure 21: Oldtowns SWOT analysis

Strengths - A market leader with strong brand name in the white coffee segment. - Extensive distribution network in the region. Opportunities Weaknesses - Low barriers of entry for the F&B business.

Threats - Threat of the new entrants who are able to immitate OldTown's restaurant concept and foods at a much competitive price. - 5-fold capacity expansion to underpin its ambitious regional expansion - Volatile raw material costs such as coffee bean might hurt its plan. profitability. - Earnings potential in untapped Halal market in Malaysia. - Huge untapped China market.
Source: Alliance Research

Initiating Coverage | Oldtown | 20 April 2012

Risks
Threat of new entrants who could successfully imitate Oldtowns recipes and restaurant concepts F&B industry is always a highly competitive industry as barriers of entry are low due to low start-up cost and high tendency of change in consumer preference. Furthermore, consistency of food quality and service standard are not easy to maintain as the group expand its caf chain aggressively. We see this as one of the key risks to Oldtown, especially if there is any successful imitation of its products recipes and restaurants concepts with a more competitive pricing. However, we believe this could be partly mitigated by its strong brand name and registration of its trademarks to protect against any infringement of its trademarks in the industry. On top of that, we are also concern of the high volatility of Oldtowns profit margin (gross profit margin of 32-38% since FY07), although it is an industry norm within the F&B industry. The high volatility of profit margin is partly due to its commoditized raw material such as flour, sugar and coffee bean. Any unexpected events such as the changes in climate, government regulations and coffee diseases could result in a sudden surge in its key raw material costs. Apart from that, labour cost and rental cost increase could also hurt its margin, given that both of the costs make up about 30% of its COGS.
Figure 23 : ICO indicative coffee bean price
39% 38.0% 200 150 100 50 2005 2006 2007 2008 2009 2010 2011 3M12 33.3% 32.5% 38% 37% 36% 35.0% 34.4% 35% 34% 33% 32% 31% 30% 29%
0 150 100 50 US cents/lb 250 200

Coffee bean, labour and rental cost increase could hurt its margin

Figure 22 : FOA index vs Oldtowns gross profit margin

FAO Food Index (LHS) 250 Oldtown's GP margin (RHS)

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Source: Bloomberg, company data, Alliance Research

Source: ICO, Alliance Research

Global economic slowdown could adversely affect the F&B industry

Last but not least, we see global economic slowdown as a risk to the group if the Eurozone sovereign debt crisis deepens. Having said that, we currently do not factor in a recession scenario in our forecasts as we believe domestic consumption in Malaysia is quite resilient as it consistently grew by more than 6% with the exception of 2009 due to global financial crisis. In fact, Oldtown managed to achieve 1.8% growth for its average revenue per outlet in FY09 despite the global financial crisis. Hence, we believe the domestic F&B industry could be rather resilient, unless there is a severe global economic recession.

