July 4, 2021 STRATEGY Malaysia THIS REPORT HAS BEEN PREPARED BY MAYBANK INVESTMENT BANK BERHAD SEE PAGE 114 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS PP16832/01/2013 (031128) Malaysia 2H21 Outlook and Lookouts Silver linings amidst the pandemic cloud For Malaysia macro, we reiterate our revised 2021 real GDP growth forecast of +4.2% (+5.1% previously); 2020: -5.6%) due to tighter restriction in May 2021 and lockdown since June 2021. We cut growth forecasts for non-manufacturing sectors on the supply side, and private expenditure on the demand side. Global economic recovery plus higher commodity ASPs cushioned downside to GDP via upgrades in manufacturing and external trade growth forecasts. Sizeable positive impulse from economic stimulus – and direct fiscal injection – remains given the additional PEMULIH package that adds to the yet to be utilized parts of earlier stimulus and Budget 2021 spending allocation, thus upward revision to Government consumption expenditure growth and unchanged outlook with regards anticipated public investment rebound. We raised 2021 budget deficit/GDP forecast to 6.8%, from 6.0%, and expect no change in current record-low 1.75% Overnight Policy Rate (OPR). A silver lining amid the pandemic cloud is the acceleration in COVID-19 vaccinations hence rising share of population fully-vaccinated, which is one of the conditions for exit from the current full lockdown, easing/lifting of restrictions, and re-opening of the economy. For Malaysia equities, bucking our bullish expectations, as articulated in our 2021 Strategy report (“Malaysia 2021 Market Outlook: Goldilocks makes a comeback”, dated Dec 14), of sustained recovery following broad uptrend over 4Q20, the KLCI’s momentum stalled into Jan, brought up short by the twin shocks of a renewed national Movement Control Order (MCO) and Proclamation of Emergency. Fiscal limitations and sustained institutional selling have also weighed negatively. However, while the path to full re- opening from the current lockdown (since June 1) looks to be an extended one, corporate earnings have proven resilient, and rapidly rising vaccination rates should allow investors to refocus on equities-supportive positives into 4Q21 i.e. accelerated earnings recovery, continued albeit moderated fiscal and monetary support, ample liquidity, commodities price recovery and relative attraction vs. fixed income. Re thematics, GLC restructuring is unlikely to gain traction (though revival of the Axiata-DiGi merger is welcome) given backdrop of political volatility and continuing GLC/GLIC management changes. The dividend yield and supply chain relocation thematics offer much greater structural investability, as does sustainability / ESG investing, as detailed in our recently-published Malaysia ESG Compendium (“Sustainability: No longer optional”, dated April 8). In the wake of 1Q21 reporting, we continue to expect the KLCI to see sharp earnings recovery in 2021 (2020/2021F: -11.9%/+49.0%; if excluding glove stocks, adjusted 2021F: +35% YoY) after three straight years of earnings contraction. However, in factoring in extended NRP and political risks, we moderate end-2021 KLCI target to 1,720 (15x forward earnings, -0.5 SD vs. mean), from 1,830 (16x, in line with historical mean) previously. Re sector positioning changes, we downgrade Construction (preferred sector picks are Gamuda, IJM), Utilities (Tenaga, MFCB) and Gloves (Hartalega) to Neutral (Fig 69), and raise Gaming to overweight (GENM, BST). We continue to like Mid-cap Financials (HLBK, RHB, Allianz), Tech/Semicon (Inari, Greatech), Large-cap Oil & Gas (Dialog, Yinson), Plantations (KLK, BPlant) and Auto (BAuto). We are selective on Telcos (Telekom), REITs (Axis), Property (SP Setia) and Logistics (MISC); we stay Underweight Aviation and Mid-cap O&G. Top BUYs (Fig 70) and Top SELLs (Fig 71) are detailed on pages 68-70, recommended ESG stock picks are per Fig 61, while conviction dividend picks (providing 5-9% cash yield) are in Fig 51. Analysts Suhaimi Ilias (Economics) (+603) 2297 8682 [email protected]Anand Pathmakanthan (Equity Strategy) (+603) 2282 3730 [email protected]Wong Chew Hann (Equity Research) (+603) 2297 8686 [email protected]Malaysia Economics, FX, Fixed Income and Equities Research Teams (please refer to backpages for the full list)
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
July 4, 2021
ST
RAT
EG
Y
Mala
ysi
a
THIS REPORT HAS BEEN PREPARED BY MAYBANK INVESTMENT BANK BERHAD
SEE PAGE 114 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS PP16832/01/2013 (031128)
Malaysia 2H21 Outlook and Lookouts
Silver linings amidst the pandemic cloud
For Malaysia macro, we reiterate our revised 2021 real GDP growth
forecast of +4.2% (+5.1% previously); 2020: -5.6%) due to tighter restriction
in May 2021 and lockdown since June 2021. We cut growth forecasts for
non-manufacturing sectors on the supply side, and private expenditure on
the demand side. Global economic recovery plus higher commodity ASPs
cushioned downside to GDP via upgrades in manufacturing and external
trade growth forecasts. Sizeable positive impulse from economic stimulus
– and direct fiscal injection – remains given the additional PEMULIH
package that adds to the yet to be utilized parts of earlier stimulus and
Budget 2021 spending allocation, thus upward revision to Government
consumption expenditure growth and unchanged outlook with regards
anticipated public investment rebound.
We raised 2021 budget deficit/GDP forecast to 6.8%, from 6.0%, and
expect no change in current record-low 1.75% Overnight Policy Rate (OPR).
A silver lining amid the pandemic cloud is the acceleration in COVID-19
vaccinations hence rising share of population fully-vaccinated, which is
one of the conditions for exit from the current full lockdown,
easing/lifting of restrictions, and re-opening of the economy.
For Malaysia equities, bucking our bullish expectations, as articulated in
our 2021 Strategy report (“Malaysia 2021 Market Outlook: Goldilocks makes
a comeback”, dated Dec 14), of sustained recovery following broad uptrend
over 4Q20, the KLCI’s momentum stalled into Jan, brought up short by the
twin shocks of a renewed national Movement Control Order (MCO) and
Proclamation of Emergency. Fiscal limitations and sustained institutional
selling have also weighed negatively. However, while the path to full re-
opening from the current lockdown (since June 1) looks to be an extended
one, corporate earnings have proven resilient, and rapidly rising vaccination
rates should allow investors to refocus on equities-supportive positives into
4Q21 i.e. accelerated earnings recovery, continued albeit moderated fiscal
and monetary support, ample liquidity, commodities price recovery and
relative attraction vs. fixed income. Re thematics, GLC restructuring is
unlikely to gain traction (though revival of the Axiata-DiGi merger is
welcome) given backdrop of political volatility and continuing GLC/GLIC
management changes. The dividend yield and supply chain relocation
thematics offer much greater structural investability, as does sustainability
/ ESG investing, as detailed in our recently-published Malaysia ESG
Compendium (“Sustainability: No longer optional”, dated April 8).
In the wake of 1Q21 reporting, we continue to expect the KLCI to see sharp
earnings recovery in 2021 (2020/2021F: -11.9%/+49.0%; if excluding glove
stocks, adjusted 2021F: +35% YoY) after three straight years of earnings
contraction. However, in factoring in extended NRP and political risks, we
moderate end-2021 KLCI target to 1,720 (15x forward earnings, -0.5 SD vs.
mean), from 1,830 (16x, in line with historical mean) previously. Re sector
positioning changes, we downgrade Construction (preferred sector picks are
Gamuda, IJM), Utilities (Tenaga, MFCB) and Gloves (Hartalega) to Neutral
(Fig 69), and raise Gaming to overweight (GENM, BST). We continue to like
With the country into tighter restrictions in May 2021 and lockdown since 1 June 2021, we cut 2021 real GDP growth forecast to +4.2% from +5.1% previously (2020: -5.6%). This mainly reflects lower growth forecasts for the largest segment of supply-side and demand-side of the economy i.e. services sector (2021E: to +4.2% from +5.1% previously; 1Q 2021: -2.3% YoY; 2020: -5.5%) and private consumption (2021E: to +3.9% from +5.9% previously; 1Q 2021: -1.5% YoY; 2020: -4.3%). Both are 58% and 59.5% of 2020 GDP respectively. Cushioning the downside to the revised 2021 GDP growth forecast is global economic recovery (2021E +6.1%; 1Q 2021 +2.8% YoY; 2020: -3.3%) which is positive for the export-oriented manufacturing and external trade, hence the upgrades in this year’s growth forecasts for manufacturing sector (2021E: to +6.3% from +5.2% previously; 1Q 2021: +6.6% YoY; 2020: -2.6%), exports of goods and services (2021E: to +15.5% from +7.5% previously; 1Q 2021: +11.9% YoY; 2020: -8.9%), and imports of goods & services (2021E: to +18.0% from +8.0% previously; 1Q 2021: +13.0% YoY; 2020: -8.4%). Upward revisions in external trade growth forecasts also reflect upgrades in the in-house forecasts for this year’s ASPs for crude oil (Brent) to USD65/bbl (USD55-60/bbl previously; 2020: USD42.3/bbl) and crude palm oil (CPO) to MYR3,100/tonne (MYR2,700/tonne previously; 2020: MYR2,781/tonne).
Acknowledging the challenging business and operating environment given the ins-and-outs of restrictions and lockdowns, we lowered this year’s private investment growth forecast to +4.1% from +6.3% (2020: -11.9%). Positively, 1Q 2021 private investment grew for the first time since 4Q 2019 by +1.3% YoY (4Q 2020: -6.6% YoY), driven by the first quarterly growth of “machinery & equipment” segment after nine quarters of contractions, signaling positive impact of budget incentives and economic stimulus measures to spur capital expenditure in technology adoption, automation and digitalization. Furthermore, corporate earnings rebounded since 4Q 2020 and total approved investment recovered strongly by +95.6% YoY in 1Q 2021 (2020: -19.5%), which augurs well for private investment outlook.
There are still sizeable positive impulse left from economic and fiscal stimulus i.e. around 60% of the eight economic stimulus packages totaling MYR530b and of Budget 2021’s MYR322.5b spending allocation, as well as around a quarter of the MYR65b COVID-19 Fund, to be spent. Thus we raised Government consumption growth forecast (2021E: to +5.0% from +2.8% previously; 1Q 2021: +5.9% YoY; 2020: +3.9%) and maintain public investment’s double-digit growth outlook (2021E: no change at +15.3%; 1Q 2021: -18.6% YoY; 2020: -21.4%) amid on-going major infrastructure projects and rollout of digital infrastructure capex.
Silver linings amid the pandemic clouds are rising trends in registrations for vaccinations, daily vaccinations and vaccinated population; as well as ramp up in vaccine supplies since June 2021.
We raised our 2021 budget deficit/GDP forecast to 6.8% from 6.0% previously, factoring in the additional direct fiscal injections from the economic stimulus packages year-to-date; revenue and denominator impact of slower GDP growth forecast; and upsides to commodity-related revenues from higher crude oil and CPO price assumptions.
We are sticking to our call of no change in current record-low 1.75% Overnight Policy Rate (OPR) this year amid “passive easing” from negative real OPR; easing in financial condition indicators (i.e. yield and credit spreads); the above-mentioned remaining positive impulse in economic/fiscal stimulus; and active use of other BNM policy tools e.g. loan moratorium; SME financing and microcredit schemes.
Manufacturing Purchasing Managers Index (PMI) pointed at reversals in monthly
GDP trend in May-June 2021 after Apr 2021 surge. Hinting at the reversal in
monthly GDP trend in May-June 2021 vs Apr 2021, Malaysia’s manufacturing
purchasing managers index (PMI) eased +12.5% YoY in May 2021 and fell -21.8% YoY
in June 2021 after the +72.2% YoY surge in Apr 2021, clearly signaling slower
manufacturing production index growth in May 2021 and decline in June 2021 after
the +68% YoY jump in Apr 2021 (Fig 6). In addition, CPO output fell further by -4.8%
YoY in May 2021 (Apr 2021: -7.5% YoY). Manufacturing production and CPO output
contribute to a quarter of GDP.
Google Mobility Index also indicates potential reversal in monthly real GDP trend
for May-June 2021 after the above-mentioned estimates of bumper real GDP
growth in Apr 2021 (Fig 7).
