Director

23 July 2007

Rising global demand for CPO. Outlook for the palm oil industry is looking positive. First, demand for CPO worldwide is increasing. Consumption grew by more than 28% from 28.2m tons in 2003 to 36.3m tons in 2006. Secondly, prices of CPO have been soaring as under-cultivation in the past has resulted in supply lagging demand. CPO prices rose from a low of US$272 between Oct 2000 to Sept 2001, to a recent high of US$662.50 in Jun 2007.

GAR is a key player in the market. Golden Agri-Resources (GAR) is one of the world?s largest oil palm planters and producers of CPO, producing over 1.5m tons in FY06 and 336,955 tons in 1Q 2007. It has approximately 338,000 ha of planted area (including plasma), with a mature area of 293,000 ha (including plasma). It has the largest mature planted area among its peers. In addition, the age profile of GAR?s trees favourably positions it to capture the upside in CPO prices.

Strong R&D background. Its SMART Research Institute attempts to maximize yield by undertaking the full range of research in agronomic activities including fertilizer optimization, soil viability, mapping surveys, crop techniques, herbicide usage and pest and disease control. GAR?s subsidiary PT Dami Mas Sejahtera (Dami Mas) cultivates high yielding seedlings for its own use.

Expanded into downstream. GAR owes, operates and manages its oil palm plantations, mills and refineries, as well as the facilities for the manufacture of end user products from CPO and PK. Among other things, this vertical integration allows GAR to maximize its profit margins by monitoring market prices and adjusting the output of CPO and refined palm oil products accordingly.

Initiate coverage with BUY. As China?s per capita GDP increases, demand for refined vegetable oil products will also increase. China has to rely substantially on imports to satisfy domestic demand. As GAR is one of the leading players in the vegetable oil and oilseed processing businesses in China, the group is well positioned to capitalize on strong domestic demand. While the stock has already appreciated 113% this year, we believe that the outlook remains rosy for GAR, essentially supported by high CPO prices. We are initiating coverage on GAR with a BUY rating and a fair value estimate of S$3.22. This represents a 25% potential upside from the last closing price of S$2.57.