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Malaysia Equity Explorer Gabungan AQRS

Bloomberg: AQRS MK | Reuters: AQRS.MK Refer to important disclosures at the end of this report

DBS Group Research . Equity 13 Jun 2018

NOT RATED RM1.10 KLCI : 1,764.16 Fastest growing contractor Closing price as of 12 Jun 2018  Earnings delivery from its peak RM2.7bn orderbook Return *: 1 with continued overhead reduction has been impressive Risk: Moderate  Strong beneficiary of ECRL and Pan Borneo Potential Target 12-mth* : 12-Month RM 2.12 continuity (93% upside)  Valuations are unjustifiably cheap at 5.0x-8.7x FY18-

Analyst 19F EPS; on the back or 2-year CAGR of 89.9% for Siti Ruzanna Mohd Faruk +603 2604 3965 FY17-19F, rising ROE and improving balance sheet. Fair [email protected] value at RM2.12

The Business Tjen San CHONG +60 3 26043972 [email protected] Up and coming contractor. Gabungan AQRS is gaining prominence in the construction space with sizeable new project wins in FY16-17 which included a large package for LRT 3. All these projects were won on a competitive tender basis. It also has a property development, precast Price Relative business and a recurring income base from the maintenance of RM Relative Index 2.4 Basecamp in Sipitiang. Its construction segment contributed 77% to 213 2.2 193 group revenue in FY17. 2.0 173 1.8 153 1.6 Strong beneficiary of ECRL and Pan Borneo Sabah continuity. While its 1.4 133 current orderbook points to sufficient earnings visibility, its new order 1.2 113 1.0 93 replenishment will receive a big boost with the likely continuity of the 0.8 73 East Coast Railway Link (ECRL) and Pan Borneo Sabah. The high cost of 0.6 53 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 cancellation incurred for ECRL may eventually see this project being continued albeit at a lower cost of c.RM40bn. For Pan Borneo Sabah, it Gabungan AQRS (LHS) Relative KLCI (RHS) has jointly bid for 4 civil packages and it is one of the two precast Forecasts and Valuation suppliers in Sabah. It owns a 49% stake in Sedco Precast where the FY Dec (RMm) 2017A 2018F 2019F 2020F Revenue 469 748 1,236 1,425 balance 51% is owned by the State Government. Its established EBITDA 106 122 194 214 relationship with the State government coupled with its majority Pre-tax Profit 81.2 102 175 194 shareholder owning a stake in the master developer for Kota SAS new Net Profit 48.0 74.7 130 144 state administrative centre (which is expected to house an ECRL station) Net Pft (Pre Ex.) 36.0 74.7 130 144 will likely result in more contract flows from the Kota SAS project. EPS (sen) 10.6 12.7 22.0 24.4 EPS Pre Ex. (sen) 7.95 12.7 22.0 24.4 Fastest growing contractor. We forecast a 2-year EPS CAGR of 89.9% EPS Gth (%) 83 19 74 11 for FY17-19F, anchored by its RM2.7bn outstanding orderbook and EPS Gth Pre Ex (%) 83 19 74 11 forecasted RM800m-1.0bn per annum new wins over the next three Diluted EPS (sen) 8.14 12.7 22.0 24.4 years. The property business is expected to turn around this year and Net DPS (sen) 1.97 2.53 4.40 4.87 accelerate in FY19F with its attractively priced E-Island Residence project. BV Per Share (sen) 103 88.6 106 126 FY17 was hit by liquidated ascertained damages (LADs)/ write-offs. The PE (X) 10.3 8.7 5.0 4.5 company has also painstakingly undergone a transformation to reduce PE Pre Ex. (X) 10.3 8.7 5.0 4.5 its net gearing and bring down operating cost, which is already filtering P/Cash Flow (X) 3.3 nm 32.2 6.4 through in its financials. EV/EBITDA (X) 5.2 5.9 3.8 3.1

