Malaysia. Tenaga Nasional Another loss-making quarter? Buy(unchanged) Results Preview 10 January Target price:

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1 Kim Eng Hong Kong is a subsidiary of Malayan Banking Berhad PP16832/01/2012 (029059) Malaysia Results Preview 10 January 2012 Buy(unchanged) Share price: Target price: RM6.09 Wong Chew Hann, CA wchewh@maybank-ib.com (603) RM6.90 (unchanged) Tenaga Nasional Another loss-making quarter? But, this should be the last of it. We believe that Tenaga s 1QFY12 results (scheduled for release on 17 January) will show it is still lossmaking due to lower-than-normal gas supply that requires burning oil and distillates to generate power. At x the cost of gas, this is a loss-making proposition. Nonetheless, this should be priced in. The business outlook has improved following implementation of the cost sharing mechanism that will provide at least RM2.0b to Tenaga, as well as the possibility that Tenaga will be granted a tariff hike. Maintain BUY, with unchanged target price of RM6.90 pegged to 13x FY12 PER. Core net loss of RM80m? We estimate that Tenaga will report a core net loss (ex forex, one-off items) of RM80m for 1QFY12, a significant improvement over the RM348m core net loss it reported in 4QFY11. Stock Information Description: National utility involved in the generation, transmission and distribution of electricity Information: Ticker: TNB MK Shares Issued (m): 5,456.8 Market Cap (RM m): 33, mth Avg Daily Volume (m): 3.30 KLCI: 1, Free float (%): Major Shareholders: % Khazanah 35.6 EPF 14.4 Skim AmanahSaham 10.4 Historical Chart Performance: 52-week High/Low RM7.21/RM4.89 TNB MK Equity Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) (1.8) (6.9) (9.1) Relative (%) (3.5) (3.7) (9.2) Gas supply remains the hobgoblin. We estimate average gas supply in 1QFY12 to be 1,010 mmscfd. This is much better than the 867 mmscfd received in 4QFY11, but well below its quota of 1,250 mmscfd. Tenaga has had to burn oil and distillates due to the gas shortfall, and we estimate this added RM1.0b to costs (versus additional cost of RM1.3b in 4QFY11). For the remainder of FY12, we expect an average gas supply of 1,050 mmscfd. Cost-sharing cheque yet to arrive. Tenaga has not yet received its cost-sharing reimbursement amounting to RM2.0b from PETRONAS and the Government, as both parties are tabulating and checking their numbers. Management is confident that payment will be made in FY12. We believe that the cost sharing mechanism will be extended whenever gas supply is <1,250 mmscfd, in lieu of the situation precedent. Buy, on improved outlook. The worst is behind us and Tenaga will be profitable with the cost-sharing agreement in place. There is a possible tariff hike in the works (exact timing is uncertain). Meanwhile, coal prices have receded by 20% in the last three months. Furthermore, the regasification plant in Melaka is on schedule to receive its first LNG consignment by August This will instantly resolve the natural gas supply shortage. Tenaga Summary Earnings Table FYE Aug (RM m) 2010A 2011A 2012F 2013F 2014F Revenue 30, , , , ,801. EBITDA 7, , , , , Recurring Net Profit 2, , , ,263 Recurring Basic EPS (Sen) EPS growth (%) 17.5 (81.1) DPS (Sen) PER EV/EBITDA (x) Div Yield (%) Net Gearing (%) ROE (%) Consensus Net Profit (RM m) - - 2,394 2,803 3,192 Source: Maybank IB SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

