DBS Regional Industry Focus Plantation Companies Near term weakness

• Malaysia’s Aug10 palm oil production surprised on the upside, as Sabah/Sarawak FFB yields m-o-m recovered stronger than expected
• Exports dropped by 17.6% m-o-m, as Chinese, Pakistani demand slowed – pushing inventory up to 6-month high
• Downgrade Lonsum and Kencana Agri to FULLY VALUED. Top picks remain Sampoerna Agro, TSH Resources and Wilmar

Production boost in Sabah/Sarawak. Aug10 palm oil production data released by MPOB yesterday revealed a 5.7% m-o-m growth to 1.605m MT (slightly ahead of our forecast
of 1.577m MT), despite a typically slower fasting month. Aug10 FFB yields in Sabah/Sarawak had jumped by 9.6% mo-m and 11% y-o-y; while Peninsular yields were flat. We expect a somewhat slower Sep10 production growth (-0.9% m-o-m) to 1.591m MT (due to Eid holidays).

… met by slowdown in shipments. Aug10 shipments however slowed down significantly, led by m-o-m drops in exports to China (-44.4%) and Pakistan (-43.8%), as we
suspect demand for Eid and Mid Autumn festivals had been pre-shipped in July. We believe CPO’s persistent price strength and China’s huge soybean imports so far also played a part in switching some demand to soybean oil. Overall, exports dropped by 17.6% m-o-m to 1.211m MT – weaker than 1.302m MT we forecast last month. We anticipate Sep10 exports to regain some ground to 1.340m MT (+10.6% m-o-m). As a result of higher production volume and lackluster demand, palm oil inventories rose to a 6-month high at end of Aug10, representing stock/usage ratio of 9.5%. Seasonal pick up in production next month is expected to push this number higher to 9.8%.

Some downgrades; shift to laggards Since last month, spot CPO prices have been sustained at RM2,757/MT. This strength should dissipate as we enter into peak harvest
season and higher stock/usage ratio (to 11.5% in Oct10). In this report we downgrade Lonsum and Kencana Agri to FV, as we believe the strength is unjustified. Our upstream top picks remain laggards such as Sampoerna A. and TSH.

In favour of processors. We reiterate our view that processors such as Wilmar (our midstream top pick) will benefit given an anticipated near-term weakness in CPO prices, Already, we are seeing spot refining margin expanding; while spot
crushing margins are also rising on the back of flat soybean prices and rising soy oil and soy meal prices (pg. 3). A bountiful US soybean harvest in Sep-Nov10 would be a catalyst for more margin enhancement in 2H10. Soy oil and palm olein supply, on the other hand, may have to substitute some rapeseed oil demand on biodiesel mandates.