Net Div Yield (%) 1.8 2.3 4.0 4.4 The Stock P/Book Value (X) 1.1 1.2 1.0 0.9 Net Debt/Equity (X) 0.1 0.1 0.1 0.0 Fair value at RM2.12. Our fair value is SOP-based where construction ROAE (%) 13.3 15.2 22.6 21.0 forms c.80% of our total SOP. Its valuation is at a bargain following the recent sell down resulting from the review of the ECRL after the general Consensus EPS (sen): 13.4 17.6 22.8 elections. The stock is trading at just 5.0x-8.7x FY18-19F EPS with a 2- Other Broker Recs: B: 4 S: - H: - year EPS CAGR of 89.9% for FY17-19F (making it the fastest growing contractor in our universe). ICB Industry : Industrials At A Glance ICB Sector: Construction & Materials Issued Capital (m shrs) 475 Principal Business: Gabungan AQRS Bhd is a full service property Mkt. Cap (RMm/US$m) 529 / 131 development and construction company. The Company's activities Major Shareholders (%) include property development, civil and infrastructure works. Ganjaran Gembira 11.2 Source of all data on this page: Company, AllianceDBS, Bloomberg Chee Cheoon Ow 7.1 Finance L.P Employees Provident Fund 6.2 Free Float (%) 53 3m Avg. Daily Val (US$m) 1.4 . *This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.

ed: CK / sa: WMT, PY, CS

Equity Explorer Gabungan AQRS

REVENUE DRIVERS

Chart 1 : Revenue Breakdown Slew of impressive construction projects. Gabungan AQRS is RM m involved in multiple infrastructure and building projects. Completed 1,600 projects include the MRT 1 Package V1 from Sungai Buloh to Kota 1,400 280 Damansara with a contract value of RM474m. It was also given 1,200 additional work for the construction and completion of a viaduct 1,000 396 guide way for SSP Spur Line (contract value of RM47m) which was 800 reflected in FY17 earnings. Order book replenishment has been 204 600 1,132 impressive post the transformation exercise with RM1.5bn wins in 400 92 828 FY16 and RM1.3bn in FY17. FY17 order wins include LRT 3 60 102 532 200 366 (RM1.1bn), its largest job to date. Other major ongoing projects 212 220 - include the Sungai Besi – Ulu Kelang Elevated Expressway (SUKE) 2015 2016 2017 2018F 2019F 2020F Construction Property Package CA3 (RM628m) as well as building project Pusat Pentadbiran Sultan Ahmad Shah (PPSAS) (RM361m). The Table 1: Key ongoing construction projects construction segment contributed c.77% to FY17 revenue which Light Rail Transit 3 included RM47m pre-tax gain from MRT 1 variation works. Project Value RM1.137bn However, excluding the exceptional gain, PBT margins were Date of possesion 5 October 2017 attractive at c.30% backed by progressing stages of construction as Construction period 38 months well as efficient cost control. Developer Prasarana Bhd Main contractor Gabungan Strategik Sdn Bhd Property segment. Gabungan AQRS is also involved in property Pusat Pentadbiran Sultan Ahmad Shah (PPSAS) Project Value RM362m development projects. Some of the completed projects are Kinrara Date of possesion 27 December 2016 Uptown (RM230m GDV), Contours (RM160m GDV) and Permas Construction period 39 months Centro (RM180 GDV). The property segment only contributed Developer Kreatif Sinar Gabungan Sdn Bhd c.20% to FY17 revenue with losses of RM27m due to a property Main contractor Gabungan Strategik Sdn Bhd Sungai Besi - Ulu Kelang Elevated Expressway (SUKE) Package CA3 development write-off cost in respect of land sale and provision of Project Value RM628m LAD. Ongoing projects include The Peak, Bahru (RM696m Date of possesion 28 August 2016 GDV) where 30% has been sold as well as Contours which is Construction period 40 months completed but 83% sold. Upcoming projects are the One Jesselton Main contractor Syarikat Muhibah Perniagaan & Pembinaan Sdn Bhd Sub contractor Gabungan Strategik Sdn Bhd Waterfront (RM1.8bn GDV) and E’Island Residence, Putra Perdana (RM491m). Both upcoming projects are slated to be launched in Table 2: Property projects 2018. The Peak @ Iskandar, Johor Bahru Development Details High rise luxury residential with 668 units Steady income from Petronas Basecamp. Gabungan AQRS enjoys a Land Size 5.43 acres recurring income stream from its Petronas Basecamp in Sipitang Estimated GDV RM696m 2018 with revenue of RM2.8m every quarter. This rental agreement is for Expected completion 5+5 years with Petronas Chemicals Fertiliser Sabah Sdn Bhd. E'Island Residence, Putra Perdana Land Owner AQRS The Building Company Sdn Bhd KEY OPERATING ASSETS Contractor Gabungan Strategik Sdn Bhd Development Details 1,140 condominium units Land assets. Its joint venture with Suria Capital Holdings Bhd, One Land Size 19.03 acres Jesselton Waterfront is located on 6.82 acres of prime waterfront Estimated GDV RM491m real estate in , Sabah and carries RM1.8bn in GDV. Expected completion Aug-21 Other land assets include 19.03 acres for the PR1MA Putra Perdana Selling Price RM280k - RM495k development and 5.43 acres for The Peak, Johor Bahru. Source: Company, AllianceDBS