2 Gas shortage is the root of the problem Strong demand for power. Power demand growth in the first two months of 1QFY12 was an impressive 7.2% YoY, materially higher than management s initial guidance of 3%-4%. The major source of the strong demand is the commercial sector; this is highly beneficial to Tenaga because the commercial sector pays the highest tariff. Electricity off-take by the commercial sector made up 35% of Tenaga s unit electricity sales in the first two months of 1QFY12. Tenaga s unit electricity sales (Peninsula Malaysia) GWh Sep-Oct 2011 Sep-Oct 2010 Change (YoY) Industrial 6,810 6, % Commercial 5,543 5, % Domestic 3,301 3, % Others % Total 15,983 14, % Source: Company Depressed gas supply. Due to continuous disruption of gas facilities, Tenaga has been getting substantially less gas than its official quota of 1,250 mmscfd. We believe Tenaga received 1,010 mmscfd of gas in 1QFY12, a marked improvement over the previous three quarters. Tenaga s natural gas supply mmscfd 1,200 1,000 1,088 1, , FY10 1Q-11 2Q-11 3Q-12 4Q-11 1Q-12F Sources: Company, Maybank IB Tenaga may incur additional fuel costs of RM1.0b in 1QFY12. We estimate Tenaga to have incurred RM1,022m in costs from having to burn fuel oil and distillates in 1QFY12 based on our assumptions of: 1) power demand growth of 6.0%; 2) average gas supply of 1,010 mmscfd; and 3) average fuel oil price of USD124.1/bbl over the quarter. Tenaga s cost of fuel and distillate Gwh Oil Distillate 1,500 2,340 2,362 1,212 1,247 1,250 1,128 1,115 1,000 1, QFY11 2QFY11 3QFY11 4QFY11 1QFY12F Sources: Company, Maybank IB 10 January 2012 Page 2 of 6

3 Things to look forward to in 2012 Cost-sharing mechanism makes Tenaga profitable. The table below shows Tenaga s unit generation cost for various fuel types. Using oil and distillates alone would be loss-making and therefore not feasible. However, with the cost-sharing mechanism whereby Tenaga, PETRONAS and the Government equally split the additional cost of fuel, Tenaga would be marginally profitable. The current cost-sharing agreement covers the period from 1 January 2010 until 31 October Tenaga is expected to receive the reimbursement of RM2.0b soon after PETRONAS and the Government tabulates and verifies the figures. We believe that this sets a situation precedent whereby the cost-sharing mechanism will be applied if gas supply remains <1,250 mmscfd. This being the case, we can expect Tenaga to be compensated for the period from November 2011 onwards as the gas supply was below the threshold limit. Unit cost for power generation via various fuel type (4QFY11) Sen/kwh Without cost sharing Electricity tariff = Gas Coal Distillate Oil Sources: Company, Maybank IB Coal prices trending down. Another piece of good news is that coal prices have been easing since September 2011 and are now at USD97.6/ton. This is highly beneficial as a USD10/ton change in fullyear average coal prices realized translates to a RM550m change in Tenaga s fuel costs. Should the current downward trend in coal prices continue, Tenaga would enjoy substantial savings. Newcastle benchmark coal price (USD/ton) Steady downward trend has been established 90 Jan/2011 Mar/2011 May/2011 Jul/2011 Sep/2011 Nov/2011 Source: Bloomberg 10 January 2012 Page 3 of 6