Figure 6: Malaysia – Manufacturing PMI vs Manufacturing Production Index (% YoY)
Figure 7: Malaysia – Google Mobility Index vs Real GDP
Source: Department of Statistics Malaysia (DOSM), CEIC Google Mobility Index is the average of "retail & recreation", "transit station", "workplaces", "grocery & pharmacy" & 'parks", and refers to % change on the date vs baseline which is the median index of the 5 week period of 3 Jan - 6 Feb 2020 Source: Department of Statistics Malaysia (DOSM), CEIC
Month, 2021 June July-Aug Sep-Oct Nov-Dec
Phases Phase 1 Phase 2 Phase 3 Phase 4
Expected Phase Transition Timeline Start 1 June mid-/end-July end-Aug end-Oct
Metrics / Threshold Values for Phase Transition Latest
7-Day Average COVID-19 Cases 24-30 June Average: 5,853 <4,000 <2,000 <500
% ICU Beds Use for COVID-19 Cases >90% i.e. 94% as at 15 June 2021 Moderate (<75%) Adequate Adequate
Vaccination Rate (% of Population) 30 June: 7.1% 10% 40% 60% (80% by end-2021)
Economic Reopening; Social & Movement
Restrictions
Full MCO. Essential economic
activities only with 60%
workforce capacity. Social &
movement restrictions
Open more economic
sectors e.g manufacturing
of automotive (vehicles &
components), cement,
ceramic, rubber, iron,
steel, & furniture as well as
commercial activities i.e.
computer &
telecommnications,
electrical appliances,
stationary & book shops,
car wash & hairdressing
salons; 80% workforce
capacity. Social &
movement restrictions
remain
All economic activities will
be opened with 80%
workforce capacity except
"negative list" (e.g.
conventions, pubs, spas,
beauty salons). Social
activities like education &
selected sports will operate
in stages
All economics sectors will
be opened and more social
activities will be allowed
including domestic travel
and tourism
(40)
(30)
(20)
(10)
0
10
20
30
40
50
60
70
80
Jan-
20
Feb-
20
Mar
-20
Apr-20
May
-20
Jun-
20
Jul-2
0
Aug-
20
Sep-
20
Oct-2
0
Nov-2
0
Dec-
20
Jan-
21
Feb-
21
Mar
-21
Apr-21
May
-21
Jun-
21
Manufacturing PMI Manufacturing Production Index
(70)
(60)
(50)
(40)
(30)
(20)
(10)
0
(30)
(25)
(20)
(15)
(10)
(5)
0
5
10
Jan-
20
Feb-
20
Mar
-20
Apr-20
May
-20
Jun-
20
Jul-2
0
Aug-
20
Sep-
20
Oct
-20
Nov-2
0
Dec-
20
Jan-
21
Feb-
21
Mar
-21
Apr-21
May
-21
Jun-
21
Real GDP (% YoY) Google Mobility Index (RHS)
July 4, 2021 7
Strategy Research
Slower 2021 real GDP growth forecast, driven by services &
private consumption growth downgrades
Slower 2021 GDP rebound on downgrades in services and private consumption
growth forecasts (Fig 8). We continue to expect the Malaysian economy to rebound
but by a slower +4.2% vs +5.1% previously (2020: -5.6%).
Assuming 1½-2 months FMCO or Phase 1 of NRP. We assume current FMCO or
Phase 1 of NRP to be between 1½ to 2 months. Our forecast applies the official
estimate for daily GDP losses of MYR1b which is less then the official figure of
MYR2.4b incurred during MCO1.0 as more sectors, industries, businesses and
companies are allowed to operate, as well as are better prepared and well-
adjusted to the lockdown this time around.
The downward revision in this year’s GDP growth mainly due to slower services
sector and private consumption growth forecasts. We lowered the growth
forecasts for services sector (2021E: to +4.2% from +5.1% previously; 1Q 2021: -
2.3% YoY; 2020: -5.5%) on the supply side and private consumption (2021E: to +3.9%
from +5.9% previously; 1Q 2021: -1.5% YoY; 2020: -4.3%) on the demand side. Both
are the largest component of supply-side and demand-side GDP i.e. 58% and 59.5%
of 2020 GDP respectively, and most sensitive to, and most impacted by, tighter
movement restrictions and lockdowns.
Figure 8: Malaysia - Real GDP
% YoY ACTUAL MAYBANK OFFICIAL
1Q
2020 2Q
2020 3Q
2020 4Q
2020 1Q
2021 2020 2021E
2021E Previous
2022E 2022E
Previous 2021E*
Real GDP 0.7 (17.2) (2.7) (3.4) (0.5) (5.6) 4.2 5.1 6.0 5.0 6.0-7.5
Crude Palm Oil (MYR/tonne, average) 2,781 4,067 (6M) 3,100 2,600 2,800-3,000 * Under review Source: Department of Statistics Malaysia (DOSM), Bank Negara Malaysia (BNM Annual Report 2020), Maybank Kim Eng
Additional factor for trimming our consumer spending growth forecast is the
upward revision to this year’s unemployment rate to 4.7% from 4.5%
Figure 12: Malaysia – Skill-Related Under-Employment Rate (%)
Figure 13: Malaysia – Skill-Related Under-Employment Growth
Note: Skill-related under-employment represents workers with tertiary education who took up semi-skilled and low skilled occupations due lack of opportunities in the job market and are willing/want to change their jobs to make use of their qualifications and occupational skills more effectively Source: Department of Statistics Malaysia (DOSM)
Source: Department of Statistics Malaysia (DOSM)
Figure 14: Malaysia – Numbers of Workers Retrenched Figure 15: Malaysia – Wages & Salaries in Manufacturing & Services Sectors (% YoY)
Note: 1H 2021 data was up to 25 June 2021 Source: Social Security Organisation (SOCSO)
Source: CEIC
Wage subsidies, direct cash assistances and fiscal incentives for discretionary
spending limit the downside on private consumption. Mitigating factors on the
job market situation and consumer spending include Wage Subsidy Programme
(WSP1.0-WSP4.0) with allocations totaling MYR24.4b, where based on our tracking
since its rollout last year up to June 2021, MYR15.8b has been approved and
disbursed, benefiting over 3m workers.
There are also the direct cash assistances, namely the one-off measures under the
economic stimulus packages i.e. Bantuan Prihatin Rakyat (BPR), Bantuan Khas
COVID-19 (BKC – Special COVID 19 Assistance) and job loss assistance, as well as
the annual cash handout Bantuan Prihatin Negara (BPN, formerly “BR1M” under BN
Government and “BSH” under PH Government) - to over 11m recipients from the
low-and-middle income and vulnerable households and individuals totaling
MYR37.5b in 2020-2021.
Further, the Employees Provident Fund (EPF) measures add to disposable income
and cash in hand for consumers i.e. option for lower workers’ monthly EPF
contribution rate for 2021 of 9% vs the mandatory 11% that is estimated to
potentially boost disposable income by as much as MYR9b, and the withdrawals
from Account 1 (i-Sinar) and Account 2 (i-Lestari) that totaled MYR77.57b as of to-
1,183 1,281
1,312 1,333
1,307 1,408
1,446 1,404
1,461 1,417
1,555 1,541
1,637 1,674
1,763 1,887
2,093
8.2 8.9 9.1 9.1 8.9
9.5 9.7 9.4 9.7 9.4 10.3 10.1
10.7 11.2
11.7 12.4 13.7
0
2
4
6
8
10
12
14
0
500
1,000
1,500
2,000
2,500
1Q17 3Q17
1Q18 3Q18
1Q19 3Q19
1Q20 3Q20
1Q21
Skill-Related Under-Employed - Number ('000, LHS)
Skill-Related Under-Employment - % Share of Total Employment (5)
date4 i.e. MYR19.6b under i-Lestari and MYR57.97b under i-Sinar, with potential
additional MYR30b from the latest withdrawal scheme i-Citra.
At the same time, household income in the plantation sector is buoyed by the high
crude palm oil (CPO) prices (6M2021: MYR4,067 per tonne; 2020: MYR2,781 per
tonne).
In addition, to boost discretionary consumer spending, the Government extended
for the second time the stamp duty and sales tax exemptions for purchases of
residential property and cars respectively until end-Dec 2021. These exemptions
were first introduced under the “PENJANA” economic stimulus package back in
June 2020. And under the “PERMAI” economic stimulus package in Jan 2021, the
Government extended the special MYR2,500 personal income tax relief for
purchases of mobile phones, computers and tablets until 31 Dec 2021 following its
expiry on 31 Dec 2020.
There is also the prospect of “pent-up” consumer spending by the “cashed-up”
individuals later in the year – and more so next year – as economy re-opens
following rising vaccinations that is targeted to reach the targeted 80% population
coverage by Dec 2021. The fuel for the “pent-up” spending is the “cashed-up”
consumers as implied by the surge in banking system’s savings and demand deposits
held by individuals (Fig 16) to levels well above what it could have been (dotted
red line) had there been no pandemic and the deposits continued to grow at the
same pace as the immediate pre-COVID19 months.
Figure 16: Malaysia – Individuals’ Savings & Demand Deposits in the Banking System (MYRb)
Note: Dotted red line refers to estimated individuals’ savings & demand deposits since Jan 2020 assuming 3.2% YoY monthly growth (i.e. the average in 2017-2019)
Source: BNM, Maybank Kim Eng
4 Ministry of Finance’s LAKSANA Report #52, 6 May 2021 & EPF CEO interview with
theEdge, 24 June 2021
200
210
220
230
240
250
260
270
280
290
300
310
Jan-1
8
Mar-
18
May-1
8
Jul-
18
Sep-1
8
Nov-1
8
Jan-1
9
Mar-
19
May-1
9
Jul-
19
Sep-1
9
Nov-1
9
Jan-2
0
Mar-
20
May-2
0
Jul-
20
Sep-2
0
Nov-2
0
Jan-2
1
Mar-
21
May-2
1
July 4, 2021 11
Strategy Research
Positive impact on manufacturing & external trade from
global economic rebound provide some cushion
Further cushioning the downside to Malaysia’s 2021 GDP growth is the rebound in
global economy (Fig 17), which is positive especially for the export-oriented
manufacturing sector (70% of manufacturing sector and 15% of GDP), and on
external trade on the demand side, where total trade (exports + imports) is 116.5%
of GDP and net external trade (exports – imports) is 6.5% of GDP. We calculated
global real GDP rebounded +2.8% YoY in 1Q 2021 (4Q 2020: -0.3% YoY; 1Q 2020: -
1.5% YoY) – the first quarterly YoY growth since 4Q 2019, and expect the global
economy to expand by +6.1% this year (2020: -3.3%).
Global Composite Purchasing Managers Index (PMI) averaged 57.6 in Apr-May 2021
Source: Bloomberg & CEIC (1Q 2020 - 1Q 2021, 2019-2020); Maybank Kim Eng Economics Research (World quarterly & annual; ASEAN-6's 2021-2022); Average of Consesus, IMF World Economic Outlook, OECD Economic Outlook & ADB Development Outlook (2021-2022 for others)
5 Vietnam Economics - Modest 2Q GDP Recovery, Covid Wave Remains A Risk, 29 June 2021 6 Singapore Economics - Manufacturing Jumps on Low Base, Expect Flash 2Q GDP at +12.8%,
Total Approved Investment Real Private Investment (RHS)
July 4, 2021 15
Strategy Research
Figure 23: Malaysia – Components of Gross Fixed Capital Formation
Source: CEIC
Silver linings on COVID-19 vaccines supplies & vaccinations
Speeding up vaccination is now considered “sine qua non” for recovery by
complementing macroeconomic stimulus measures; flattening the pandemic curve;
accelerating the process of easing and exiting containment measures thus re-
opening of the economy; as well as quickening the achievement of herd immunity
The concern was the earlier slow pace of vaccination since the National COVID-
19 Immunisation Programme (PICK) kicked off on 24 Feb 2021. By end June 2021,
8,083,685 people have been vaccinated (5,774,667 first doses and 2,309,018 two
doses) vs 16,846,760 people registered to get vaccinated (68.3% of target
population to be vaccinated).
A silver lining for Malaysia amid the pandemic cloud is that our tracking of
vaccination registrations, daily doses as well as vaccines supplies are heading
in the right direction, in relation to the official targets of 10%, 40%, 60% and 80%
population fully vaccinated by mid-July 2021, end-Aug 2021, end-Oct 2021 and
end-2021 respectively amid rising trends in weekly registration for vaccination (Fig
24), daily vaccination (Fig 25) and percentage of vaccinated population (Fig 26),
while monthly supplies of vaccines is ramped up in June 2021 onwards after the
slow pick up in Feb-May 2021 (Fig 27).
Figure 24: Malaysia – Weekly Numbers of People Registered for Vaccination
Figure 25: Malaysia – Daily Vaccinations (Number of Doses)
Source: Special Committee on COVID-19 Vaccine Supply (JKJAV) Source: Special Committee on COVID-19 Vaccine Supply (JKJAV)
(45)
(40)
(35)
(30)
(25)
(20)
(15)
(10)
(5)
0
5
10
15
20
25
1Q
2016
2Q
2016
3Q
2016
4Q
2016
1Q
2017
2Q
2017
3Q
2017
4Q
2017
1Q
2018
2Q
2018
3Q
2018
4Q
2018
1Q
2019
2Q
2019
3Q
2019
4Q
2019
1Q
2020
2Q
2020
3Q
2020
4Q
2020
1Q
2021
Machinery & Equipment
Structure
Other Assets
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
1,100,000
1,200,000
1,300,000
1,400,000
1,500,000
1,600,000
1,700,000
9-15
16-2
23-2 30
6-12
13-1
20-2 27
4-10
11-1
18-2
25-3 1-
7
8-14
15-2
Weekly Registrations for Vaccination 4-week Moving Average
0
40,000
80,000
120,000
160,000
200,000
240,000
280,000
320,000
360,000
400,000
440,000
1-Mar
-21
11-M
ar-2
1
21-M
ar-2
1
31-M
ar-2
1
10-A
pr-2
1
20-A
pr-2
1
30-A
pr-2
1
10-M
ay-2
1
20-M
ay-2
1
30-M
ay-2
1
9-Ju
n-21
19-J
un-2
1
29-J
un-2
1
Daily Doses
7-Day Moving Average
Target Average Daily Doses in June-July 2021
July 4, 2021 16
Strategy Research
Figure 26: Malaysia – % of Population Vaccinated (1 Dose and Fully-Vaccinated)
Figure 27: Malaysia – Supply of Vaccines (doses)
Source: Special Committee on COVID-19 Vaccine Supply (JKJAV) Source: Maybank Kim Eng’s compilation of actual (Feb-May 2021) and expected/estimated (June-Sep 2021) deliveries of Pfizer, AstraZeneca and Sinovac vaccines (based on official statements and media reports)
The Government is also increasing the numbers of COVID-19 vaccination centres
(PPVs) including several mega PPVs as well as drive-through PPVs in areas/states
with high population density like Klang Valley, Johor and Penang, as well as mobile
PPVs to facilitate vaccination in the rural and remote areas as well as for target
groups like the elderly and the disabled. Private hospitals and clinics are also
included into PICK with a total of 1,000 enrolled by end-June 2021. Further, sectors,
industries and employers have taken the initiatives together with the
Federal/State governments and on their own to undertake vaccinations of their
employees e.g. manufacturing, construction, plantation, transport, banks.