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Equity Explorer Gabungan AQRS

GROWTH PROSPECTS Rapid Transit System (RTS) and BRT system will spur demand for The Peak. This project has no more bank borrowings tied to it and needs Rosy prospects for orderbook. Its current orderbook stands at an incremental cost of c.RM120m to complete (RM90m RM3.4bn with unbilled orders of RM2.7bn as of end-Mar 2018. The construction and RM30m paid to land owners). Hence, there is no largest unbilled orderbook comes from the LRT3 project which need to be aggressive in cutting prices to achieve sales. started in Oct 2017 and had unbilled orders of RM1.1bn as of end- Mar 2018. This will sustain the group’s earnings up to FY20F. The Upcoming projects include the with group expects to secure RM1.5bn order wins by end 2018, backed RM1.8bn GDV, which is targeted to start physical construction by the East Coast Rail Line, Pan Borneo Sabah Highway as well as works in 4Q18. As construction works will only start in 4Q18 with the federal government’s projects in Kota SAS. The federal the completion of Suria Corp Office and Retail Mall targeted in 2021 government projects in Kota SAS include police headquarters, state and the hotel, service suites and condominium to complete in 2023, admin offices and federal government offices. we have not factored in the One Jesselton project into our forecast yet. Its track record shows that the group has secured infrastructure and building jobs of up to RM974m with the State Government of Besides this, its E’Island Residence, Putra Perdana with RM491m Pahang, giving it an advantage to win the portion of the ECRL that GDV, is expected to be officially launched in end-18. This project goes through Pahang. Based on recent media articles, we was previously supposed to be launched with PRIMA but has since understand this project may continue but the newly formed changed resulting in upward revisions to GDV and margins. We government may negotiate to reduce the project value by c.RM15bn believe the attractive pricing at RM280k/unit – RM495k/unit will be from the projected cost of RM55bn. This is following the high cost well received and thus contribute positively to earnings from FY19 of cancellation (RM20bn) as well as work progress of c.14% with onwards. RM19.7bn drawn down and paid to contractor China Chart 2: Gabungan AQRS’ construction revenue (RM m) Communication Construction Company (CCCC). RM m 1,200 1,132 As for the Pan Borneo Highway Sabah, it is jointly bidding for the project with Suria Capital Holdings Bhd which is one of Sabah’s 1,000 state companies where it could be among the potential beneficiaries 828 of the RM12bn project. They have submitted tender for 4 packages. 800 It also enjoys an advantage for federal government projects in Kota 600 532 SAS as Tanah Makmur Kota SAS Sdn Bhd, which is the master 366 developer for the 1,500 acres of Kota SAS, is 10.8% owned by the 400 325 270 284 group’s CEO, Dato’ Azizan. 212 220 173 200 Additional revenue stream may also come from its associate Sedco Precast Sdn Bhd (owns a 49% stake) which is the precast market - leader in Sabah. This bodes well for it in supplying pre-cast concrete 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F to the Pan Borneo Highway which can be worth up to RM2bn as they are one of the two suppliers of precast in Sabah. Chart 3: Gabungan AQRS’ construction PBT RM m % To be more conservative, we have forecasted RM1.0bn new orders 500 32% 32% 40% for FY18 followed by RM800m/RM800m for FY19F/20F. This is 400 14% 17% 13% 14% 13% 12% 11% 20% below its RM1.5bn new order assumption for FY18F. We believe a -2% blended PBT margin of 13-14% is sustainable as we expect new 300 0% order wins to have lower margins compared to current margins of -20% 200 149 c.30%. 115 114 -40% 70 100 55 49 38 40 24 -60% Jump start for property. The property segment has been slow in -4 0 FY17 due to the lower number of projects, which caused the -80% 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F segment to be loss making in FY17. Ongoing projects include The -100 -100% Peak in Johor Bahru with RM106m unbilled sales and RM432m in Construction PBT Construction PBT Margins unsold inventory. The current take-up rate is at 30% but the group plans to re-launch the property in 3Q18 as it believes upcoming Source: Company, AllianceDBS developments around The Peak such as the Johor Bahru-Singapore Table 3: Orderbook as of end-Mar 2018 Expected Contract Unbilled Projects Client Start Completion amount (RM m) orders (RM m) Sungai Besi Ulu Klang (SUKE) Package CA3 Syarikat Muhibah Perniagaan & Pembinaan Sdn Bhd Aug-16 Dec-19 628 475 Light Rail Transit 3 (LRT 3) Prasarana Malaysia Bhd Oct-17 Dec-20 1137 1086 The Peak, Johor Bahru AQRS The Building Company Sdn Bhd Jan-14 Aug-18 308 128 Pusat Pentadbiran Sultan Ahmad Shah (PPSAS) Kreatif Sinar Gabungan Sdn Bhd Dec-16 Mar-20 362 154 PR1MA Gambang Perbadanan PR1MA Malaysia Jun-18 May-21 424 370 E'Island Residence AQRS The Building Company Sdn Bhd Sep-18 Aug-21 314 314 Landed homes in Kota SAS KotaSAS Sdn Bhd Apr-18 Mar-21 189 189 Total 3362 2716 Source: Company, AllianceDBS