4 Tariff hike review still on the cards. The second round of tariff reviews was supposed to be conducted in December There has been no announcement from the Government thus far. More interestingly, the Government has already imposed a 1% tariff hike for the Green Energy fund since December 2011, and there has been little resistance from the public. It could be that the Government is testing the waters first before eventually proceeding with a base tariff hike for Tenaga. Management s internal estimate is for a tariff hike of 4.0% based on the current coal price and base agreement with the Government. If this is successfully implemented, we estimate that it will raise net profit by an additional RM73m per month based on Tenaga s current cost structure. We have yet to impute this into our earnings forecasts pending the actual announcement. LNG regasification on track. We understand that the regasification plant in Melaka is progressing well and is on track to be completed by August This facility will inject 200 mmscfd into the national gas gridline, and thus fully satisfy Tenaga s natural gas requirements. This would mean burning oil and distillates for power generation will be a thing of the past. Tenaga s financial prospects will significantly improve, and we believe this is a key reason to be optimistic on Tenaga. First-generation PPAs coming to an end Energy Commission (EC) stamps its mark. The EC is targeting 4,500MW of gas generation capacity by 2017 via a combination of new and existing power plants. This is meant to replace the outgoing capacity of the first generation power purchase agreements (PPAs) that are due to expire in The first gas-fired 750MW power plant is up on offer and everyone (Tenaga and IPPs) are welcome to participate. Tenaga has confirmed that it will participate in the bidding for this project, but there have been no indications from the IPPs. We understand that the bidding process will start as early as 1Q12, with a possible outcome by 2Q12. Tenaga s MD has been very vocal that any proposal must be by way of an open tender process. We concur; this is a proven method to ensure competitive offers, and lower the eventual cost of power generation. We expect Tenaga will have a good chance of winning the bid as it has successfully forced the industry to be extremely competitive. Cases in point: the IRR for the Manjung power plant extension and that of new IPP Tg. Bin was at 6% at the project level, versus the mid-teen IRRs enjoyed by the first-generation IPPs. Long term positive, the IPP burden is easing. Although this project will only benefit Tenaga in the long term, it is an important milestone as it proves that the competitive landscape is improving. With the expiry of onerous first-generation PPAs, Tenaga is now less susceptible to uncommercial burdens and is able to manage its business outlook in a more transparent and economical way. 10 January 2012 Page 4 of 6

5 APPENDIX 1 Definition of Ratings Maybank Investment Bank Research uses the following rating system: BUY Total return is expected to be above 10% in the next 12 months HOLD Total return is expected to be between -5% to 10% in the next 12 months SELL Total return is expected to be below -5% in the next 12 months Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Some common terms abbreviated in this report (where they appear): Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings BV = Book Value FV = Fair Value PEG = PE Ratio To Growth CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders Funds EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date EV = Enterprise Value PBT = Profit Before Tax Disclaimer This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. 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This report is prepared for the use of Maybank Investment Bank Berhad's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank Investment Bank Berhad and Maybank Investment Bank Berhad accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. 10 January 2012 Page 5 of 6

6 APPENDIX 1 Additional Disclaimer (for purpose of distribution in Singapore) This report has been produced as of the date hereof and the information herein maybe subject to change. Kim Eng Research Pte Ltd ("KERPL") in Singapore has no obligation to update such information for any recipient. Recipients of this report are to contact KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law. As of 10 January 2012, KERPL does not have an interest in the said company/companies. Additional Disclaimer (for purpose of distribution in the United States) This research report prepared by Maybank Investment Bank Berhad is distributed in the United States ( US ) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Kim Eng Securities USA, a brokerdealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Kim Eng Securities USA in the US shall be borne by Kim Eng. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. This report is not directed at you if Kim Eng Securities is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Kim Eng Securities is permitted to provide research material concerning investments to you under relevant legislation and regulations. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply if the reader is receiving or accessing this report in or from other than Malaysia. As of10 January 2012, Maybank Investment Bank Berhad and the covering analyst does not have any interest in in any companies recommended in this Market themes report. Analyst Certification: The views expressed in this research report accurately reflect the analyst's personal views about any and all of the subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. Additional Disclaimer (for purpose of distribution in the United Kingdom) This document is being distributed by Kim Eng Securities Limited, which is authorised and regulated by the Financial Services Authority and is for Informational Purposes only.this document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers. Published / Printed by Maybank Investment Bank Berhad(15938-H) (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, MenaraMaybank, 100 JalanTun Perak, Kuala Lumpur Tel: (603) ; Fax: (603) Stockbroking Business: Level 8, Tower C, DataranMaybank, No.1, JalanMaarof Kuala Lumpur Tel: (603) ; Fax: (603) January 2012 Page 6 of 6