OPR: To cut or not to cut…?
OPR has been on holding pattern for a year now. BNM has kept the Overnight
Policy Rate (OPR) unchanged in the past five Monetary Policy Committee (MPC)
meetings after the 25bps cut at the 6-7 July 2020 MPC to current record-low of
1.75%. MPC meeting on 7-8 July 2021 will be a year after the last OPR cut.
Figure 28: BNM’s MPC Meetings, 2020-2021
Date Outcome
21-22 January 2020 OPR cut by 25bps to 2.75%
2-3 March 2020 OPR cut by 25bps to 2.505
(Note: SRR cut by 100bps to 2.00% announced on 19 March 2020,
effective 20 March 2020)
4-5 May 2020 OPR cut by 50bps to 2.00%
6-7 July 2020 OPR cut by 25bps to 1.75%
9-10 September 2020 OPR maintained at 1.75%
2-3 November 2020 OPR maintained at 1.75%
19-20 January 2021 OPR maintained at 1.75%
3-4 March 2021 OPR maintained at 1.75%
5-6 May 2021 OPR maintained at 1.75%
7-8 July 2021 TBA
8-9 September 2021 TBA
2-3 November 2021 TBA
Source: BNM
0
2
4
6
8
10
12
14
16
18
20
27-F
eb-2
1
6-Mar
-21
13-M
ar-2
1
20-M
ar-2
1
27-M
ar-2
1
3-Ap
r-21
10-A
pr-2
1
17-A
pr-2
1
24-A
pr-2
1
1-May
-21
8-May
-21
15-M
ay-2
1
22-M
ay-2
1
29-M
ay-2
1
5-Ju
n-21
12-J
un-2
1
19-J
un-2
1
26-J
un-2
1
% of population vaccinated (1 dose) % of population fully-vaccinated
3. Central Bank Liquidity & Financing Measures e.g. Reserve Requirement; BNM Asset Purchases; BNM’s SME Funding Scheme
4. Benchmark Interest Rate refers to cuts in BNM’s Overnight Policy Rate (OPR)
Source: Compilation by Maybank Kim Eng
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Dec-95
Jan-97
Feb-98
Mar-99
Apr-00
May-01
Jun-02
Jul-03
Aug-04
Sep-05
Oct-06
Nov-07
Dec-08
Jan-10
Feb-11
Mar-12
Apr-13
May-14
Jun-15
Jul-16
Aug-17
Sep-18
Oct-19
Nov-20
1 1 1 1
3
1
1 1 1 1 1 1 1
2
1 1 1 1
1
1 1 1
1 1 1 1
1 1
0
1
2
3
4
5
6
7
8
Jan-
20
Feb-
20
Mar
-20
Apr-20
May
-20
Jun-
20
Jul-2
0
Aug-
20
Sep-
20
Oct-2
0
Nov-2
0
Dec-
20
Jan-
21
Feb-
21
Mar
-21
Apr-21
May
-21
Jun-
21
Benchmark Interest Rate
Central Bank Liquidity & Financing Measures
Banking Sector Measures
Economic/Fiscal Stimulus Packages & Budget
July 4, 2021 20
Strategy Research
EQUITIES
July 4, 2021
ST
RAT
EG
Y
Mala
ysi
a
July 4, 2021 21
2H 2021 Outlook and Lookouts
Deferred, not derailed
COVID-centric setbacks = delayed market recovery
Bucking our bullish expectations, as articulated in our 2021 Strategy report (“Malaysia 2021 Market Outlook: Goldilocks makes a comeback”, dated Dec 14), of sustained recovery following broad uptrend over 4Q20, the KLCI’s momentum stalled into Jan, brought up short by the twin shocks of a renewed national Movement Control Order (MCO) and Proclamation of Emergency. Fiscal limitations and sustained institutional selling, both foreign and domestic, have also weighed negatively. However, while the path to full re-opening from the current lockdown (since June 1) looks to be an extended one, corporate earnings have proven largely resilient, and rapidly rising vaccination rates should allow investors to refocus on equities-supportive positives into 4Q21 i.e. accelerated earnings recovery, continued albeit moderated fiscal and monetary support, ample liquidity, commodities price recovery and relative attraction vs. fixed income. We retain a balanced positioning, via a mix of value and growth stocks, and continuing yield focus. Top BUYs (Fig 70) and Top SELLs (Fig 71) are detailed on pages 68-70, recommended ESG stock picks are per Fig 61, while conviction dividend picks (providing 5-9% cash yield) are in Fig 51.
1H21 recap: renewed pandemic-led headwinds As captured by Fig 1, the KLCI has been range-bound through 1H21, as a combination of renewed uptrend in daily COVID cases (Fig 2) and slow pace of vaccinations resulted in disruptive Movement Control Orders (MCOs) of various intensities (Fig 3). Undershooting GDP and lack of fiscal space, as underscored by the government resorting to tapping the National Trust Fund, further dented sentiment and overshadowed some mitigating positives, the latter including generally robust corporate reporting (Fig 14), undershooting NPLs (Fig 27) and strength in the exports-oriented manufacturing and commodities sectors (crude oil, CPO). While retail participation remained near records (Fig 13), sustained net selling by both foreign and domestic institutional investors (Fig 19) resulted in the KLCI being the worst performing benchmark in ASEAN over 1H21 (Fig 7; -6% YTD).
2H21 outlook: more pain before durable gains
Uncertain timeline for the National Recovery Plan (NRP; Fig 23), given the multiple preconditions necessary to enable phase transition, coupled with rising political risk ahead of the re-opening of Parliament, sets the market up for a difficult 3Q21. However, we see broadly improving visibility on these issues into 4Q21, with other equities-supportive factors including sharply higher vaccination rate, a more settled global economic recovery (Fig 24) and comparative asset class attraction vs. fixed income (Fig 35) and deposits, per negative real rates (Fig 31). Re thematics, GLC restructuring is unlikely to gain traction (though revival of the Axiata-DiGi merger is welcome; Figs 43-44) given backdrop of political volatility and continuing GLC/GLIC management changes. The dividend yield (Fig 50) and supply chain relocation (Figs 64-65) thematics offer much greater structural investability, as does sustainability / ESG investing (Figs 52-29; see our recently-published Malaysia ESG Compendium (“Sustainability: No longer optional”, dated April 8).
Balanced positioning, with ESG and yield overlays
In the wake of 1Q21 reporting, we continue to expect the KLCI to see sharp earnings recovery in 2021 (2020/2021F/2022F: -12.5%/+37.9%/+2.1%; if excluding glove stocks, adjusted 2021F/2022F: +28%/+14% YoY) after three straight years of earnings contraction. However, in factoring in extended NRP and political risks, we moderate end-2021 KLCI target to 1,720 (15x forward earnings, -0.5 SD vs. mean), from 1,830 (16x, in line with historical mean) previously. Re sector positioning changes, we downgrade Construction, Utilities and Gloves to Neutral (Fig 69), and raise Gaming to Overweight (GENT, BST). We continue to like Mid-cap Financials (HLBK, RHB, Allianz), Tech/Semicon (Inari, Greatech), Large-cap Oil & Gas (Dialog, Yinson), Plantations (KLK, BPlant) and Auto (BAuto). We are selective on Telcos (Telekom), REITs (Axis), Property (SP Setia) and Logistics (MISC); we are staying Underweight with regards the Aviation and Mid-cap O&G sectors.
KLCI vs. MSCI EM Index
Current KLCI: 1,533 (30-Jun-2021) YE KLCI target: 2021E 1,720 (15x forward PER)
of beats-to-misses was a high 2.2x (4Q: 1.3x), only the third time beats surpassed
misses since 1Q10 (Fig 15). Four sectors reported earnings outperformance – banks,
construction, petrochemicals and plantations – while, for a second consecutive
quarter, there were no sectors that broadly missed expectations.
Notwithstanding this positive bias, 1Q’s earnings upgrade-to-downgrade ratio of
1.7x (led by upgrades for banks, automotive, petrochemicals and plantations) was
significantly lower than the aforementioned beats-to-misses ratio, reflecting
analysts’ cautiousness due to the resurgent pandemic and renewed national
lockdown. In a related vein, we upgraded ratings for 5 stocks (4Q20: 12), and
downgraded 4 (3). Bumi Armada was raised to BUY; ViTrox, Lotte Chemical, UEM
Sunrise and Tan Chong were raised to HOLD; Sunway REIT and THP were cut to
SELL; HLFG and PChem were reduced to HOLD.
Fig 12: Malaysia key indices, 2021 YTD (% gains/(losses))
Fig 13: Foreign vs. domestic institution vs. domestic retail participation in equity trades since early-2010 (%)
Source: Bursa Malaysia, Maybank KE (chart) Source: Bursa Malaysia, Maybank KE (chart)
July 4, 2021 29
Strategy Research
Fig 14: Quarterly core net profit of research universe (those with quarter ended Feb/March 2021)
Note: Exclude stocks with FYE Jan, Apr, Jul, Oct; Source: Company results data, Maybank KE
Fig 15: Quarterly reporting: below-to-above expect-ations ratio (research universe)
Fig 16: Quarterly reporting: above expectations (% of research universe)
Source: Company results data, Maybank KE Source: Company results data, Maybank KE
Having consolidated the earnings changes for the respective stocks that reported:
Post-1Q21 reporting, combined core earnings for our research universe were
tweaked up by a small +1.2% for 2021E and +0.7% for 2022E. Also, core earnings
for 2020 are now +1.4% higher than our estimates back in early-Mar 2021, after
incorporating results of those that reported in March (for quarters ended Jan
2021).
For 2021E, after incorporating our recent earnings downgrade for Hartalega
and also the change in KLCI constituents in June (i.e. Mr.DIY replacing
Supermax) we now estimate our research universe’s core earnings to grow by
+39.8% YoY (vs. +44.3% per our estimates in early-Mar 2021) and for the KLCI,
+37.9% (vs. +50.1% previously).
Much of this high growth estimate is contributed by the Gloves sector, where
we expect their 2021E core earnings to be 2.2x that of 2020; and Banks, where
we expect core earnings to rebound +21% YoY after falling -19% YoY in 2020.
Petrochemical is another key contributor to our research universe’s core
earnings growth in 2021E; we expect core profits to double YoY.
Our estimated KLCI core earnings growth forecast is lower than that of our
research universe, partly due to Supermax (SUCB MK, CP: MYR4.13; Not Rated)
dropping out of the KLCI in June 2021, and being replaced by the relatively
smaller earnings base of Mr.DIY (MRDIY MK, CP: MYR3.66; BUY; TP: MYR4.00).
Fig 2: Below-to-above expectation ratio (research universe)
Source: Company results data, Maybank KE
Fig 3: Above expectation (% of research universe)
Source: Company results data, Maybank KE
July 4, 2021 30
Strategy Research
Excluding the Glove stocks would derive a lower core profit rebound of
+28.7% YoY (vs. +39.8% with Glove stocks) for our universe in 2021E. For 2022E,
corresponding profit growth is +16.3% (vs. +4.2% with Glove stocks).
As detailed in Fig 17 below (i.e. core earnings growth by sector), while only a
handful of sectors were able to deliver core earnings growth in 2020 (i.e. Gloves,
Plantation, Technology and Shipping, the latter essentially MISC), almost all
sectors are to see double-digit growth in 2021E, with key drivers being: i) the
gloves sector, where earnings are to more than double YoY; and ii) and
banks/financials, where earnings are forecast to rebound +21.1% YoY (on lower
provisioning and NIM recovery), after 2020E’s similarly (albeit negative trend)
provisioning and NIM-led -19.1% YoY decline. Re notable sector earnings upgrades,
an upward revision in Plantation earnings estimates incorporates revised-higher
CPO ASP assumption for 2021E of MYR3,100/t (from MYR2,700/t previously; 2022E
estimate of MYR2,600/t is unchanged). On the flipside, we expect Casinos and
Aviation to remain loss-making in 2021E as restrictions for both local and
international travel continue - only the former is forecast to return to profitability
in 2022E, albeit still below 2019’s pre-pandemic level of earnings.