Jan-12

Jul-00

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-01

Jul-02

Jul-03

Jul-11

Initiating Coverage | Oldtown | 20 April 2012

FINANCIAL HIGHLIGHTS
3-year earnings CAGR of 25.8%
Strong growth underpinned by 40%volume growth in FMCG business Oldtown reported a 3-year CAGR of 28.9% and 29.0% for its revenue and core profit respectively from FY09 to FY11, driven by its strong caf chain expansion from 107 outlets to 196 outlets, translating to 3-year CAGR of 22%. Going forward, we project the groups earnings to grow by a 3-year CAGR of 25.8%, underpinned by its strong volume growth in FMCG (3-year CAGR of 35.3%) segment as well as continuous caf chain expansion of 26 new outlets p.a. We expect Oldtowns net margin to improve slightly from 11.6% in FY11 to 13.1% in FY14 due to its better economies of scales as the group grows bigger. Our forecasts are 8.8% lower than Bloomberg consensus forecasts in FY12, but 8.8% higher than Bloomberg consensus forecasts in FY13. In contrarian to the consensus view, we believe Oldtowns earnings growth would only take off strongly in FY13, once its new manufacturing plant start commissioning in Jan/Feb 2013.
Figure 24 : Key assumptions
FY10 Key Assumptions Total # of Caf Outlets- (a) F&B- new outlets addition Fully-owned Caf Outlets Partly-owned Caf Outlets Franchised Licensed (Master franchise- Indonesia & China) FMCG- ASP (RM/ kg)- (b) Production capacity (k kg) FMCG- (c) Actual production (k kg) FMCG- (d= c x e) Capacity utilisation rate (%) FMCG- (e) Forecasts Revenue by segments (RM m) F&B (f*) FMCG (g= b x d) Revenue growth by segments F&B FMCG Overall avg revenue/caf outlet (RM k/yr)- (h = f x a) Growth % Avg revenue/ fully or partially-owned outlet Growth % Avg revenue/ franchised or licensed outlet (estimate) Growth % 255.1 166.0 89.1 31.7% 28.9% 37.4% 948.8 6.8% 1,072.7 1,760.8 285.4 177.2 108.3 11.9% 6.7% 21.5% 903.9 -4.7% 964.4 -10.1% 1,610.0 -8.6% 322.9 195.8 127.1 13.1% 10.5% 17.4% 861.7 -4.7% 1,001.0 3.8% 1,610.0 0.0% 428.8 217.0 211.8 32.8% 10.8% 66.7% 860.8 -0.1% 1,001.0 0.0% 1,610.0 0.0% 506.5 238.2 268.3 18.1% 9.8% 26.7% 856.6 -0.5% 1,001.0 0.0% 1,610.0 0.0% 175 30 16 5 9 15.31 16,621 9,168 8,027 5,818 48.3% 63.5% 196 21 (1) 2 17 3 15.40 16,621 9,168 9,464 7,032 56.9% 76.7% 222 26 9 7 10 15.40 16,621 9,168 10,878 8,251 65.4% 90.0% 248 26 7 5 14 15.40 53,293 45,840 16,589 13,752 31.1% 30.0% 274 26 7 5 14 15.40 53,293 45,840 20,483 17,419 38.4% 38.0% FY11 FY12F FY13F FY14F

* f- Given the comprehensive workings, we only disclose the outcome, however, the drop in overall revenue/caf outlet was mainly due to higher contribution from franchised/ licensed outlets.
Source: Company data, Alliance Research

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Initiating Coverage | Oldtown | 20 April 2012

Strong balance sheet with net cash of RM0.21 per share

Strong balance sheet with net cash making up 13.9% of its market cap Oldtown has a strong balance sheet with net cash of RM0.21 per share as at 31 Dec 2011. This enables the group to expand its F&B business aggressively over the next 3 years.

Capex normalised in FY13

We estimate Oldtown to spend RM43m and RM8m for capex in FY12 and FY13 respectively as the group is currently building its beverage manufacturing plant which costs RM34m. We anticipate the group to incur about RM8-9m for its F&B business over the next 2 years as we project the group to open 8-9 fully-owned caf outlets p.a. Based on our understanding, the set-up cost for a new outlet is about RM700k, depending on the size of it.

VALUATION AND RECOMMENDATION

Initiate coverage with a Buy recommendation and TP of RM1.69 In conclusion, we initiate coverage on Oldtown with a Buy recommendation and target price of RM1.69, based on its 12-month forward P/E of 13x. We believe Oldtown is fair to be valued at 13x, given that (1) the regional F&B peers are on average trading at a 12-month forward PER of 13.8x, (2) Oldtown has the strongest 3-year earnings CAGR of 25.8%, translating to only 0.5x PEG, and (3) Oldtown appears to be the best proxy to ride on the rising coffee consumption in China. Last but not least, Oldtown offers the best FY12-FY14 yields of 4.0-6.6%, based on its dividend policy of 50% payout ratio.

Figure 25 : Peer comparison Net Dividend Yield (%) CY12 CY13 4.0 3.0 1.9 1.8 1.4 0.4 6.0 3.4 1.9 1.8 1.9 0.5

Company OldTown Super Group Food Empire Bread Talk Average Starbucks US

Call Buy N/R N/R N/R

Target Currency price RM SGD SGD SGD 1.69 N/R N/R N/R

Share price 1.51 1.91 0.42 0.56

Mkt Cap EPS Growth (%) (m) CY12 CY13 498.3 1,062.5 219.6 157.3 14.9 -0.9 10.7 24.4 8.5 38.1 16.4 12.9 17.6 21.5 25.1