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Equity Explorer Gabungan AQRS

FINANCIAL HIGHLIGHTS Chart 4: Historical financial highlights RM m 1,600.0 Boost from construction. Gabungan AQRS recorded a net profit 1,424.8 of RM48m in FY17, backed by work progress from the SUKE, PPSAS 1,400.0 1,235.9 as well as LRT 3 projects. It also incurred some gains from land sale 1,200.0 (RM15m) and MRT1 variation orders (RM33m) as well as some LAD 1,000.0 748.0 exposure (RM12.2m) and the altium development write-off cost 800.0 (RM17m). Excluding all these, core net profit came in at RM35.9m 600.0 469.4 330.1 (+132% y-o-y). 400.0 272.5 129.9 143.8 200.0 48.0 74.8 Going into FY18, we expect earnings to be supported by ongoing (9.7) 22.6 0.0 construction projects as well as some recognition from the property (200.0) 2015 2016 2017 2018F 2019F 2020F segment. The group plans to focus on The Peak which has a 30% take-up rate and targets to sell out this project by FY19. Revenue Net Profit

Chart 5: Historical margins FY19F earnings are expected to improve further from better 35% 30% construction contribution, as we have factored in RM800m worth of 30% 27% 25% new orders in FY19F coupled with contribution from the other 25% 25% 25% property projects such as E’Island Residence. 18% 20% 18% 13% 14% 14% 14% Steady margins. We expect group net margins to hover around 10- 15% 11% (FY18-20F). We believe the group will be able to sustain 10% 11% margins, backed by ongoing construction projects as well as 5% 10% 10% 7% 0% -3% continuous efforts to reduce operating costs. 3% -5% -4% Gearing improved significantly. The group was able to bring down -10% net gearing to 0.06x in 1QFY18 from 0.78x in FY15. Interest cost 2015 2016 2017 2018F 2019F 2020F Gross Margin Pre-tax Margin Net Margin has declined by 47% y-o-y to RM2.06m in 1QFY18. This is due to a Chart 6: Segmental margins significant reduction of industrial HP loans from RM5.5m in FY16 to 40% RM1.5m in FY17. We expect gearing to be manageable going 30% forward. 17% 32% 15% 15% 20% 12% 15%

10% 14% COST STRUCTURE 11% 13% 13% 0% Operating costs reduced. The group has been able to bring down -10% -2%

operating costs to revenue from 16% in FY16 to 13.9% in FY17 -20% -29% and a further 9.4% in 1Q18. Management targets to reduce -30% operating costs to revenue to 8% in FY18. This is after the -40% implementation of a strong set of operating policies which resulted 2015 2016 2017 2018F 2019F 2020F in improvement in operational efficiency. Construction PBT Margins Property PBT Margins

Chart 7: Historical gearing levels BUSINESS RISKS RMm 500.0 0.90 Delays in construction. Any delays due to the design and 0.78 450.0 0.80 engineering issues and soil conditions may incur higher project cost 0.69 400.0 0.70 350.0 overruns. Timely completion is critical to avoid paying liquidated 0.60 300.0 ascertained damages to clients. 0.50 250.0 0.38 0.40 200.0 0.29 Fluctuations in prices of raw materials. The construction business 0.30 150.0 typically requires a wide range of raw materials, including steel bars, 100.0 0.11 0.20 ready-mix concrete, diesel, electrical cables and fittings, which are all 50.0 0.10 subject to price fluctuations. 0.0 - 2013 2014 2015 2016 2017

Gross Debt Net Debt Gearing (x) (rhs) Source: Company, AllianceDBS

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Equity Explorer Gabungan AQRS