Fig 17: Maybank KE Research universe core earnings, growth, PER, P/B and ROE (30 Jun 2021)
Source: Bloomberg, Maybank KE
Taking a closer look at market activity by participant, as shown in Fig 19, domestic
institutions, which were net buyers in Apr 2021 at MYR0.5b, turned net sellers in
May at MYR0.3b, and this continued into June at MYR0.5b. Meanwhile, domestic
retail investors were net buyers in May at MYR0.4b (Apr: +MYR0.6b), and this
continued for the 24th sequential month in June, with net buy of +MYR1.7b. For
Jan-June 2021, foreign investors net sold a total of MYR4.2b, domestic institutions
sold MYR4.0b, while domestic retailers bought MYR8.2b. The selling by domestic
institutions is not just due to weak sentiment given the uncertain domestic
economic, political and earnings outlook, but also: i) an increasing preference to
invest offshore in search of better returns (especially in “new economy” equity
markets like the US and North Asia) and diversification benefits; and ii) weaker
July 4, 2021 31
Strategy Research
contribution-withdrawal dynamics for investment funds, especially private sector
pension fund EPF, which has almost RM1tn AUM (Fig 18).
EPF’s measures to add to the disposable income and cash in hand of its 14.6m
members (c.7.6m active contributors) include: i) option for lower workers’
monthly EPF contribution rate for 2021 of 9% (vs. mandatory 11%) estimated to
potentially boost disposable income by as much as MYR9b; and ii) withdrawals from
Account 1 (70% of total pension savings; under the i-Sinar scheme) and Account 2
(30% of total pension savings; under the i-Lestari scheme) totaling MYR76b as of
mid-April 2021 i.e. MYR19.6b under i-Lestari (effective April 2020 – March 2021)
and MYR55.9b under i-Sinar (effective Jan-Dec 2021). The third EPF withdrawal
scheme announced as part of the aforementioned PEMULIH package, i-Citra, allows
EPF members to withdraw up to MYR5k from the combined balance of both Account
1 and 2. Official estimate suggests a MYR30b impact from i-Citra, but we think the
actual amount could be smaller, at about 50% of this expectation, considering that
many with low EPF balances might have already fully or significantly exhausted
their EPF savings through i-Sinar (Account 1) and i-Lestari (Account 2). In totality,
these three withdrawal schemes add up to a sizeable c.MYR100b in withdrawals,
weighing on EPF’s capacity to extend its historical support re market levels and
activities.
Fig 18: EPF: portfolio AUM breakdown as at 1Q21 (MYR b)
Portfolio Weightage Value
Equities 44% 432.1
Fixed Income Instruments 46% 451.7
Money Market Instruments 4% 39.3
Real Estate & Infrastructure 6% 58.9
TOTAL 100% 982.0
Source: EPF, Maybank KE (compilation)
Malaysia’s net foreign sell trend has no quick fixes, having long pre-dated the
pandemic (per Fig 22), with only some modest, temporary reversals, foreign net
selling of Malaysian equities has been unabated since 2013, and the cumulative net
sell since 2010 stands at MYR35.7b as at end-April 2021. Reasons for this continuous
downtrend are multiple, and include: i) Malaysia’s sharply reduced weightings in
global equity indices as faster-growing, large new emerging markets like China and
India muscle in – for example, Malaysia’s weightage in the MSCI Emerging Markets
Index has plummeted from a high of almost 20% in 1994, to 1.76% in 2020; ii)
trapped domestic liquidity, especially re government-linked investment companies
(GLICs) like EPF and PNB, which perpetuates high market valuations and has the
negative knock-on of weakening corporate governance discipline; iii) dominance
of poorly-managed government-linked companies (GLCs) with low profitability that
accentuate Malaysia’s “middle income trap” issues i.e. being “old economy”-
dependent, with correspondingly weak earnings growth prospects; iv) accelerated
erosion of Malaysia’s historical political stability premium since the 1MDB scandal
in 2015, and subsequent frequent changes in government and policy; and v)
negative sustainability/ESG-related developments across major market sectors
such as plantations, oil & gas, power generation and manufacturing.
In looking to catalyse a reversal of the negative foreign shareholding trend, the
biggest boost, in our view, would come from sharply reducing the dominance of
GLCs and GLICs which, by reversing the crowding out of the far more efficient
private sector, would improve the market’s profitability and governance metrics,
as well as valuations, liquidity and free-float. Incentivising the IPO of “new
economy” stocks, not just tech-related but also sustainability-linked industries like
renewable energy and recycling, would also help. Concerted regulatory action to
draw a line under Malaysia’s current negative ESG headlines and implement best-
practice sustainability reporting and processes would be a key draw for the rapidly-
growing pool of sustainability-themed AUM globally – see our maiden Malaysia ESG
July 4, 2021 32
Strategy Research
Compendium report “Sustainability: No longer optional”, dated April 8) for a full
update and assessment of Malaysia’s sustainability positioning at both the country
and individual company levels.
Fig 19: Cumulative foreign, domestic institutions and retail investors’ net buy/(sell) of MY equities in 2021 YTD (MYR b)
Fig 20: Foreign net buy/(sell) in June 2021 vs. 2021 YTD (USD b)
Source: Bursa Malaysia, Maybank KE (chart) Source: Bloomberg, Bursa Malaysia, Maybank KE (chart)
Fig 21: Malaysia equities rolling 12M foreign net buy/(sell) as % of market capitalisation
Fig 22: Cumulative foreign net buy/(sell) since 2010 (MYR b)
Source: Bursa Malaysia, Bloomberg, Maybank KE (calculation, chart) Source: Bursa Malaysia, Maybank KE (chart)
July 4, 2021 33
Strategy Research
2H21 outlook: more pain before durable gains
Vaccination rates are accelerating into 3Q21 – daily vaccinations are expected to
hit around 300,000-400,000 in the coming months, from a recent high of over
200,000 in mid-June - and the government has reiterated its expectation that the
country will achieve herd immunity, which is defined as 80% of the population fully
vaccinated, by end-2021. However, the transition from the current Full MCO (FMCO)
to a full reopening of all economic sectors looks to be an extended one, based on
the recently released National Recovery Plan (NRP). Announced on June 16, the
NRP outlines, as detailed in Fig 23 below, the metrics that will determine the
timelines for exit from the current lockdown (Phase 1) and the subsequent 3 phases
of post-lockdown staggered re-opening of economic activities as well as
progressive easing of social and movement restrictions.
There are three key metrics that need to show continued improvement for the
country to progress through the stages, namely: i) average daily COVID-19
infections; ii) public health system capacity (based on ICU bed use for COVID cases);
and iii) % of population fully vaccinated. Phase 4 – when all economic sectors will
be reopened and operating at 100% capacity, while more social activities will be
permitted, including domestic travel and tourism – is only envisaged to be possible
in Nov and the intervening months promise more economic pain and related
downside risk to corporate earnings, especially for the aforementioned “front-line”
sectors like consumer, retail, REITs, tourism and aviation.
Fig 23: Malaysia: National Recovery Plan
Source: PM’s Speech (15 June 2021), Maybank KE (compilation)
Notwithstanding the aforementioned drawn-out pathway to a full reopening, there
are several positive factors that will cushion the ongoing economic stresses faced
by the country and the corporate sector. One major mitigating factor is that large
developed markets, where vaccination penetration is far more advanced, are
already reopening their economies. This, coupled with sustained stimulative fiscal
and monetary policy, is underpinning MKE’s upbeat view on global economic
growth in 2021, at +6.1% YoY (Fig 24; 1Q21: +2.8% YoY; 2020: -3.3%). The ongoing
strong global demand rebound is validated by surging commodity prices and
shipping rates, and is a major positive for Malaysia’s export-oriented
manufacturing sector (70% of manufacturing sector and 15% of GDP i.e. a
significant support for labour income and employment), and on external trade,
where total trade (exports + imports) is 116.5% of GDP and net external trade
(exports – imports) is 6.5% of GDP.
July 4, 2021 34
Strategy Research
Fig 24: Global Real GDP
Source: Bloomberg & CEIC (1Q 2020 - 1Q 2021, 2019-2020); MKE Economics Research (World quarterly & annual; ASEAN-6's 2021-2022); Average of Consensus,
IMF World Economic Outlook, OECD Economic Outlook & ADB Development Outlook (2021-2022 for others)
On the domestic front, areas of strength that will buffer downside earnings risks
and support equity market sentiment are articulated as follows:
Resilient banking sector: as detailed in his banking sector update report
“1Q21 results round-up”, dated June 8, banks sector analyst Desmond
expects aggregate core banking sector earnings to grow +23% in 2021E
(2020: -21.9%; 2022E: +12.8%), as the key profitability drags experienced
in 2020 - higher credit costs due to pre-emptive provisioning, declining
NIM due to steep reduction in the OPR (-125bps) and modification loss
(totaling RM1.35bn at the net profit level) arising from the 6mth loan
moratorium (from 1 April to 30 Sept) – moderate. In terms of the impact
from the blanket loan moratorium (as contained within the PEMULIH
economic package announced June 28) effective from July 7, as
articulated in banks sector analyst Desmond Ch’ng’s update report
“Another blanket loan moratorium”, dated Jun 29, a worst-case scenario
that assumes a modification (mod) loss of similar quantum to that in 2020
per first blanket moratorium (Mar-Sept 2020) would reduce most banks’
earnings by a relatively manageable 0-6%.
While domestic loan growth is to remain challenging in 2021E (Fig 25;
+3.8%, vs. a moratorium-lifted +3.4% in 2020), NIMs are expected to
recover (+9bps, vs. 2020’s 10bps compression) as CASA surges (Fig 26) and
deposits fully re-price downwards to reflect the OPR cuts in 2020 (none
expected in 2021). Similarly, while asset quality deterioration is
anticipated – note BNM’s stress test projections in its 2H20 Financial
Stability Report indicate banks could see gross impaired loans (GIL) rise
to between 4.0% and 5.4% by end-2022 (April: 1.57%) – significant pre-
emptive provisioning has already been made by the sector over 2020 and
loan loss coverage is healthy (1Q21: 116% ex-regulatory reserves; 128% if
including regulatory reserves). This provisioning build-up is also reflective
of the potential medium-term risks posed by targeted repayment
assistance (TRA) loans which made up around 13% of total loans (vs. c.14%
at end-4Q20) for the banks under our coverage as at end-1Q21. Retail
July 4, 2021 35
Strategy Research
loans under TRA make up 11% of total retail loans and the percentage is
a higher 15% for non-retail loans; hence, we forecast moderating average
credit cost of 64/46bps in FY21E/22E (2020: 81bps).
As important as aforementioned projected earnings recovery is the
banking sectors’ strong liquidity and capital positioning. System liquidity
is ample (April Loan-to-Fund Ratio at 82%, while Liquidity Coverage Ratio
is at a near-record 152%, per Fig 33), having been buttressed by BNM’s
cuts to the Statutory Reserve Requirement (SRR) in March 2020, by 100bps
to 2.0%, and easing of related parameters (i.e allowing MGS and MGII to
be part of SRR compliance). Taken together, these measures released
MYR30b-MYR40b worth of liquidity into the banking system.
Capital backing is similarly ample, with April 2021 system CET1 ratio, core
capital ratio and risk-weighted capital ratios at 14.6%, 15.1% and 18.3%,
respectively. As highlighted in Fig 28 below, 1Q21group CET1 ratios were
generally comfortable at above 13% for all banks except AMMB, which saw
a plunge in its CET1 ratio following the 1MDB-related Global Settlement
provision of MYR2.83b. However, by utilizing the transitional arrangement
(TA), which allows banks to initially add back a portion of the Stage 1 and
Stage 2 provisions for Expected Credit Loss to core equity, and also having
successfully raised MYR800m fresh capital via a private placement in April,
AMMB’s CET1 ratio will rise to 12%.
Fig 25: YoY consumer loan growth (Jan 2010 – May 2021) Fig 26: Total deposits vs. CASA growth (Sept 2010 – May 2021)
Source: BNM Source: BNM
Fig 27: GIL ratios by segment Fig 28: CET1 ratios - commercial bank, group levels (1Q21)
Source: BNM Source: Banks, Maybank KE (chart)
July 4, 2021 36
Strategy Research
Expansionary fiscal policy, infrastructure stimulus: as detailed in Fig 29
below, since March 2020, the government has announced eight economic
stimulus packages worth a headline MYR530b or c.37.5% of GDP. However,
only a much more modest MYR83b or 5.9% of GDP is direct fiscal injections,
mostly involving direct cash transfers, as well as wage and other subsidies
for low-middle income groups. The remainder headline sums are off-
balance sheet measures, the biggest among which are blanket loan
moratoriums/targeted repayment assistance (TRA) by the banking sector,
eased EPF pension withdrawals/contributions (via three separate
programmes), corporate working capital loan guarantee scheme under
Danajamin) and various SME financing/guarantee schemes, including from
BNM. Besides direct spending, tax breaks are also part of the
government’s stimulus arsenal, most significantly extension of stamp duty
and sales tax exemptions for purchases of residential property and cars,
respectively, until end-Dec 2021 (these breaks were first introduced in
the PENJANA package in June 2020).
Scope for additional direct fiscal injections is limited – note the most
recent MYR150b PEMULIH package contained only MYR10bn in direct fiscal
injections, while the government was forced, in April, to tap the National
Trust Fund (KWAN; sole contributor is national oil & gas company
PETRONAS, with the fund totaling MYR19.2b as at end-2019) for MYR5bn,
ostensibly to pay for COVID-19 containment measures. Further, after
factoring in the aforementioned additional direct fiscal injection, the
revenue and denominator impact of downward revision in 2021E GDP
growth (from 5.1% to 4.2%), and upsides to oil-related income from higher
crude oil price assumption, we have raised 2021 budget deficit forecast
to 6.8% of GDP, from 6% previously (2020: 6.2%).