P/E (x) CY12 CY13 13.1 17.3 13.4 11.0 14.7 94.0 9.5 14.9 11.9 9.3 12.1 75.1

P/BV (x) CY12 CY13 2.1 2.7 1.4 1.8 0.8 26.4 1.9 2.5 1.3 1.5 0.8 23.2

ROE (%) CY12 CY13 16.1 16.4 11.0 17.0 6.8 29.7 20.3 17.2 11.2 17.6 7.9 32.2

Note: Super Group, Food Empire, Bread Talk and Starbucks US are based on Bloomberg consensus. Source: Alliance Research, Bloomberg

N/R

USD

N/R

58.81

44,307.5

25.3

Share price date:19 Apr 2012

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Initiating Coverage | Oldtown | 20 April 2012

APPENDIX I
Industry analysis
A growing but competitive market Malaysian F&B industry is a growing but competitive industry. According to 2010 Population and Housing Census of Malaysia (Census 2010), Malaysia has a young population with a median age of 27.6 years or 57.2% of the population is younger than 30 years old. This socalled Generation Y (Gen-Y) population is considered the fastest growing segment of the country workforce and the majority of them are deemed to have a high propensity to spend, including F&B expenditure as compared to previous generations. As such, we believe the F&B industry could be one of the biggest beneficiaries of the countrys young population.
Figure 26 : Malaysian population breakdown
55-64, 6.7% 50-54, 4.8% > 65, 5.0% 0-14, 27.6%

40-49, 11.9%

30-39, 14.3%

15-19, 10.0%

20-29, 19.6%

Source: Census 2010, Alliance Research

Low barriers of entry

The barriers of entry for F&B industry are considered low given the low start-up costs. However, we view customer service and branding as the most critical success factors within the F&B industry as increasingly affluent Malaysian consumers are less price-sensitive now, but more focus on brands, product quality (both of food/coffee quality and restaurants ambience) and customer service. By building a strong brand via a differentiation strategy within the F&B industry, it could act as barriers to entry to the new entrants. Generally speaking, consumers spending behaviour is greatly affected by their disposable income, which depends on general economic condition in the near term. As consumers are increasingly discerning with heightened consumer rights awareness, bargaining power of consumer in the F&B industry is high due to low switching costs. Again, we believe the only way to mitigate the risk of high bargaining power of consumer is to build brand loyalty among customers via consistent good product quality and customer service. On the other hand, we view the bargaining power of suppliers in the F&B industry as moderate due to the trading nature of its commoditized raw materials such as flour, coffee bean and sugar, which depend on global supply and demand dynamics. Oldtown sources 80% of its coffee requirement from overseas, such as Brazil and Indonesia on a 6-12 months contract basis. Together with its typical inventory level of 6-9 months, this enables the group to plan its costs pass through more efficiently. Coffee industry is a growing industry in Asia. The primary substitute products posing a potential threat to coffee are caffeinated soft drinks produced by Pepsi and Coca-Cola. However, there exist significant difference in tastes, hence, consumers were unlikely to directly substitute coffee for caffeinated soft drinks or vice versa. As a result, it actually presented the industry with little threat of substitution.

High bargaining power of buyers

Moderate bargaining power of suppliers

Low threat of substitute product

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Initiating Coverage | Oldtown | 20 April 2012 Presently, Malaysia has about 14 caf chain operators with the top five making up 78% of the total number of caf outlets in the country. While on the FMCG segment, Oldtown is the third largest coffee retailer with 9.5% market share in 2011. Within the white coffee segment, Oldtown is the clear market leader with 42.3% market share, leading the second and third largest player, Super Group and Chek Hup who are estimated to have about 20% and less than 10% market share respectively, based on management guidance. As for the Hong Kong and Singapore coffee mix markets, Oldtown ranked is number 2 with increasing market share over the past 3 years, challenging the market leader, Nescafe which has about 29% market share in Hong Kong. Going forward, we expect the rivalry competition within the caf/coffee industry to increase as we anticipate the major players strive to capture larger market share.
Figure 28 : Oldtowns FMCG market share breakdown by country
% 24.2% 20.9% 14.3% 10.9% 7.2% 5.9% 4.7% 3.1% 2.6% 1.8% 1.5% 1.1% 0.9% 0.8% 100.0%