MANAGEMENT & STRATEGY This has resulted in declining gearing and finance costs, as well as a reduction in operating costs. New and improved. Gabungan AQRS had a change in

management in April 2016 where Dato‘ Azizan Jaafar stepped in He is backed by a solid team. The group CFO is Ow Yin Yee. She has and took over as Group CEO and formed Team GBG. He has more 26 years of working experience in the areas of accounting, finance than 25 years of experience in the construction industry and eight and taxation. She has worked in the construction and property years of experience in the property development industry. He has industry for over 13 years. The managing director of the worked with many firms including Warrington Martin, Henry Riley & construction division is led by Ir. Bakri bin Ishak. He has over 31 Sons, Taisei Corporation and Ahmad Zaki Sdn Bhd. He is also a years of experience in the construction industry as project director shareholder in Tanah Makmur Kota SAS Sdn Bhd. He has for major projects which include MRT 1 and SUKE. As for the transformed the group since he became CEO, from a net loss property division, the managing director is Ir. Tai Jiunn Hong who position in FY15 to profit making in FY16/17. He believes in has 16 years of experience in engineering and property development exploring new frontiers in construction and property development, industries, encompassing mixed developments, high-end shopping streamlining internal management process and improving efficiency. malls, high-end residential towers and office towers.

Table 4: Key Management Name Position Y.M. Tunku Alizan bin Raja Muhammad Alias Independent Non-Executive Director and Chairman

Dato' Azizan bin Jaafar Executive Director and Group Chief Executive Officer

Dato Paul Ow Chee Cheoon Executive Director and Group Deputy Chief Executive Officer

Datuk Kamarudin bin Md Ali Senior Independent Non-Executive Director

Ow Yin Yee Executive Director and Group Chief Financial Officer

Muk Sai Tat Independent Non-Executive Director

Loo Choo Hong Independent Non-Executive Director

Ir. Bakri bin Ishak Managing Director (Construction Division)

Ir. Tai Jiunn Hong Managing Director (Property Division) Source: Company, AllianceDBS

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Equity Explorer Gabungan AQRS

Key Assumptions Sensitivity Analysis FY Dec 2015A 2016A 2017A 2018F 2019F 2020F 2018 Construction Net Profit +/- 3% Orderbook replenishment 0.0 1,461 1,326 1,000 800 800 margins +/- 1% (m) Construction Margins (1.9) 11.9 20.2 13.1 13.8 13.2 Property margins +/- Net Profit +/- 2% (%) Property Margins (%) 12.4 10.8 (10.7) 15.0 15.1 15.2 1%

Segmental Breakdown FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Revenues (RMm) Construction 212 220 366 532 828 1,132 Property 60.4 102 92.4 204 396 280 Others 0.0 8.36 11.4 11.9 12.5 13.1 Total 273 330 469 748 1,236 1,425 PBT (RMm) Construction (4.1) 26.2 73.7 69.7 114 149 Property 7.47 11.0 (9.9) 30.6 59.6 42.5 Others (11.3) 6.45 17.4 1.44 1.54 1.64 Total (7.9) 43.7 81.2 102 175 194 PBT Margins (%) Construction (1.9) 11.9 20.2 13.1 13.8 13.2 Property 12.4 10.8 (10.7) 15.0 15.1 15.2 Others N/A 77.2 153.1 12.1 12.3 12.5 Total (2.9) 13.2 17.3 13.6 14.2 13.6

Income Statement (RMm)

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Revenue 273 330 469 748 1,236 1,425

Cost of Goods Sold (224) (242) (326) (559) (918) (1,066) Margins Trend Gross Profit 48.4 87.6 144 188 318 359 Other Opng (Exp)/Inc (47.4) (29.7) (53.1) (85.7) (143) (165) 20.0% Operating Profit 1.07 57.9 90.7 103 175 194 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 18.0% Associates & JV Inc 0.18 (0.1) 0.03 4.41 5.88 5.88 16.0% Net Interest (Exp)/Inc (9.1) (14.2) (9.6) (5.5) (6.2) (6.5) 14.0%