Nonetheless, as articulated in MKE Economics team’s recent update
report “Malaysia Macro: “Now-casting” slower 2021 GDP rebound”, dated
June 12, still-pending disbursements mean the economy will continue to
be supported by expansionary fiscal policy via a record Budget 2021 and
rolling economic stimulus packages. We estimate there is still 48% of the
total MYR380b economic stimulus packages left for deployment for the
rest of 2021 after 52% having been disbursed since 2020 up to May 2021.
Further, there is another MYR205b or 64% of Budget 2021 spending
allocation to be utilized. Higher-than-expected oil prices may also provide
capacity for additional spending measures – our sensitivity analysis shows
that every USD10/bbl increase in annual average crude oil price can lift
oil tax revenues by MYR4bn and Petronas dividend by MYR3.4b (Budget
2021 oil price assumption: USD42/bbl).
Fig 29: Economic Stimulus Packages 2020-2021
Source: Official Announcements, PM’s Speeches, Maybank KE (compilation)
July 4, 2021 37
Strategy Research
Infrastructure stimulus was expected to play a key role in meeting the
government’s 2021 GDP growth projection, as underpinned by Budget
2021’s 38% increase in GDE, to a record MYR69b. Longer term, under the
government’s Medium-Term Fiscal Framework (MTFF) 2021-23 which
provides fiscal projections for the next three years, the projected GDE
allocation for 2021-23 is MYR212.5b. With MYR69b GDE already set aside
for 2021, this leaves MYR143.5b for 2022-23, or MYR72b per annum,
implying sustained, if not higher infrastructure roll-outs over the medium
term, boding well for construction sector order books.
However, due to various MCO disruptions, government net development
expenditure in 1Q21 fell 24% QoQ, to MYR15.3b, which is 22% of the
Budget 2021 allocation. Construction activities (except for critical works)
have been halted again from June 1st under Malaysia’s FMCO. This came
just one week after a 60% workforce capacity directive was enforced from
25 May under MCO 3.0. With FMCO being in full-force in June and an 80%
workforce capacity cap under FMCO Phase 2 (anticipated in Jul/Aug), we
expect activities will remain subdued for much of the rest of the year,
hence limiting the multiplier impact on the economy for now –
nonetheless, we see spending / construction activity accelerating once
again into 2022 as the pandemic is brought under control, with a number
of big-ticket projects in the pipeline (Fig 30), including the National
Digital Infrastructure Plan (JENDELA), KVMRT3 and the High Speed Rail
(HSR). Given fiscal constraints, the public-private partnership (PPP;
JENDELA is an example, with 60% funding by industry players) model is
likely to be prioritized, with new major infrastructure projects such as
the KVMRT3 being implemented via Private Finance Initiatives (PFI) cum
deferred payment financing model.
July 4, 2021 38
Strategy Research
Fig 30: Infrastructure projects: brick-and-mortar + digital
Source: Various, Maybank KE (compilation)
Monetary/Liquidity conditions: while we do not expect further
reductions in the benchmark Overnight Policy Rate (OPR) in 2021 (2020: -
125bps, to 1.75%; last cut was in BNM’s July 2020 Monetary Policy
Meeting), “passive easing” is occurring via negative real OPR (Fig 31). Real
OPR remained negative in May 2021, at -2.65% (April 2021: -2.95%) as
inflation remained elevated at +4.4% YoY (April 2021: +4.7% YoY), with
the slight MoM moderation being due to the double-digit rise in transport
costs being offset by easing food inflation. For 5M 2021, real OPR was -
0.35% as inflation averaged +2.1%. Assuming unchanged OPR this year,
real OPR is projected to average -0.85% in 2021 (Fig 48; 2020 average:
+3.24%), based on our full-year inflation rate forecast of +2.6% (2020: -
1.2%), implying -409bps fall in real OPR this year (2020: +82bps).
July 4, 2021 39
Strategy Research
Fig 31: Headline Inflation and OPR
Source: CEIC, Maybank KE
Further, BNM has stated it would utilise all available policy levers as
appropriate to create the enabling conditions for a sustainable economic
recovery. In terms of buttressing system liquidity, besides the
aforementioned SRR reduction, BNM has also sporadically purchased MGS
since Feb, with current level of holdings equal to 1.3% of total MGS
outstanding, well below the 10% limit (Fig 34). Further, the automatic
loan moratorium in April-Sept has been replaced by targeted loan
moratorium extension and flexible loan repayments, which are extended
by the banking system to eligible borrowers until end-2021. Direct support
to the SME sector (Fig 32) has also been made available. With the MYR10b
allocation for the Special Relief Fund (SRF) fully utilized, BNM has
followed up with a further MYR2.5b in new SME lending schemes,
including expansion to the Targeted Relief & Recovery Facility (TRRF -
announced as part of Budget 2021 in Nov 2020) and a MYR0.7b top up to
the SME Automation & Digitalisation Facility (ADF), to MYR1b.
Fig 32: BNM Funds for SMEs
Source: BNM
July 4, 2021 40
Strategy Research
These combined liquidity supports coupled with the sharp decline in
deposit rates (which are pegged to the OPR) and aforementioned lower
EPF contributions have resulted in a sharp spike in CASA deposits growth
(Fig 26; +24.9% YoY in 1Q21, vs. broad deposits growth of +7.0% YoY).
Coupled with generally liquidity-flush bank balance sheets, as
underscored by near-record LCR (Fig 33), not only do banks have
significant leeway to manage funding costs and improve margins, as
reflected by our expectation of NIM recovery in 2021 (+9bps) as a driver
of sector earnings recovery, but there is ample scope for liquidity
deployment into higher-risk assets like equities in a bid to boost yields.
Fig 33: Banking system: Liquidity Coverage Ratio (LCR) trend Fig 34: BNM Holdings of Government Securities
Source: BNM Source: BNM, CEIC
Asset allocation favouring equities over fixed income: as articulated by
MKE Head of Fixed Income Winson Phoon in his MY Fixed Income 2H21
Outlook update report “ASEAN+ Rates Views: 2H21: No Clear Path”, dated
July 1, rising external yields will inevitably weigh on Ringgit bonds when
supply profile remains heavy (to fund wide fiscal deficits), demand faces
headwinds (especially that from banks and EPF, which together own over
80% of total GII and c.45% of total MGS outstanding – as flagged earlier,
the numerous withdrawal schemes for EPF savings as part of the fiscal
packages adds up to c.MYR100b in gross withdrawals) and the rate cut
cycle has likely come to the tail end (no further OPR cuts anticipated in
2021). Additional pressure albeit incremental is seen from the Dec 2020
move by Fitch to revise Malaysia’s sovereign rating down, from A- to BBB+.
Overall, MKE’s fixed income team believes both domestic and external
dynamics support the argument for high yields. Against this mildly bearish
view (see Fig 35), we maintain our 10-year MGS yield forecast of 3.30% by
end-1H21 and 3.50% by end-2021; MKE’s corresponding expectations for
the 10-year US Treasury yield are 1.6% and 1.8% by end-1H21 and end-
2021, respectively.
July 4, 2021 41
Strategy Research
Fig 35: Fixed income market outlook: by country
Source: Maybank KE
As shown in Fig 36, Ringgit government bonds delivered a strong return in
2020, marking the second year in a row where total return reached high
single-digit following a record 9.1% gain (price + coupon returns) in 2019.
The outperformance vs. equities is underscored by Fig 37, where the gap
between equity yield and 10yr MGS yield has widened considerably over
the last two years, to well above mean. As is being borne out YTD May
2021, a similarly exceptional performance in 2021 is unlikely, barring a
double-dip recession. A key headwind is heavy funding needs of the
government as fiscal deficit slippage continues (note MKE’s
aforementioned revision of 2021 budget deficit ratio to 6.8%, from 6.0%,
due to a combination of higher spending and lowered GDP growth
expectation). This implies not just heavy MGS issuance, but also a parallel
increase in off-balance sheet government-guaranteed (GG) bond supply
to fund key infrastructure projects and financial support to statutory
bodies and agencies.
Fig 36: MY Government Bond: Annual returns Fig 37: KLCI's equity premium (over 10Y MGS) at 401bps @ 30
Jun 2021 (mean = 243bps)
Source: Bloomberg, Maybank KE
*Total return in Ringgit for MGS and GII
Source: Bloomberg, Maybank KE
July 4, 2021 42
Strategy Research
A bright spot on the demand side has been that foreign buying interest
has remained strong. May’s net buying of MYR1.9b marked the 13th
consecutive month of inflows. Cumulative inflows since May 2020 totaled
a massive MYR62.1b, nearing the record of MYR67.9b in Dec 2010-Jul 2011,
which occurred during the QE period after the global financial crisis.
According to foreign composition data, which is released quarterly,
foreign official investors, i.e. central bank/government related funds,
contributed +MYR8.5b/65% of the total inflows in 1Q21, followed by
pension funds +MYR3b and asset managers +MYR3b while offshore banks
and insurance companies were net sellers of –MYR0.8b and –MYR0.7b
respectively in 1Q21. Nonetheless, while Ringgit debt still offers
attractive carry vs. USD, MGS demand by foreigners is likely to be more
muted for the rest of 2021 on anticipated global economic acceleration,
aforementioned weak domestic supply-demand dynamic and bottoming
interest rates, the latter being underscored by the Fed being expected to
give its first hint of QE Taper as early as in July’s FOMC, not ruling out the
first rate hike to come by the end of 2022.
Re sovereign ratings, as detailed in Fig 38 below, we believe additional
negative rating action from Fitch looks unlikely following the downgrade
to BBB+/stable in December 2020, while Moody’s is expected to keep
Malaysia at A3/stable. S&P also just reaffirmed Malaysia’s foreign
currency and local currency long-term issuer ratings at A- and A,
respectively, while retaining its negative outlook. This is despite
Malaysia’s debt metrics continuing to surpass S&P’s rating downward
indicators of “annual change in net general government debt >4%” and
“interest/revenue ratio >15%”, both probably on a sustained basis. As
such, the reaffirmation appears to be a matter of qualitative adjustment
by S&P to extend Malaysia on its negative watch.
Fig 38: Sovereign Rating: Positive and Negative Triggers
Country Fitch Moody’s S&P
Rating BBB+/Stable A3/Stable A- A-/Negative Last Update 04-Dec-20 28-Jan-21 22-Jun-21 Last Action Rating Downgrade Unchanged Unchanged
Positive Indications
● Sustained reduction in general government debt over the medium term, for instance due to implementation of a strong fiscal consolidation strategy. ● Improvement in governance standards relative to peers, e.g. through greater transparency and corruption control.
● Better prospect for fiscal consolidation e.g. broaden the revenue base, resulting in a sustained improvement in government debt burden and debt affordability. ● Enhancements to the institutional framework that raises governance standards, resulting in increased policy stability, better management of public finances and a boost to the country’s potential growth.
● Economy expands considerably faster than our forecast, and in turn produces a fiscal performance that’s better than we expected, reducing debt further than anticipated.
Negative Indications
● Weaker prospects for a reduction in government debt in the medium term to levels closer in line with peers, for instance due to an insufficient fiscal consolidation strategy after the coronavirus shock or crystallisation of contingent liabilities. ● Deterioration in governance standards, for example indicated by a lower score for the World Bank governance indicators.
● Fiscal strength deterioration through the weakening of debt and debt affordability, sharp rise in contingent liabilities and/or a softening of the commitment to medium-term fiscal consolidation. ● Volatile politics that undermine credibility and effectiveness of institutions and threaten the stability of capital flows. ● Weaker medium-term growth prospects through lower investments.
● Growth suffers a deeper or more prolonged downturn than we currently expect, or a weaker commitment to fiscal consolidation. ● Annual change in net general government debt >4% on a sustained basis, or interest/revenue ratio >15%. ● Deterioration in political stability such that policymaking becomes materially less predictable.
Source: Rating Agencies
July 4, 2021 43
Strategy Research
Firming commodity prices: Malaysia’s oil & gas (O&G) and palm oil
plantation industries are not only major contributors to the economy
(mining and agriculture are a combined 13% of GDP), employment and
exports (c.20% of total), but also represent significant weightings in the
KLCI, per Fig 42. Commodity prices in general have been enjoying an
uptrend since the lows seen in 2Q20 (Figs 39-40 below), against a
backdrop of recovering demand and constrained supply. In the crude oil
space, regional oil & gas sector analysts Kaushal Ladha and Thong Jung
Liaw, in their recent update report “Crude – summer burn”, dated June
21, have raised their forecast for this year’s average price for crude oil
(Brent) to USD65/bbl (USD55-60/bbl previously; 2020: USD42.3/bbl),
which is in line with the EIA’s (Energy Information Administration)
expectations, while 2022E’s price forecast is at USD64/bbl (vs. EIA’s
USD62/bbl). Their view reflects oil price trending lower HoH in 2H21,
premised on increased output from OPEC+ and potentially the lifting of
sanctions against Iran.
