Impact of new export tax rate system 15 October 2012 OVERWEIGHT. Rationale for report : Sector update

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1 Investment Highlights PLANTATION SECTOR Impact of new export tax rate system 15 October 2012 OVERWEIGHT Gan Huey Ling Rationale for report : Sector update (Maintained) Positive for Sabah upstream players. We believe that the export tax structure to be implemented on 1 January 2013 would give upstream plantation players more avenues to sell their CPO products. They would not have to depend on the local refiners to buy their products. No significant impact on the profits of Sabah upstream players. This is because the upstream players in Sabah are already realising a lower CPO price due to the RM80-100/tonne discount imposed by the refiners in the state. With the export tax structure, upstream companies can either sell CPO to the refiners in Sabah and absorb the RM80-100/tonne discount or export overseas and pay RM124/tonne (assuming a tax rate of 5% on CPO price of RM2,480/tonne) in export taxes. Based on this, the difference between the refiners discount and export tax would be about RM24/tonne. This would not have a material impact on the profitability of the upstream players in Sabah. For every RM100/tonne change in CPO price, net profit of the large plantation companies would change by 2% to 3% while that of the smaller companies would change by 5% to 7%. Alternatively, plantation companies in Sabah could sell their CPO on the MDEX futures market or ship their CPO to the refiners in Peninsular Malaysia. However, upstream companies in Peninsular Malaysia would record lower CPO prices. This is because refiners in Peninsular Malaysia have not imposed the discount of RM80-100/tonne on CPO prices unlike their counterparts in Sabah. Hence, the new export tax rate structure would affect the profitability of upstream companies in Peninsular Malaysia. This means that CPO prices in Peninsular Malaysia would converge close to prices in Sabah in the future. Most of the plantation companies under our coverage have more exposure to Indonesia and Sabah compared to Peninsular Malaysia. Positive for refiners especially those in Peninsular Malaysia. Refiners in Malaysia would enjoy a more level playing field with their Indonesian counterparts. Based on the new export tax structure in Malaysia, the rate would be 5% at current prices. There is no export tax on refined products in Malaysia. In Indonesia, the current export tax rate on CPO is 13.5% and 6% for refined palm olein (cooking oil). In essence, the discount to CPO price in Malaysia would be about 5% compared with Indonesia s 7.5% (13.5% less 6%). This means that Indonesian refiners would only have a 2.5-percentage point advantage in terms of CPO cost or about RM81/tonne. In contrast, the price differential between CPO in Malaysia and Indonesia is roughly RM469/tonne presently. Companies with overseas refineries could be shipping out their CPO supply now. Export taxes would erode operating margins of these companies next year. Without the tax-free CPO export quota, companies would be incurring export taxes when they ship their CPO to their refineries overseas next year. We believe that these companies would be trying to ship out as much CPO as they can, to their overseas operations in the remaining 2 ½ months of the year. We reckon that these companies would either use their remaining quota or obtain quota from parties, which have not used up their quota. In a recent news report, the Minister was quoted as saying that he would ask companies, which have not used up their quota to surrender to those, which have no problems exporting. IOI Corporation has roughly 1.2mil tonnes of annual refining capacity in the Netherlands and 550,000 tonnes/year of specialty fats manufacturing capacity in the Netherlands and the US. Sime Darby has an annual refining capacity of about 500,000 tonnes in the Netherlands. The annual production capacity of Kuala Lumpur Kepong s oleochemical plants in China and Europe is estimated at 437,000 tonnes/year. Why isn t the export tax structure implemented now? We believe that the government is not implementing the export tax system immediately so that companies, which are in the midst of shipping out their CPO under the tax-free quota system, would not be affected. Also, companies, which have not exhausted their tax-free CPO quota, would still have time to do so. PP12246/05/2013(032379)