Exceptional Gain/(Loss) 0.0 0.0 11.5 0.0 0.0 0.0 12.0% Pre-tax Profit (7.9) 43.7 81.2 102 175 194 Tax (8.3) (15.4) (31.6) (25.4) (43.8) (48.4) 10.0% Minority Interest 6.51 (5.7) (1.6) (1.6) (1.5) (1.4) 8.0% Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 6.0% Net Profit (9.7) 22.6 48.0 74.7 130 144 2016A 2017A 2018F 2019F 2020F Net Profit before Except. (9.7) 22.6 36.0 74.7 130 144 Operating Margin % Net Income Margin % EBITDA 16.3 72.9 106 122 194 214 Growth Revenue Gth (%) (49.0) 21.1 42.2 59.3 65.2 15.3 EBITDA Gth (%) (86.7) 346.4 45.7 15.0 58.5 10.6 Opg Profit Gth (%) (99.0) 5,334.8 56.6 13.3 70.6 10.7 Net Profit Gth (Pre-ex) (%) nm nm 112.1 55.7 73.7 10.7 Margins & Ratio Gross Margins (%) 17.8 26.5 30.6 25.2 25.7 25.2 Opg Profit Margin (%) 0.4 17.5 19.3 13.7 14.2 13.6 Net Profit Margin (%) (3.5) 6.9 10.2 10.0 10.5 10.1 ROAE (%) (3.0) 7.8 13.3 15.2 22.6 21.0 ROA (%) (1.1) 2.3 4.6 5.7 7.1 6.2 ROCE (%) (3.3) 1.4 6.0 10.0 15.9 15.5 Div Payout Ratio (%) N/A 0.0 18.5 20.0 20.0 20.0 Net Interest Cover (x) 0.1 4.1 9.5 18.7 28.3 30.0

Source: Company, AllianceDBS

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Equity Explorer Gabungan AQRS

Quarterly / Interim Income Statement (RMm) Revenue Trend 180 100% FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017 1Q2018 160 80% 140 Revenue 86.1 159 79.8 80.5 150 127 60% 120 Cost of Goods Sold (58.6) (118) (56.7) (50.7) (101) (94.8) 40% 100 20% Gross Profit 27.5 40.6 23.1 29.8 49.6 32.7 80 Other Oper. (Exp)/Inc (10.0) (10.9) (9.8) (12.3) (18.9) (11.6) 0% 60 -20% Operating Profit 17.6 29.7 13.4 17.5 30.8 21.2 40

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 20 -40%

Associates & JV Inc 0.0 (0.1) (0.1) 0.16 0.20 0.56 0 -60%

Net Interest (Exp)/Inc (4.0) (3.8) (3.1) (2.7) 0.65 0.27

4Q2015

1Q2016

2Q2016

3Q2016

4Q2016

1Q2017

2Q2017

3Q2017 4Q2017 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 1Q2018 Pre-tax Profit 13.5 25.9 10.2 15.0 31.6 22.0 Revenue Revenue Growth % (QoQ) Tax (6.6) (7.3) (3.6) (6.3) (15.8) (5.4) Minority Interest 0.57 (2.4) (0.6) 0.80 (0.6) (0.1) Net Profit 7.45 16.1 5.98 9.43 15.2 16.5 Net profit bef Except. 7.45 16.1 5.98 9.43 15.2 16.5 EBITDA 17.5 29.6 13.3 17.7 31.0 21.7

Growth Revenue Gth (%) 24.7 84.7 (49.8) 0.8 86.7 (15.1)

EBITDA Gth (%) 53.8 69.0 (55.3) 33.2 75.4 (29.9) Opg Profit Gth (%) 54.1 69.5 (55.1) 30.9 75.9 (31.2) Net Profit Gth (%) 44.5 116.7 (62.9) 57.7 61.5 8.1 Margins Gross Margins (%) 32.0 25.6 28.9 37.0 33.0 25.7 Opg Profit Margins (%) 20.4 18.7 16.7 21.7 20.5 16.6 Net Profit Margins (%) 8.7 10.2 7.5 11.7 10.1 12.9

Source: Company, AllianceDBS

Balance Sheet (RMm) Asset Breakdown (2018) FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Net Fixed Assets - 1.6% Net Fixed Assets 55.1 43.6 32.4 19.4 9.07 (3.2) Assocs'/JVs - Invts in Associates & JVs 3.94 3.75 3.89 8.30 14.2 20.1 0.7% Other LT Assets 134 101 100 100 100 100 Debtors - Cash & ST Invts 43.2 35.4 145 125 117 187 83.3% Inventory 33.6 25.1 31.6 54.4 89.1 104 Debtors 469 522 620 988 1,632 1,881 Bank, Cash Inventory - Other Current Assets 230 245 193 193 193 193 and Liquid 4.6% Total Assets 969 977 1,125 1,487 2,154 2,482 Assets - 9.8% ST Debt 212 196 159 159 159 159 Creditor 340 342 430 739 1,282 1,489 Other Current Liab 9.71 12.8 33.8 25.4 43.8 48.4 LT Debt 82.2 72.5 29.6 29.6 29.6 29.6 Other LT Liabilities 2.25 2.93 1.62 1.62 1.62 1.62 Shareholder’s Equity 321 344 463 523 627 742 Minority Interests 1.24 6.89 8.43 9.99 11.5 12.9 Total Cap. & Liab. 969 977 1,125 1,487 2,154 2,482