High rivalry competition

Figure 27 : Caf chain operators in Malaysia

Secret Recipe Old Town White Coffee Starbucks Coffee Subway Sandwiches Pappa Rich Coffee Bean & Tea Leaf Station 1 Leisure Caf Hailam Kopitiam San Francisco Coffee Dome Caf Gloria Jean's Coffee Killiney Kopitiam Kluang Station Georgetown White Coffee Total # of outlets 212 183 125 95 63 52 41 27 23 16 13 10 8 7 875

Source: Company data

Source: Company data

In conclusion, the industry is highly competitive with one positive and three negative scores in Porters Five Forces Analysis, while the bargaining power of suppliers is considered moderate.

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Initiating Coverage | Oldtown | 20 April 2012

APPENDIX II
External auditors
The current external auditors of Oldtown are Deloitte, which have not expressed a qualified opinion on the companys financial statements.

Board of directors
Oldtown has a strong and experienced management team. The group practices good corporate governance by splitting the roles of the chairman of the board and managing director. The board consists of eight members, of which three are independent directors. 1) Datuk Dr Ahmed Tasir bin Lope Pihie, 60 Independent non-executive chairman, since 2009 Qualification > Bachelor in Agriculture Science (University Malaya), MSc in Seed Technology (University of Edinburgh, Scotland), PhD in Science and Technology Policy (University of Manchester, UK) Experience > He was the CEO of Malaysia Industry-Government Group for high technology from 1993-2008. He presently serves as the Chairman of Nagaya Global Bhd and Strand Aerospace Malaysia Sdn Bhd. 2) Lee Siew Heng, 45 Group Managing Director, since 2007 Qualification > Completion of secondary education Experience > He had accumulated more than 20 years of experience in the manufacturing and retailing industry with 9 years in the coffee beverage industry. 3) Goh Chin Mun, 40 Executive Director, since 2007 Qualification > Completion of secondary education Experience > He started his career in 1983 with Nam Heong Coffee Shop in Ipoh. Subsequently, he co-founded White Caf (WC) where he was appointed the Product Research and Development Director and was then responsible for the formulation of the blend of white coffee that is produced by the group. 4) Tan Say Yap, 36 Executive Director, since 2009 Qualification > Diploma in Hotel Business Management (Syuen Hotel and Catering Management Institute) Experience > He co-founded and established WC in 1999. From 2005 to 2009, he was appointed the Business Development Director of Kopitiam Asia Pacific as is responsible for the caf outlet operation during that period. 5) Clarence DSilva A/L Leon DSilva, 50 Executive Director & COO of F&B segment, since 2009 Qualification > Bachelor in Business Administration (California Technical College, US) Experience > He started his career in 1983 with Kentucky Fried Chicken as a management trainee. In 1989, he left to take up employment with Carls Jr. Asia Development Corporation and was eventually promoted to the position of General Manager of the brand in Thailand. In 2003, he joined Yoshinoya Food System as the Chief Operating Officer (COO). Clarence joined Oldtown in 2009 as the COO of Oldtowns F&B segment.

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Initiating Coverage | Oldtown | 20 April 2012

Board of directors (continued)

6) Chuah Seong Meng, 36 Executive Director and COO of FMCG segment, since 2009 Qualification > BBus. majoring in Marketing (University of Tasmania, Australia), Certified Marketer (Chartered Institute of Marketing, UK) Experience > He joined WCM as a Marketing Manager in 1999 and was eventually promoted to Group Marketing Manager in 2007. He currently oversees the business operations of the groups FMCG business. 7) Chin Lai Yong, 43 Non-independent non-executive director, since 2009 Qualification > Diploma in Cost Accounting (London Chamber of Commerce and Industry) Experience > In 1998, she participated as an investor in the fashion retailing business before joining WCM as an administration officer from 2003 to July 2009. 8) Mark Wing Kong, 52 Independent non-executive director, since 2009 Qualification > CA with Malaysian Institute of Certified Public Accountant (MICPA) Experience > He was general manager of Corporate Finance department in ArabMalaysian Merchant Bank Bhd. He left the company to join LB Aluminium Bhd in 1997 where he is currently the CEO. 9) Dr. Leong Chik Weng, 48 Independent non-executive director, since 2009 Qualification > BSc in Chemical Engineering (West Virginia University, US), PhD in Chemical Engineering (University of Massachusetts, US) Experience > He joined Raychem Corporation Menlo Park from 1989 to 1996. His last position at Raychem was Technical Director. He is currently the CEO of e-Lock Corporation Sdn Bhd. Note: Chin Lai Yong is the sister-in-law of Lee Siew Heng.