2 Issue of demand. With an improved cost advantage, we reckon that Malaysian refiners would be encouraged to buy CPO from the upstream players and sell competitively against their Indonesian counterparts. We understand that overseas buyers prefer to buy refined palm products from Malaysia due to its better quality. With the smaller price difference between palm products in Malaysia and Indonesia, we believe that buyers would not mind paying a small premium for Malaysian palm oil. In another development, a recent article on Bloomberg said that China may increase import orders for palm oil as the domestic price of palm oil is now more expensive than the price of overseas shipments. November shipments from Malaysia cost about 6,660 Yuan a tonne, 300 Yuan less than the domestic price. Possibility of Malaysian CPO exports softening next year as more refined products are being exported. What would India and Indonesia do? India may be affected next year if Malaysian plantation companies choose to sell their CPO to the local refiners instead of overseas customers. We wonder if India buyers would start stocking up on crude palm oil now. The Indian government has been encouraging imports of palm oil in crude form in support of its domestic refineries. Recently, the Indian government increased the base import price of refined palm oil by 118% to make imports of refined palm oil more expensive relative to crude. There is a risk that the Indian government may increase the base import price or import tax rate for refined palm oil. With Indonesian refiners facing competition from their peers in Malaysia and an excess supply in the refining industry, there is a risk that the Indonesian government may increase the export tax rate for CPO. The Indonesian government reviews the export tax rates every month. The Malaysian government has said that it would be discussing with the Indonesian Government to stabilise CPO prices. Malaysian government announces new export tax rate system. Last Friday, the Malaysian government announced that the export tax rate system would be implemented from 1 January 2013 onwards. The system would be on a step-up basis with tax rates ranging from 4.5% to 8.5% on CPO prices starting from RM2,250/tonne. For every RM150/tonne increment, the CPO export tax rate would rise by 0.5-percentage point (see Table 3). The tax-free CPO export quota would be abolished. Apart from this, the Malaysian government has also proposed to implement the B10 biodiesel programme, which would boost palm oil consumption by another 300,000 tonnes/year and incentives for replanting of old oil palm trees.. TABLE 1 : PEER COMPARISONS Share price FD EPS (sen) FD PEs (x) Fair values Upside FY12F GDPS FY12F Div yield (RM) FY12F FY13F FY12F FY13F (RM) (sen) IOI Corp % % KLK % % Kulim % % TH Plantations % % Gent Plant % % IJM Plantations % % TSH Resources % % Source: AmResearch AmResearch Sdn Bhd 2

3 TABLE 2 : INDONESIA S LATEST EXPORT TAX STRUCTURE Oct-12 Oct-12 Sep-12 Sep-12 Price Tax Price Tax (US$/tonne) % (US$/tonne) % Palm kernel PK meal Crude palm oil Crude palm kernel oil Crude palm oelin Crude palm stearin Crude palm kernel olein Crude PK stearin Palm Fatty acid distillate Hydrogenated Palm oil (bulk) >20kg Hydrogenated PKO (bulk) >20kg Hydrogenated Palm olein (bulk) >20kg Hydrogenated Palm kernel olein (bulk) >20kg Hydrogenated PK stearin (bulk) >20kg Hydrogenated palm stearin (bulk) >20kg RBD palm olein RBD palm oil RBD PKO RBD PK olein RBD PK stearin RBD Palm stearin Hydrogenated RBD palm olein Hydrogenated RBD palm oil Hydrogenated RBD PKO Hydrogenated RBD PK olein Hydrogenated RBD PK stearin Hydrogenated RBD Palm stearin RBD palm olein (branded <20kg) Palm-based biodiesel (fatty acid methyl ester) Source: Bloomberg AmResearch Sdn Bhd 3

4 TABLE 3 : MALAYSIA S REVISED EXPORT TAX RATE STRUCTURE CPO price Export tax rate (RM/tonne) (%) Less than Source: Bloomberg TABLE 4 : REFINING CAPACITY AND CPO PRODUCTION IN 2011 Refining capacity CPO Production Number of refineries Penin Msia 14,756,400 10,372, Sabah 6,859,800 5,843, Sarawak 2,386,000 2,695,534 6 Source: MPOB AmResearch Sdn Bhd 4

5 TABLE 5: REGIONAL VALUATION COMPARISONS PE (x) ROE (%) Dividend Yield (%) FY12F FY13F FY14F FY12F FY13F FY14F FY12F FY13F FY14F Indonesia PT Astra Agro PT Bakrie Sumatra PT London Sumatra BW Plantation Gozco Plantation PT SMART PT Salim Ivomas Pratama JA Wattie Provident Agro Sampoerna Agro Simple average Singapore Wilmar International Olam International Noble Group Golden Agri Resources Indofood Agri Resources Kencana Agri First Resources Bumitama Agri Mewah International Global Palm Resources Simple average Malaysia Genting Plantations IJM Plantations United Plantations IOI Corporation Kuala Lumpur Kepong Felda Global Ventures Kulim Sarawak Oil Palms TH Plantations TSH Resources Sime Darby Tradewinds Plantation Sarawak Plantations Hap Seng Plantations Simple average Source: Bloomberg

6 CHART 1 : HISTORICAL CPO PRICES (RM/TONNE) Source: MPOB Published by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan Kuala Lumpur Tel: (03) (general) (03) /99 (dealing) (03) (research) Fax: (03) The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 6