As articulated by regional plantations analyst Chee Ting in his recent
sector update “May stockpile has inched up only marginally MoM”, dated
June 10, we maintain our view that the current high crude palm oil (CPO)
prices are not sustainable going into 2H21 as CPO output is expected to
pick up seasonally. However, the present labour shortage in Malaysia may
result in harvest coming in below potential. Further, as CPO spot price
has corrected in recent weeks, it has become more price competitive vis-
à-vis other major vegetable oils. CPO price now trades at massive
discounts to other key vegetable oils, namely US SBO (USD585/t) and EU
rapeseed oil (USD618/t), which will be supportive of CPO price in the
immediate term. We have raised our CPO ASP assumptions for 2021 to
MYR3,100/t (from MYR2,700; 2020: MYR2,781/tonne) while leaving 2022E
unchanged at MYR2,600/t. With 5M2021 CPO price averaging MYR4,111/t,
revision risk appears to remain to the upside, with positive flow-through
Source: Bloomberg (as of 27 June), Maybank KE (chart) Source: Bloomberg (as of 27 June), Maybank KE (chart)
Domestic politics remains a key overhang: While we have highlighted
multiple positive drivers for the KLCI in 2021, the stars are not completely
aligned – continuing political uncertainty and related newsflow volatility
remains a headwind and a wildcard. Tensions among the ruling Perikatan
Nasional’s (PN) coalition partners, especially between the PM’s
(significantly smaller) party Bersatu, and UMNO that led the former
Barisan Nasional (BN) government, are clear. PN has been able to forestall
any potential vote of no confidence via the imposition of a State of
July 4, 2021 44
Strategy Research
Emergency on Jan 13, which effectively suspends Parliament (hence
securing the current government in place) until at least August, which is
when the Emergency is meant to expire. Piling pressure on the PM is the
recent Conference of Rulers meeting called by the King in June and
attended by the Malay Rulers (Sultans) of Malaysia’s various states, the
post-meeting declaration being that there was no need to place the
country under the Emergency beyond Aug 1, and that Parliament should
be reconvened as soon as possible. As such, a disruptive snap general
election (GE) in 2021 is a distinct possibility – well ahead of mid-2023 as
would be expected under the full 5-year GE cycle – especially if the
current third wave of COVID-19 is brought under control with the help of
accelerated vaccine deployment.
Political instability means continued distraction and delay to urgently-
needed policy resolutions and reforms, which spills into extended
sluggishness re private sector investment, which has struggled in the low
single-digits for much of the past decade. The latter is underscored by
extended weak domestic direct investment (DDI) i.e. the Malaysian
Investment Development Authority’s (MIDA) approved DDI had declined
6.0% pa from MYR175.1b in 2014 to MYR128.5b in 2019, while approved
foreign direct investment (FDI) increased 5.1% pa from MYR64.6b in 2014
to MYR82.9b in 2019. In pandemic-wracked 2020, DDI fell further to
MYR99.8bn (-22% YoY), while FDI came in at MYR64.2b (-22% YoY).
Exacerbating the investment deficit is uncertainty surrounding the
longevity of GLC/GLIC leadership. As was the case after the Pakatan
Harapan (PH) came to power in 2018, the new PN government has been
busy appointing and replacing key management at the country’s sprawling
GLCs (government-linked companies) and GLICs (government-linked
investment companies), all of which are under the purview of various
government ministries. Quite apart from the question of whether MPs or
other politically-affiliated personalities should be appointed to important
corporate sector positions, the threat of further potential changes to
GLC/GLICs leadership teams as the political winds change will hobble
management strategy and policy execution, to the detriment of the broad
economy.
At the equity market level, a clear lack of policy clarity is a major
investment deterrent. A slew of large economic sectors, as detailed in Fig
41 below, are awaiting government and regulatory policy
guidance/finality – this is over and above the ongoing uncertainties
created by reviews of tax structures and investment incentives, especially
given the country’s heavy fiscal burdens in the wake of Covid-19. Until
this is delivered, related private sector investment in these sectors will
remain tepid. Such policy clarity would, hence, be a significant economic
stimulus and re-rating catalyst for broad swathes of the equity market,
especially as many of these pending investments (e.g. airport expansions,
fiber broadband coverage/quality improvement) are high-multiplier in
nature, utilizing domestic labour and capital inputs, i.e. minimal leakage
(unlike, for example, the ECRL which requires large foreign labour and
capital inputs).
July 4, 2021 45
Strategy Research
Fig 41: Malaysia sector-specific regulatory lookouts
Sector Lookouts Comments
Aviation Regulated Asset Base (RAB) model
MAHB’s current Operating Agreement (OA) prescribes set Passenger Service Charges (PSC) regardless of the amount it invests/re-invests in airports. MAHB has been touting a new OA based on a RAB model that will set PSC depending on the amount it invests/re-invests in airports. This will essentially guarantee MAHB a set ROI. That said, its implementation has been delayed since 2019. MAHB recently declined to give guidance on when the new OA will be implemented. Further delays and potential revisions to the framework appear likely.
Banking Virtual Banking Guidelines; Alternative Reference Rate
The Exposure Draft on the licensing framework for digital banks was issued on 27 Dec 2019. It calls for digital banks to maintain minimum capital funds unimpaired by losses of MYR100m during the foundational phase and MYR300m thereafter. Moreover, BNM has imposed an asset threshold of not more than MYR2b in the initial 3-5 years of operations. Interested parties have been invited to apply and the licences are expected to be awarded early-2022. BNM has issued a Discussion Paper on introducing an Alternative Reference Rate (ARR) that is nearly risk free, and that will run parallel to the KL Interbank Offered Rate (KLIBOR). The market will have the flexibility to choose between either the KLIBOR or ARR as the reference rate for the pricing of financial instruments.
Consumer
Excise duties on devices and vape gels/juices; Legalisation framework for nicotine-based vape products
Budget 2021 has the government imposing excise duties of 10% on devices for all types of electronic and non-electronic cigarettes including vapes effective from 1 Jan 2021. Excise duties on liquids (i.e. vape gel/juices) used in electronic cigarettes will also be imposed at a rate of 40 sen per milliliter. We understand that the government is in the midst of drawing up a regulatory framework to legalise nicotine-based vapes but the timeline on this is still unclear.
Plantation
Possible re-introduction of CPO export duty exemption or revamp of the existing export tax structure in 2H21 Government to allow rehiring of foreign workers again toward end-2021 when the majority of the population has been vaccinated
Malaysia’s processed palm oil (PPO) is losing its price competitiveness vis-à-vis Indonesia as evidenced by creeping imports and declining exports YTD. This structural problem stems from Indonesia’s new progressive export tax structure introduced in December 2020 to raise levy to fund its B30 mandate. The GoM and industry should act fast to avert a repeat of 2012. After all, the refiners are an integral part of the ecosystem as 77% of all Malaysian exports between 2011 and 2020 are in the form of PPO. The refiners’ inability to operate profitably will result in low utilization rates which in turn, may lead to CPO inventory rising quickly in 2H during the seasonally peak production months. Eventually, it will send the wrong signals to the market that may lead to CPO price pressure on the downside. Due to COVID-19, the government has temporarily halted the hiring of the much-needed foreign workers into Malaysia since last year. This resulted in a net outflow of foreign workers the past 12 months as some workers chose to return to their home countries upon expiry of their contracts. Plantation companies are now suffering from acute shortage of labour which may result in suboptimal harvesting activities in 2H21.
Property Extension of Home Ownership Campaign (HOC) 2020-21
The government has granted a further extension for HOC 2020-21 for another six months, until 31 Dec 2021. This is on top of the policy easing measures announced in Budget 2021 last November i.e. stamp duty exemption on instruments of transfer and loan agreement for first time home buyers for residential properties up to MYR500k/unit is now extended until Dec 2025. These measures will help sustain buying sentiment, though further measures may be required if MCOs are extended.
Telco 5G plans and MSAP review
Recall the government has decided for Digital Nasional Berhad. (DNB is the government's wholly-owned SPV) to own, implement and manage a single 5G network in Malaysia. The incumbent telcos are to lease 5G capacity on a wholesale basis. Details pertaining to the technical specifications and the leasing rates are still being worked on, with some clarity possibly forthcoming in 2H21. Meanwhile, regulated access prices for fibre broadband are currently being reviewed, with new prices possibly in place beginning 2022. We do not expect a significant contraction from current rates.
Toll highway Highway restructuring proposal
Gamuda had, on 10 May 2021, confirmed its proposal to sell its four concession highways to an independent equity fund financed entirely by the private debt capital market. The proposal includes maintaining the current toll rates, with a short concession extension, which could relieve the government from paying any compensation during the proposal period. The government will have no equity interest in the buying entity, and there will be no cash outflows or guarantees required from the government.
If Gamuda's proposal goes through, we expect to see similar frameworks to be used for the restructuring of the other highway concessions.
Utilities Tenaga's RP3 terms
Tenaga will enter into a new regulatory cycle next year (RP3, 2022-2024) and has begun negotiations with the regulator for new terms. The RP3 base tariff would likely be announced in end-2021, with the detailed regulatory terms being disclosed in early-2022. We continue to not expect any deterioration of Tenaga's earnings in RP3. Tenaga has thus far managed to preserve its 7.3% regulatory return in RP2 (2018-2020) for an additional year in 2021.
Source: Maybank KE
July 4, 2021 46
Strategy Research
Following on from the above, we flag 4 market thematic ideas that bear watching,
and the leveraging of which could potentially deliver significant relative
outperformance for appropriately-positioned investors:
Thematic 1: GLC Restructuring
Government-linked companies (GLCs) dominate the KLCI, contributing around 40%
of KLCI market capitalisation (Fig 42) – this is ex-IHH, which we no longer consider
a GLC following Khazanah’s sale of a 16% stake in Nov 2018 to Mitsui, (which is now
the largest shareholder). Note the most recent semi-annual review of the 30-stock
KLCI in June 2021 did not involve GLCs, with rubber glove maker Supermax being
removed and replaced by recently-IPO’d consumer goods and home improvement
retailer Mr. DIY. Government-linked investment companies (GLICs) such as EPF,
PNB, Khazanah and KWAP dominate the shareholder lists of these GLCs, while state
oil & gas corporation Petronas, which is wholly-owned by the government, holds
majority stakes in its listed downstream operations. The GLCs are dominant in key
economic sectors such as banking, telcos, power, property and plantations, but
have broadly underperformed their non-GLC sector peers based on efficiency and
profitability metrics for decades.
While Malaysia, under the oversight of Khazanah, launched a GLC Transformation
(GLCT) Programme in 2004, introducing initiatives such as key performance
indicators and board-composition reform in a bid to improve accountability and
performance, the more tangible result over the programme’s 10-year course was
greater scale, not improved efficiency or shareholder returns. Such GLC dominance
effectively crowds out private capital, which is ceteris paribus, accepted as being
more efficient, competitive and value-generative for the broad economy. In
parallel, GLICs are a reliable share price support, displacing more hardnosed
private sector investors and distorting capital-market signaling that is essential to
optimizing capital allocation and value-creation discipline.
Bearing in mind the lessons learned from GLCT1, we would advocate a second and
more aggressive transformation programme (i.e. GLCT 2.0), that focuses on the
matching of capable, performance-linked and empowered management teams
with these asset-rich but efficiency lacking entities. Given their outsized
weightage in not only the equity market but also the broader economy, such GLC
reforms, if properly executed, represent the most tangible and internally-driven
opportunity to reinvigorate Malaysia’s broad economic dynamism.
July 4, 2021 47
Strategy Research
Fig 42: KLCI’s constituent ownership by controlling shareholders/GLCs/GLICs + next 5 stocks ranked by market cap.
Company Stock code Market Cap Non-GLC/GLIC major sh. (%)
EPF Khazanah PNB KWAP Petronas % total Total (MYRb) (%) (%) (%) (%) (%)
(MYRb)
1 Maybank MAY MK 93.5 14.1 48.3 5.0 67.4 63.0
2 Public Bank PBK MK 81.3 17.3 14.7 2.6 4.1 38.7 31.5
Source: Bloomberg, Maybank KE (compilation as of 27 June); Note: GLCs in orange highlights
Post-GE14 changes in leaderships at key GLICs, such as Khazanah and PNB, in
tandem with regulatory changes in sectors like telcos and power, this was seen as
an opportunity for flow-through comprehensive restructuring of GLC management
teams and corporate structures (i.e. streamlining, asset disposals). The matching
of capable, performance-linked management with the asset-rich but efficiency-
lacking GLCs is the biggest opportunity to reinvigorate Malaysia’s broad economic
dynamism, as well as equity market performance given aforementioned pervasive
GLC influence
However, despite these leadership changes, anticipated reforms of these sprawling,
underperforming GLCs that these funds control have been slow in coming. Given
GLCs collectively account for more than a third of KLCI market capitalisation, their
poor operating performance has been a key drag on market performance. With the
change in government in March 2020, the new PN governing coalition has made
their own appointments to the GLC and GLIC management teams, further delaying
reforms. Over 2020, we saw CEO changes at PNB and Petronas, while early 2021
saw a new CEO at EPF; more changes may be forthcoming at other GLCs/GLICs (e.g.
media is reporting a potential CEO change at Khazanah), and potentially among
regulators such as Bursa Malaysia (note appointment of respected technocrat Tan
Sri Abdul Wahid Omar as new chairman in April 2020), the Securities Commission
and Bank Negara as well.