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Initiating Coverage | Oldtown | 20 April 2012

APPENDIX III
Business Model
Figure 29 : Oldtowns F&B business process flow

Source: Prospectus

White coffee background

White Coffee originated from Ipoh, Malaysia and is known for its robust aroma and its creamier and richer taste. It is basically produced from the same species of coffee beans that black coffee used, i.e. Robusta or Arabica coffee. However, Old Town White Coffee is a blended of 3 types of coffee beans i.e. Robusta, Arabica and Liberica, of which 70% of the coffee bean used is Robusta. The main difference between white and black coffee is basically the way the coffee beans are roasted. To produce a traditional black coffee, coffee beans are roasted with sugar and margarine. While white coffee beans are only roasted with margarine. Without sugar, the roast is not as dark and hence termed as white coffee.

Coffee beans introduction

Arabica coffee is a pricier and more superior specie as compared to Robusta coffee. It produces the rich flavour and body found in a good cup of coffee. Arabica coffee is difficult to grow, and prone to disease. Hence, requires more hand cultivation and result in lower yield harvests per acre. Robusta specie is a hardy, high yielding plant which is resistant to numerous pests. Most of the large coffee companies in the world will blend a small amount of Arabica coffee beans with a larger portion of Robusta coffee beans. Liberica is a specie of coffee that originated from Liberia, West Africa since 1843. Today, most of the liberica coffee trees are grown in Malaysia, Indonesia and Philippines with some in West Africa, and India. However, only nearly 1% of Liberica coffee is traded in coffee trading around the world. This beautiful long-living plant is strong, lush, with fruits and seeds proportion double to those of Arabica and more immune to parasites attacks.

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Initiating Coverage | Oldtown | 20 April 2012

Oldtown
Balance Sheet FY 31 Dec (RM m) PPE Intangible Assets Inventories Receivables Other assets Deposit, bank and cash Total Assets LT borrowings ST borrowings Payables Other liabilities Liabilities Share capital Reserves Shareholders' equity Minority interest Total Equity Total Equity and Liabilities 2010P* 110.8 52.0 12.9 36.6 12.4 30.6 255.2 12.5 6.7 39.0 8.8 67.0 330.0 (142.0) 188.0 0.3 188.2 255.2 2011A 66.8 47.7 16.4 44.3 17.2 85.6 278.1 13.3 2.4 34.6 10.5 60.8 330.0 (112.9) 217.1 0.2 217.3 278.1 2012F 90.5 47.7 17.5 43.6 17.2 80.2 296.8 13.3 2.4 35.1 10.5 61.3 330.0 (94.7) 235.3 0.3 235.5 296.8 2013F 77.5 47.7 23.8 58.3 17.2 108.6 333.1 13.3 47.5 10.5 71.4 330.0 (68.7) 261.3 0.3 261.7 333.1

Financial Summary
2014F 67.0 47.7 28.1 68.9 17.2 145.7 374.7 13.3 56.2 10.5 80.1 330.0 (35.8) 294.2 0.4 294.6 374.7 Income Statement FY 31 Dec (RM m) Revenue EBITDA Depreciation & amortisation Net interest expense Share of associates Exceptional items Pretax profit Taxation Minority interest Net profit Adj net profit Key Statistics & Ratios FY 31 Dec Growth Revenue EBITDA Pretax profit Net profit Adj EPS Profitability EBITDA margin Net profit margin Effective tax rate Return on assets Return on equity Leverage Total debt / total assets (x) Total debt / equity (x) Net debt / equity (x) Key Drivers FY 31 Dec Total # of cafe outlets Growth (%) Sales volume of FMCG (k kg) Growth (%) Avg revenue per outlet (RM k) Growth (%) Avg ASP per kg (FMCG) Growth (%) Valuation FY 31 Dec EPS (sen) Adj EPS (sen) P/E (x) EV/EBITDA (x) Net DPS (sen) Net dividend yield 2010P 255.1 59.5 (12.8) (1.5) (0.4) (1.5) 43.4 (11.5) (0.2) 31.7 32.8