Non-Cash Wkg. Capital 383 438 380 470 588 640 Net Cash/(Debt) (251) (233) (43.4) (63.4) (71.2) (0.7) Debtors Turn (avg days) 590.6 548.4 444.0 392.2 386.8 449.9 Creditors Turn (avg days) 558.5 547.8 454.5 392.0 407.5 481.0 Inventory Turn (avg days) 59.7 47.1 33.4 28.8 28.9 33.4 Asset Turnover (x) 0.3 0.3 0.4 0.6 0.7 0.6 Current Ratio (x) 1.4 1.5 1.6 1.5 1.4 1.4 Quick Ratio (x) 0.9 1.0 1.2 1.2 1.2 1.2 Net Debt/Equity (X) 0.8 0.7 0.1 0.1 0.1 0.0 Net Debt/Equity ex MI (X) 0.8 0.7 0.1 0.1 0.1 0.0 Capex to Debt (%) 3.2 0.2 1.1 1.1 1.1 1.1

Source: Company, AllianceDBS

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Equity Explorer Gabungan AQRS

Cash Flow Statement (RMm) Capital Expenditure FY Dec 2015A 2016A 2017A 2018F 2019F 2020F RMm 2.5 Pre-Tax Profit (7.9) 43.7 81.2 102 175 194 Dep. & Amort. 15.1 15.1 15.5 15.0 12.4 14.3 2.0

Tax Paid (15.2) (9.7) (13.8) (33.8) (25.4) (43.8) 1.5 Assoc. & JV Inc/(loss) (0.2) 0.10 0.0 (4.4) (5.9) (5.9) Chg in Wkg.Cap. (58.6) (31.4) 54.3 (81.5) (136) (56.9) 1.0 Other Operating CF 3.64 11.9 11.7 0.0 0.0 0.0 Net Operating CF (63.2) 29.6 149 (3.0) 20.2 101 0.5 Capital Exp.(net) (9.5) (0.5) (2.1) (2.0) (2.0) (2.0) 0.0 Other Invts.(net) (38.8) (2.1) 0.28 0.0 0.0 0.0 2016A 2017A 2018F 2019F 2020F Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0 Capital Expenditure (-) Div from Assoc & JV 0.0 0.09 0.0 0.0 0.0 0.0 Other Investing CF (0.5) 6.12 (18.4) 0.0 0.0 0.0 Net Investing CF (48.7) 3.64 (20.2) (2.0) (2.0) (2.0) Div Paid 0.0 0.0 0.0 (15.0) (26.0) (28.7) Chg in Gross Debt 141 5.10 (155) 0.0 0.0 0.0 Capital Issues (2.3) (0.1) 54.3 0.0 0.0 0.0 Other Financing CF (6.0) (11.8) (8.5) 0.0 0.0 0.0 Net Financing CF 133 (6.8) (109) (15.0) (26.0) (28.7) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Cash 20.9 26.4 19.9 (20.0) (7.8) 70.5

Opg CFPS (sen) (1.2) 15.6 20.9 13.3 26.5 26.8 Free CFPS (sen) (18.7) 7.45 32.5 (0.9) 3.08 16.8