July 4, 2021 48
Strategy Research
Sovereign wealth fund Khazanah, which has controlling stakes in key Malaysian
GLCs (Fig 43), had seen a change in leadership in 2018’s post-GE14. In Aug 2018,
ex-EPF CEO Shahril Ridza took over from Tan Sri Azman Mokhtar, Khazanah’s CEO
since 2004 (recent media reports indicate Shahril will not renew his contract when
in expires in Aug, and that he will be replaced by Amirul Feisal, Maybank’s ex-
Group CFO). This is a key barometer for the pace and efficacy of GLC reform. As
underscored by the 2018 MYR8.4b IHH stake disposal to Mitsui, and subsequent
placing out of shares in investee companies like CIMB, Khazanah has split its
investment portfolio into two categories, i.e. “strategic” for companies where it
will want to maintain control (i.e. Tenaga, Telekom, MAHB as well as unlisted PLUS
and MAS) and “investment” where there is no need to maintain dominant
shareholding (i.e. IHH, CIMB and Astro).
Unfortunately, the announced return thresholds for the two classifications are
underwhelming and prima facie hardly a spur to management to raise their game
i.e. for holdings classified as commercial, targeted return is equivalent to the
Malaysian CPI + 3% (i.e. 4-5% in total) on a five-year rolling basis, while holdings
classified as strategic are required to return the equivalent of the 10-year MGS
(currently 2.7%) on a similar five-year rolling basis.
At the same time, Khazanah’s portfolio restructuring efforts have been difficult to
get off the ground, with a planned merger between UEM Sunrise and privately-
controlled Eco World Development announced in Oct 2020 subsequently being
called off in early 2021. Further, no new plans have been announced re ending the
perennial cash burn at beleaguered national airline MAS. More positively, a
proposed merger between Khazanah-controlled mobile telco Axiata and its local
Telenor-controlled competitor DiGi is back on the cards (initially proposed, and
subsequently called off, in 2019), with the transactions agreement between Axiata,
Telenor and DiGi signed in mid-June 2021, and deal completion anticipated in 2Q22,
subject to relevant approvals. Axiata and Telenor will each hold equal stakes of
33.1% respectively in MergeCo, which will continue to be listed and will have a
combined pre-synergy equity value of close to MYR50b. There are also market
expectations that Mitsui, as part of a potential privatization effort, may bid to
acquire Khazanah’s remaining stake in IHH, providing a clean, all-cash exit.
How Khazanah proceeds to execute on the above restructurings, as well as the ESG
/ sustainability thematic that is now a major investment consideration for all
stakeholders, will set the tone for broader GLC reform appetite, including how
aggressively peer GLICs like PNB, EPF and KWAP are willing to evolve from being
historically passive, politically-affected investors, into ROI-centric “activist”
shareholders with a hands-on approach to concurrently advancing their ESG /
sustainability agendas (note EPF, KWAP and Khazanah are signatories to the UN
Principles for Responsible Investment or PRI, with EPF taking the ostensible lead
on implementation of these principles – see Thematic 3 below for more details).
July 4, 2021 49
Strategy Research
Fig 43: Khazanah: key holdings in Malaysian corporates
Stocks Ticker Portfolio Market Cap.
(MYRb) Khazanah stake (%)
Market valuation of stake (MYRb)
Comment
Tenaga TNB MK Strategic 56.7 25.6 14.5 Has seen stake rationalisation in the past IHH IHH MK Commercial 49.6 26.0 12.9 Sold 16% stake to Mitsui in Nov 2018 CIMB CIMB MK Commercial 47.0 27.0 12.7 Issues exchangable bond (3.5%) in July 2019 Axiata AXIATA MK Commercial 35.4 36.8 13.0 Has signed agreement to merge with DiGi.com MAHB MAHB MK Strategic 10.2 33.2 3.4 Has seen stake rationalisation in the past Telekom T MK Strategic 22.9 20.1 4.6 Has seen stake rationalisation in the past UEM Sunrise UEMS MK Commercial 2.0 69.6 1.4 Proposed merger with EcoWorld called off in Jan UEM Edgenta UEME MK Commercial 1.4 69.1 1.0 Held via wholly-owned UEM Group Astro ASTRO MK Commercial 5.9 20.7 1.2 Thought to be looking for a buyer for its stake Time dotCom TDC MK Commercial 8.4 19.6 1.7 Attempted sale in the past MAS - Strategic - 100.0 - Unlisted; held under wholly-owned UEM Group PLUS - Strategic - 51.0 - Unlisted; held under wholly-owned UEM Group
TOTAL 66.4
Compared with Khazanah's end-2020 Realisable Asset Value of MYR125.0b (2019: MYR137.4b) and Net Worth Adjusted of MYR81.9b (2019: MYR91.6b)
Source: Bloomberg, Company Website, Maybank KE (compilation as of 27 June)
National Equity Corporation PNB, with over MYR320b assets under management,
also has controlling stakes in some of Malaysia’s largest and most important
companies, including the largest banking group Maybank and the de-merged Sime
Darby group of companies (Fig 43). Following GE14, former Bank Negara governor
Tan Sri Dr Zeti was appointed group chairman of PNB in June 2018, replacing Tan
Sri Abdul Wahid Omar. In October 2019, Jalil Rasheed, formerly the CEO of Invesco
(Singapore), replaced Abdul Rahman as CEO of PNB, the latter moving on to
become the chairman of Sime Darby. Jalil subsequently resigned from PNB in June
2020, with his replacement being Ahmad Zulqarnain, previously deputy managing
director with Khazanah.
Similar to Malaysia-centric Khazanah’s growth strategy going forward, PNB is also
looking to increase the share of overseas assets in its investment portfolio i.e. to
diversify and reduce country and currency concentration risk. A focus on growing
offshore assets has worked well for EPF, the private sector pension fund with
almost MYR1t in AUM as at 1Q21 (36% of which is overseas investments). EPF has
achieved stable dividend payouts over the past few years, despite weaker Ringgit
asset returns. This is attributed to the stronger ROI generated by its non-Ringgit,
multi-asset investments offshore. While PNB has executed some strategic
divestments - most recently, it sold its 56.3% stake in listed Chemical Company of
Malaysia (CCM) in Nov 2020 to privately-controlled plantation and industrial
chemicals group Batu Kawan for MYR293mn – these have been for its more
peripheral investments and not its anchor holdings per Fig 44 below.
Fig 44: PNB: key holdings in Malaysian corporates
Stocks Ticker Market Cap.
(MYRb) PNB stake
(%) Market value of
stake (MYRb) Comment
Sime Darby SIME MK 14.9 51.8 7.7 Auto-centric conglomerate; also trading/industrial/logistics Sime Property SDPR MK 4.3 57.8 2.5 Malaysia's largest property developer in terms of land bank Sime Plantations SDPL MK 29.0 56.3 16.3 World's largest palm oil plantation company by planted area Maybank MAY MK 93.5 48.3 45.1 Malaysia's largest banking group by assets and profits Velesto VEB MK 1.2 53.9 0.7 Largest jack-up drilling rig player in the country SP Setia SPSB MK 4.4 62.2 2.8 Launched the takeover offer for SP Setia in 2011 CCM Duopharma DBB MK 2.2 51.7 1.1 Manufacturer and distributor of pharmaceuticals/medicines MNRB MNRB MK 1.0 54.8 0.6 National reinsurance company; also Takaful operations UMW UMWH MK 3.7 59.7 2.2 Auto-centric conglomerate; also equipment and M&E
TOTAL
78.9 Compared with PNB's end-2020 Assets Under Management of MYR322.6b (2019: MYR312.0b)
Source: Bloomberg, Company Website, Maybank KE (compilation as of 27 June)
July 4, 2021 50
Strategy Research
Should the aforementioned new management teams at Khazanah and PNB begin to
restructure their mostly-listed domestic investments in earnest, this would be a
major catalyst for the KLCI, especially if peer funds like EPF and KWAP also follow
suit and become more “activist” with regards stewardship of their investee
companies. There would be significant value creation potential from disposal of
assets, many of which currently incur a “GLC discount”, especially if these assets
come under new, private sector management. At the same time, the decline in
GLIC influence on the equity market (as they steadily reallocate more of their AUM
offshore) would improve market free-float and allow for more optimal price
discovery, especially in relation to underperforming GLCs.
Petronas, by far the most valuable GLC and a cornerstone of Malaysia’s economy
and fiscal position (oil and gas-related income in the form of taxes, dividends and
royalties are projected to remain above 20% of total fiscal revenues in 2021, vs. a
projected 22% share in 2020; 2019: 32%), has not been spared by the oil price crash
due to COVID-19. Petronas made a headline loss of MYR21b for FY20 (Dec YE), as
compared to a profit of MYR40.5b in FY19; excluding impairments, the FY20 and
FY19 adjusted net profit figures would be MYR10.5b and MYR48.8b, respectively.
Its recent 1Q21 results showed significant improvement, in line with a recovery in
broad energy prices as economic re-openings accelerated – net profit more than
doubled, to MYR9.3b (1Q20: MYR4.5b), while net cash position stabilized at
MYR55b (end-2020: MYR52.1b) – however, the latter is still sharply lower than end-
2018’s MYR105b (Fig 46), sapped by weaker profitability and increased fiscal
commitments. On the latter, Petronas paid MYR34b in dividends in 2020 (Fig 45),
after paying an even more elevated MYR45b in 2019 (this included a special
dividend of MYR30b; 2018: MYR26b). Budget 2021 projects the 2021 dividend to be
a much lower MY18b, but upside risk is clear given continuing fiscal stresses.
Fig 45: PETRONAS: Dividends vs. crude oil price Fig 46: PETRONAS: Quarterly net cash
Source: PETRONAS, Maybank KE (chart) Source: PETRONAS, Maybank KE (chart)
Wild Card #1: Monetising Petronas’ stakes in its listed downstream entities
Petronas remains financially resilient despite its aforementioned pressured
earnings over 2020 and heavy dividend commitments over 2019/20. However,
while Petronas appears to have the financial muscle to fund current capex run-
rate (FY20: MYR33.4b, vs. MYR50b projected before COVID-19; FY19: MYR47.8b)
and meet its reduced MYR18b dividend commitment to the government, the
country’s challenged fiscal situation may potentially require continuing Petronas
support in the future via higher dividends. Besides the MYR30b special dividend
paid to the new PH government for 2019, specifically to finance one-off GST and
income tax refunds owed to taxpayers, note Petronas’ previously-flagged MYR24b
dividend for 2020 was hiked by MYR10b in the run-up to Budget 2021.
In early Dec 2019, Petronas raised around MYR6b by disposing the following stakes
to domestic GLICs: i) 228m shares representing a 5.1% stake in MISC for MYR1.8bn;
July 4, 2021 51
Strategy Research
ii) 59m shares representing a 5.9% stake in Petronas Dagangan for MYR1.3b; and
iii) 191m shares representing a 9.7% stake in Petronas Gas for MYR2.9b. In Dec
2020, Petronas disposed a further 266m MISC shares, equivalent to a 5.96% stake,
for an estimated MYR1.77b, as well as 140m stapled securities, or 7.75% of KLCCP,
comprising KLCC Property Holdings Bhd and KLCC Real Estate Investment Trust
(REIT), for an estimated MYR997mn. As articulated in strategy update “A KLCI +
fiscal stimulus combo, please (and hold the deficit)”, dated 2nd Oct 2019, we had
proposed Petronas should reduce its stakes in its listed subsidiaries (see Fig 47) to
51%, preferably via exchangeable bonds, so allowing continued Petronas
management control and earnings / cashflow consolidation, whilst also supporting
multiple fiscal and capital market objectives as follows:
Fiscal reserve fund:, we estimate divestments to 51% (i.e. maintaining
control and consolidation) would generate around MYR13b (Fig 47), which
could be divvied up to the government for fiscal spending purposes and/or
into a development fund focused on co-investing in “Industry 4.0”
projects critical for Malaysia escaping the middle income trap. This is
similar to Saudi Arabia’s rationale for listing its state-owned oil company
Aramco i.e. utilising IPO proceeds to diversify away from oil via funding
of a new forward-looking industrial strategy. Besides funding, Petronas
would bring internationally-acknowledged management and governance
standards to such a fund, providing a high degree of comfort for potential
domestic and foreign investment partners.
In this regard, Petronas Ventures, the group’s venture capital arm,
executed its first investment in Malaysia in June 2020 by investing in local
agriculture technology startup Braintree Technologies, which is
developing artificial intelligence-driven robots for farm automation and
smart farming. Other investments include Iraya Energies, which converts
unstructured data into actionable insights for exploration and production
activities, and SOLS Energy, a one-stop solar photovoltaic solutions
company with an innovative financing model. These investments are also
in line with the group’s Sustainability Agenda and the United Nations’
Sustainable Development Goals (SDGs) focusing on promoting sustainable
economic growth, industry innovation and climate action.