Price Date: 19 April 2012

2011A 285.5 58.0 (13.8) (0.8) (0.7) 9.2 51.9 (11.7) (0.0) 40.2 33.1 2012F 318.4 69.3 (19.4) 0.8 50.7 (12.7) (0.0) 38.0 38.0 2013F 425.3 89.9 (21.0) 1.2 70.0 (17.5) (0.1) 52.5 52.5 2014F 503.0 103.4 (17.5) 2.0 88.0 (22.0) (0.1) 65.9 65.9

2010P

2011A

2012F

2013F

2014F

31.7% 19.3% 8.0% 4.8% -13.2%

11.9% 5.5% 19.7% 26.7% 0.9%

11.5% 13.3% -2.4% -5.4% 14.9%

33.6% 29.5% 38.1% 38.1% 38.1%

18.3% 18.3% 25.6% 25.6% 25.6%

Cash Flow Statement FY 31 Dec (RM m) Pretax profit Depreciation & amortisation Change in working capital Net interest received / (paid) Tax paid Others Operating Cash Flow Capex Others Investing Cash Flow Issuance of shares Changes in borrowings Dividend paid Others Financing Cash Flow Net cash flow Forex Beginning cash Ending cash

2010P 43.4 12.8 (5.1) (0.0) (11.1) 0.7 40.7 (6.5) (21.8) (28.3) 7.1 (9.5) (2.0) (4.4) 7.9 (0.0) 9.0 17.0

2011A 51.9 13.8 (14.5) 0.8 (11.2) (9.4) 31.4 (9.9) (20.4) (30.3) 79.2 (5.8) (8.3) 65.2 66.3 (0.1) 17.0 83.2

2012F 50.7 19.4 0.1 (2.0) (12.7) 55.5 (43.1) 2.0 (41.1) (19.8) (19.8) (5.4) 83.2 77.8

2013F 70.0 21.0 (8.4) (2.3) (17.5) 62.9 (8.0) 2.3 (5.7) (2.4) (26.4) (28.8) 28.3 77.8 106.2

2014F 88.0 17.5 (6.3) (3.1) (22.0) 74.1 (7.0) 3.1 (3.9) (33.0) (33.0) 37.2 106.2 143.3

34.4% 12.4% 26.5% 12.8% 14.4%

32.5% 14.1% 22.6% 12.4% 16.3%

33.0% 11.9% 25.0% 13.2% 16.8%

32.0% 12.3% 25.0% 16.7% 21.1%

32.0% 13.1% 25.0% 18.6% 23.7%

0.08 0.10 Net cash

0.06 0.07 Net cash

0.05 0.07 Net cash

0.04 0.05 Net cash

0.04 0.05 Net cash

2010P 175 5,818 948.8 15.31

2011A 196 12.0% 7,032 20.9% 903.9 -4.7% 15.40 0.5%

2012F 222 13.3% 8,251 17.3% 861.7 -4.7% 15.40 0.0%

2013F 248 11.7% 13,752 66.7% 860.8 -0.1% 15.40 0.0%

2014F 274 10.5% 17,419 26.7% 856.6 -0.5% 15.40 0.0%

2010P 9.6 9.9 15.2 5.5 0.0% 0.57 2.7

2011A 12.2 10.0 15.1 4.6 6.5 4.3% 0.66 2.3

2012F 11.5 11.5 13.1 4.1 6.0 4.0% 0.71 2.1

2013F 15.9 15.9 9.5 3.0 8.0 5.3% 0.79 1.9

2014F 20.0 20.0 7.6 2.3 10.0 6.6% 0.89 1.7

* FY10 is a pro-forma account which includes the contribution from the 8 subsidiaries which BV per share (RM) are not owned by Oldtown from Jan to May 2011. P/BV (x)

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Initiating Coverage | Oldtown | 20 April 2012

DISCLOSURE
Stock rating definitions
Strong buy Buy Neutral Sell Trading buy High conviction buy with expected 12-month total return (including dividends) of 30% or more Expected 12-month total return of 15% or more Expected 12-month total return between -15% and 15% Expected 12-month total return of -15% or less Expected 3-month total return of 15% or more arising from positive newsflow. However, upside may not be sustainable