Source: Company, AllianceDBS

VALUATIONS

Currently trading at below average valuations… The stock Expect steady earnings growth and strong balance sheet. currently trades at 8.7x FY18 EPS falling to just 5.0x FY19 EPS which Earnings volatility is moderate given the risks in the construction is below its average of the last two years’ forward PE (post sector such as rising input costs as well as delay in projects. Its net transformation) and also a 26%/53% discount to our sector gearing stood at 0.06x as of end-Mar 18 from 0.67x in FY16. average. We think this is very attractive given the explosive growth ahead with 2-year EPS CAGR of 89.9% for FY17-19F, improving Share buy back. Dato’ Azizan, Group CEO has been buying back ROE and balance sheet. Stripping out all new wins for FY18-20F, it shares of up to 1.250m units since early March18 with total shares will still register 2-year EPS CAGR of 82.1%. accumulated to date at 1.452m units. He owns effectively 11.61% stake in Gabungan AQRS which includes 11.29% stake under Given its more diversified earnings base, we have used sum-of-parts Ganjaran Gembira. to value the company. Our SOP-derived TP works out to RM2.12 where 80% comes from construction, 16% from property, 4% from Gabungan AQRS has also been buying back shares more precast and 1% from Petronas Base Camp in Sipitang. aggressively post the 14th General Elections with total shares Our assumptions are as follows: purchased so far reaching 15.3m which is being held as treasury 1) For construction, we have assumed a sustainable orderbook of shares. This works out to be 3.2% of its total share capital. RM3.65bn (which we think is conservative as we factor in partial of potential new orders from ECRL/Pan Borneo Sabah). We have Chart 8: Historical forward PE ratio (x) assumed 11x PE for our construction segment, translating into a P/E 40.00 20% discount to IJM and Gamuda and a slight discount to the 35.00 +2sd:34.2x sector average. We think the discount is warranted for now given its 30.00 +1sd:27.3x smaller market capitalisation and earnings base. 25.00 2) For property, we have only factored in two of its outstanding Avg: 20.4x 20.00 projects – The Peak and E’Island Residence where we have used DCF -1sd: 13.5x for its development profits. 15.00 3) For precast, we assume that it will clinch 30% of the RM2bn precast 10.00 requirements for Pan Borneo Sabah. This is on the back of margins 5.00 -2sd:6.6x of 10%. 0.00

Risk Assessment: Moderate

Category Risk Rating Wgt Wgtd Score 1 (Low) - 3 (High) Source: AllianceDBS, Bloomberg Finance L.P Earnings 2 40% 0.8 Financials 2 20% 0.4 Shareholdings 2 40% 0.8 Overall 2.0

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Equity Explorer Gabungan AQRS

Table 5: SOP Table SOP SOP/share Division Valutaion Method Stake (%) RMm RM Construction Sustainable orderbook RM3.65bn 100 858.0 1.80 Precast Sustainable orderbook RM600m 49 38.3 0.08 Property DCF of development profits 100 172.7 0.36 Petronas Base Camp Sipitiang DCF of rental income 100 9.8 0.02

Net cash (debt) -69.7 -0.15 Total SOP Value 1009.1

Number of shares (m) 475.5

SOP Value/Share (RM/share) 2.12 Source: Company, AllianceDBS

Table 6: Construction Peer Comparison Table

Mark et Cap Rec. TP Diluted PE (x) P/NT A (x) Div Yield (%) ROE (%)

(USDm) (Local currency) CY18 CY19 CY18 CY19 CY18 CY19 CY18 CY19 Malay sia Gamuda 2,104.8 BUY 4.73 13.6 13.2 1.2 1.1 2.6 2.6 8.9 6.3 IJM 1,564.5 BUY 2.39 13.7 11.7 0.6 0.6 2.6 2.6 4.7 12.0 WCT 290.2 BUY 1.12 9.3 9.0 0.4 0.3 2.7 2.7 4.6 -1.1 Muhibbah Eng 377.3 BUY 3.42 10.5 9.8 1.3 0.0 1.9 2.0 13.0 8.2 Kimlun 116.7 BUY 2.41 7.5 5.9 0.7 0.0 3.2 4.1 10.9 13.4 SunCon 525.0 HOLD 2.18 15.6 14.0 3.9 3.4 3.2 3.6 26.7 26.0 Simple Average 11.7 10.6 1.3 0.9 2.7 2.9 11.5 10.8 Source: Company, AllianceDBS

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Equity Explorer Gabungan AQRS

AllianceDBS Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters: 1 (>20% potential returns over the next 12 months) 2 (0 - 20% potential returns over the next 12 months) 3 (negative potential return over the next 12 months) The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment) Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon official initiation of regular coverage of the stock.

Completed Date: 13 Jun 2018 16:02:21 (MYT) Dissemination Date: 14 Jun 2018 08:20:22 (MYT)

Sources for all charts and tables are AllianceDBS unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (''AllianceDBS''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of AllianceDBS Research Sdn Bhd (''AllianceDBS'').

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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Equity Explorer Gabungan AQRS

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Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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Equity Explorer Gabungan AQRS

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DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. DBSVS is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws.

Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

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For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

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Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

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Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.

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Equity Explorer Gabungan AQRS

United This report is produced by AllianceDBS Research Sdn Bhd which is regulated by the Securities Commission Malaysia. Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, International Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Financial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for Centre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Emirates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

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Equity Explorer Gabungan AQRS

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HONG KONG MALAYSIA SINGAPORE DBS Vickers (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Paul Yong Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 65 6878 8888 , Malaysia. Tel: 65 6878 8888 Fax: 65 65353 418 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong e-mail: [email protected] Company Regn. No. 196800306E

INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

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