Sector rating definitions

Overweight Neutral Underweight - Industry expected to outperform the market over the next 12 months - Industry expected to perform in-line with the market over the next 12 months - Industry expected to underperform the market over the next 12 months

Commonly used abbreviations

Adex = advertising expenditure bn = billion BV = book value CF = cash flow CAGR = compounded annual growth rate Capex = capital expenditure CY = calendar year Div yld = dividend yield DCF = discounted cash flow DDM = dividend discount model DPS = dividend per share EBIT = earnings before interest & tax EBITDA = EBIT before depreciation and amortisation EPS = earnings per share EV = enterprise value FCF = free cash flow FV = fair value FY = financial year m = million M-o-m = month-on-month NAV = net assets value NM = not meaningful NTA = net tangible assets NR = not rated p.a. = per annum PAT = profit after tax PBT = profit before tax P/B = price / book ratio P/E = price / earnings ratio PEG = P/E ratio to growth ratio q-o-q = quarter-on-quarter RM = Ringgit ROA = return on assets ROE = return on equity TP = target price trn = trillion WACC = weighted average cost of capital y-o-y = year-on-year YTD = year-to-date

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Initiating Coverage | Oldtown | 20 April 2012

DISCLAIMER
This report has been prepared for information purposes only by Alliance Research Sdn Bhd (Alliance Research), a subsidiary of Alliance Investment Bank Berhad (AIBB). This report is strictly confidential and is meant for circulation to clients of Alliance Research and AIBB only or such persons as may be deemed eligible to receive such research report, information or opinion contained herein. Receipt and review of this report indicate your agreement not to distribute, reproduce or disclose in any other form or medium (whether electronic or otherwise) the contents, views, information or opinions contained herein without the prior written consent of Alliance Research. This report is based on data and information obtained from various sources believed to be reliable at the time of issuance of this report and any opinion expressed herein is subject to change without prior notice and may differ or be contrary to opinions expressed by Alliance Researchs affiliates and/or related parties. Alliance Research does not make any guarantee, representation or warranty (whether express or implied) as to the accuracy, completeness, reliability or fairness of the data and information obtained from such sources as may be contained in this report. As such, neither Alliance Research nor its affiliates and/or related parties shall be held liable or responsible in any manner whatsoever arising out of or in connection with the reliance and usage of such data and information or third party references as may be made in this report (including, but not limited to any direct, indirect or consequential losses, loss of profits and damages). The views expressed in this report reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendation(s) or view(s) in this report. Alliance Research prohibits the analyst(s) who prepared this report from receiving any compensation, incentive or bonus based on specific investment banking transactions or providing a specific recommendation for, or view of, a particular company. This research report provides general information only and is not to be construed as an offer to sell or a solicitation to buy or sell any securities or other investments or any options, futures, derivatives or other instruments related to such securities or investments. In particular, it is highlighted that this report is not intended for nor does it have regard to the specific investment objectives, financial situation and particular needs of any specific person who may receive this report. Investors are therefore advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situations and particular needs and consult their own professional advisers (including but not limited to financial, legal and tax advisers) regarding the appropriateness of investing in any securities or investments that may be featured in this report. Alliance Research, its directors, representatives and employees or any of its affiliates or its related parties may, from time to time, have an interest in the securities mentioned in this report. Alliance Research, its affiliates and/or its related persons may do and/or seek to do business with the company(ies) covered in this report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell or buy such securities from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report. AIBB (which carries on, inter alia, corporate finance activities) and its activities are separate from Alliance Research. AIBB may have no input into company-specific coverage decisions (i.e. whether or not to initiate or terminate coverage of a particular company or securities in reports produced by Alliance Research) and Alliance Research does not take into account investment banking revenues or potential revenues when making company-specific coverage decisions. In reviewing this report, an investor should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the overriding issue of confidentiality, available upon request to enable an investor to make their own independent evaluation of the information contained herein. Published & printed by: ALLIANCE RESEARCH SDN BHD (290395-D) Level 19, Menara Multi-Purpose Capital Square 8, Jalan Munshi Abdullah 50100 Kuala Lumpur, Malaysia Tel: +60 (3) 2692 7788 Fax: +60 (3) 2717 6622 Email: allianceresearch@alliancefg.com

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