Paced improvement in Bursa free float: while there appears little doubt
that foreign investor appetite for shares in Petronas entities would be
strong (Petronas is a Fortune 500 company of good repute, and enjoys a
debt rating one notch higher than Malaysia’s sovereign rating) the
utilization of exchangeable bonds (EBs) similar to the 5-year EBs issued
by Khazanah re CIMB is optimal, we believe. Declining interest rates
coupled with Petronas’ relatively strong debt ratings mean related EB
pricing will be attractive, with a 5-year conversion timeline and premium
conversion ratio limiting share overhang while providing visibility re free
float upside. A strong investor reception would potentially set the tone
for accelerated sell-downs by other government-linked entities of their
tightly-held GLC holdings e.g. sovereign wealth fund Khazanah, which also
pays the government an annual albeit much lower dividend (2020/21:
Fig 1: Malaysia: Green vehicle (EV & hybrid) sales as % of total
Source: Global Carbon Project, CDIAC
July 4, 2021 59
Strategy Research
We combined the granular insights from the Tear Sheets with data and risk scoring
from Sustainalytics to generate our maiden 16-stock ESG Portfolio (Fig 61). In
guiding us on the constituent make-up of this ESG portfolio, we have taken a
combination of factors and parameters into consideration as follows:
Analyst stock rating: as ESG factors are structural drivers of long-term sustainable returns, we include both BUY and HOLD-rated companies with attractive business models and long-term growth outlooks, but exclude SELL-rated stocks, the latter notably including some companies with attractive ESG credentials / scores such as Nestle and, per recent rating downgrade, Sunway REIT;
Sustainalytics risk score and category: for many of the constituents we have chosen, there is clear positive correlation or cross-check between the analysts’ fundamental stock rating and the risk score from the external ESG research provider – examples are across a diverse set of sectors and include BUY-rated names like Inari, Hartalega, Bursa and MISC, as well as HOLD-rated Westports, V.S.Ind and just-added ViTrox, all of which have strong Sustainalytics risk scores /low risk ratings;
Momentum assessment: while Sustainalytics momentum indicators are useful for flagging near-term changes in risk score, and where they are coming from (i.e. exposure or management issues), the analysts may, from their frequent dialogues with company management and deep understanding of the underlying business, have greater insights into management’s commitment and plans to address and improve the company’s ESG factors. This bottom-up, forward-looking understanding underscores some of our portfolio picks such as Yinson, IOI Corp. and Gamuda i.e. where current relatively high-risk scores have scope to improve significantly on positively pivoting business models and improving ESG factor measurements and disclosures;
FTSE4Good membership: considering whether portfolio constituent stocks are in Bursa’s FTSE4Good Bursa Malaysia Index is a useful cross-check - recall this index adopts best-in-class positive screening and inclusion criteria are consistent with the global ESG model that FTSE has developed. However, we note that the 30-stock KLCI substantially overlaps with the 75-stock FTSE4Good index (i.e. 23 of the KLCI constituent stocks are also in the FTSE4Good), per cover page chart that shows very high positive correlation between the two indices – hence, for investors looking to capture differentiated performance vs. the benchmark, a more refined ESG portfolio appears to be required.
Risk scores and ESG Tear Sheet completion: we have required constituent stocks to have both a Sustainalytics risk score as well as a completed ESG Tear Sheet (recall our 65 tear sheets are, at the moment, only mostly for stocks with >USD1b market capitalization). We note that this results at the moment in exclusion of smaller-cap stocks with prima facie promising ESG underpinnings such as RCE Capital (risk score pending) and Axis REIT (tear sheet pending).
As compared to the maiden portfolio composition published in the Compendium
report dated April 8, we made the following adjustments post-1Q21 reporting: i)
removing Sunway REIT (SREIT MK) which, per undershooting 3QFY21 results and
extended weak outlook for its retail and hotel assets, has been downgraded to
SELL (from HOLD; TP cut to MYR1.30, from MYR1.45 previously) by REITs sector
analyst Kevin Wong – please refer to results/downgrade note “Another miss in
3QFY21”, dated May 20; and ii) including tech company ViTrox (VITRO MK), which
has strong ESG indicators (refer company ESG Tear Sheet in the aforementioned
Compendium) and has been upgraded to HOLD following a moderation in valuations
and robust 1Q21 reporting (refer results/upgrade report “1Q21 in line; U/G to
HOLD” dated April 23).
July 4, 2021 60
Strategy Research
Fig. 61: ESG portfolio: recommended constituents
Source: Maybank KE, Sustainalytics, FactSet (as of 2 Jul)
Thematic 4: Capex revival, trade war opportunities
As articulated in the earlier macroeconomics section, policies to revive investment
/ capex, especially in the more dynamic and efficient private sector, are crucial
for a sustained recovery in economic growth. With the double blows of the
pandemic and political uncertainty, business confidence had fallen sharply – while
it has bounced back from the 2Q20 low, renewed lockdowns over 1H21 are
expected to weigh. Per Fig 62, the Malaysian Institute of Economic Research’s
(MIER) business conditions index has recovered to above the 100 point-optimism
threshold in 4Q20, but then eased again in 1Q21. Similarly, the MIER consumer
sentiment index reading in 1Q21 at just under 100 is at its highest in 10 quarters,
but is seeing headwinds re renewed curbs on economic activity and rising prices.
Even before the current pandemic-charged negative economic and sentiment
headwinds, private investment growth (Fig 63; note correlations with equity
market earnings growth, DDI)) has been sliding (2020: -11.9%; 2019: +1.5%; 2018:
+4.3%; 2017: +9.0%), as has public investment (2020: -21.3%; 2019: -10.8%; 2018: -
5.0%; 2017: +0.3%). The weak appetite for domestic investment was further
underscored by the fact that domestic investment approved by the Malaysian
Investment Development Authority has been falling steadily since 2015 (2020: -
* for Phils, the CREATE Act lowers the corporate tax rate from 30% to 25%, from July 2020 to July 2022, followed by a 1ppts reduction annually until 2027, to bring the tax rate down to 20%.
** for Indo, tax rate will be further reduced to 20% from 2022; public listed companies with free floats of over 40% pay a 3ppts lower corporate tax rate (2020/21: 19%; 2022: 17%)
Hence, instead of a blanket corporate tax cut, we would propose an interim step
via the government adopting the Indonesian model of allowing corporate tax
reductions for companies listed on Bursa Malaysia and which have a free float of
at least 40%. This achieves multiple fiscal and capital-market objectives:
Spur private investment: with most of the large listed corporates (now
including Petronas-listed subsidiaries post-2019/2020 stake reductions by
parent; see Fig 47) prima facie qualifying for the tax reduction, this will
be a substantial boost to corporate profitability and investment appetite
(as well as investor sentiment). With returns on invested capital now
higher, there will be a greater incentive for many of the largest
companies in the country to put broadly-healthy balance sheets to work,
translating into a powerful, private sector-led economic stimulus;
Increase market free float: by tying the corporate tax break to the
companies’ free-float, this will encourage non-compliant companies to
improve available trading liquidity in their shares. This would be
particularly impactful in the small-mid market segment, where many of
the faster-growing companies tend to be family-owned and tightly-held
i.e. barely satisfy Bursa’s minimum 25% public float requirement. The
focus on free-float also helps address Bursa’s steadily declining weighting
in free-float adjusted benchmark indices like MSCI and FTSE, which are
widely followed by the global investor fraternity.
Encourage new listings: by restricting the corporate tax concession to
listed companies, the measure will incentivize unlisted companies to IPO,
increasing both the breadth of companies on the Bursa as well as overall
July 4, 2021 64
Strategy Research
economic efficiency via the related lift to corporate sector accounting
and governance transparency from being a listed public company.
Compared to a blanket corporate tax cut, our proposed measure is much more
fiscally palatable, based on the following first-cut estimations. Bursa’s current
market capitalisation is around MYR1.8t, with the market trading on 20x current
(2020) earnings. This implies a total net earnings of c.MYR90b from Bursa-listed
companies, and related corporate tax paid of c.MYR22b (37% of 2020 fiscal year
projections) at the headline corporate tax rate of 24%. A reduction in tax rate to
20% would imply a worst-case (i.e. all corporates qualifying) foregone fiscal
revenue of around MYR4b (as compared to aforementioned estimated first-cut
c.MYR10b fiscal revenue loss with a blanket corporate tax cut) or, ceteris paribus,
a 30bps increase in the fiscal deficit.
In actuality, net revenue loss to the government will be lower as the tax cut will
spur economic activity / growth (so generating tax revenues) and not all Bursa
companies will qualify for the lower corporate tax rate (vs. our 100% compliance
assumption). As such, we gauge relatively limited fiscal stress from this measure.
Malaysia has been liberalising foreign ownership in major sectors of the economy
(i.e. manufacturing, services and financial) for the past decade, as underscored by
the deregulation of the Foreign Investment Committee’s investment guidelines
from 30 June 2009. However, certain high-profile limits remain in place, including
(Fig 67) a 30% foreign strategic shareholder ownership cap on domestic banks, a
49% foreign strategic shareholder ownership cap on telcos, and a 70% foreign equity
ownership limit on life and general insurance companies and takaful (Islamic
insurance) operators. These caps also have a negative free-float implication for
Bursa given regional indices are based on available foreign free float (i.e. if limits
on foreign shareholdings are liberalized, foreign free float could also rise). At the
same time, companies in sectors deemed strategic such as power, water, ports
and telecommunications are subject to equity ownership conditions, as imposed
by their respective sector regulators.
To make a strong statement and signal Malaysia’s openness to foreign investment,
especially during this crucial post-pandemic window of accelerated regional
investment relocations in the wake of US-China trade tensions, we would propose
the abolishment of all explicit foreign shareholding limits across the economy. This
would reverse perceptions of Malaysia being relatively closed to foreign investment
vis-à-vis open regional competitors such as Singapore, while also addressing
related foreign investor complaints e.g. friction with the US on foreign-ownership
limits in the insurance sector. Ultimately, like most liberalized developed
countries around the world, “hard” foreign ownership limits should be replaced
with “soft” investment-approval parameters centered on “prudential and best
interests of Malaysia” criteria that give regulators leeway to negotiate and
optimize with investors.
Such positive signaling on Malaysia’s openness to foreign investment is particularly
important at this juncture, given the need for a more impactful approach to
moving up the value chain and the added urgency given the post-pandemic fiscal
and growth challenges faced by the country, as well as increasingly-competed
trade and investment diversion opportunities stemming from the US-China trade
tensions. Foreign investment liberalization coupled with properly structured fiscal
incentives could build on aforementioned trade diversion and investment/FDI
relocation gains. In this regard, we note that Malaysia established a National
Committee on Investment I (NCII) in 2019, co-chaired by the International Trade
and Industry Minister and the Finance Minister to woo and fast-track related
investments. But there have been no updates from the NCII since the change in
government in March 2020.
July 4, 2021 65
Strategy Research
Fig 67: Malaysia foreign strategic shareholding limits
Source: Maybank KE (chart, compilation)
Balanced positioning, with ESG and yield overlays
As articulated in our Malaysia 2021 Market Outlook Report “Goldilocks makes a comeback”, dated Dec 14, the multiple COVID-19 vaccine breakthroughs announced from early Nov, and the expedited approvals and distribution in major economies from Dec, has been a game changer for global equity markets after a generally torrid 2020. While pandemic-accelerated structural shifts continue to underpin tech-led growth stocks, 2021’s “Goldilocks” combination of continuing fiscal and monetary stimulus, even as earnings growth recovers with accelerated economic re-openings, has helped re-rate global cyclical plays, especially financials and commodity-related (favourable supply-demand dynamics), as well as and consumer/domestic tourism (pent-up demand) stocks. On the flipside, border reopening-dependent sectors such as aviation and tourism continue to lag as uneven vaccination progress across countries and lack of internationally-accepted travel preconditions hampers expedited normalization. In the Asean context, as reflected by an underperforming KLCI YTD (Fig 7), Malaysia’s economic recovery path is facing multiple, worse-than-expected headwinds, as underscored by already-articulated undershooting GDP, fiscal stress and political uncertainties. On ASEAN peer basket valuation comparison per Fig 68 below, in line with YTD relative underperformance, the historical average 20% PE multiple premium the Malaysian market used to command over regional peers is no longer obvious, while PB and dividend yield measures have become relatively attractive. The market’s de-rating is attributable to a combination of factors, in particular sustained foreign selling, an erosion of Malaysia’s historical political stability premium and uncertain medium-long term growth potential, the latter already an issue pre-Covid per the KLCI’s negative earnings growth over 2018 and 2019 (and continuing in pandemic-impacted 2020). For a by -country rundown on 2021 equity market strategies and sector/stock positioning by MKE’s regional country Heads of Research, please refer to our latest bi-monthly ASEAN+ Strategy publication, the most recent of which is dated July 2 (“ASEAN+ Fortnightly: Highlights (21 June - 2 July))”.
Fig 68: ASEAN: regional market valuations
Index PER (x) Growth (%) ROE (%) P/B (x) Yield (%)
In the wake of recent 1Q21 reporting, and following our aforementioned downward earnings revisions in the glove sector and change in KLCI constituents, we expect the KLCI to see sharp albeit moderated earnings recovery in 2021 (2020E/2021F KLCI earnings forecast: -12.5%/+37.9% YoY, vs. -12.9%/+50.1% previously; this
0% 20% 40% 60% 80% 100%
Insurers
Telcos
Banks
July 4, 2021 66
Strategy Research
recovery comes after three straight years of earnings contraction per Fig 14. Nonetheless, with the current lockdown and subsequent recovery phases looking to be drawn out (Fig 23), and the promise of political volatility following Parliament’s reconvening in the coming months, the market’s anticipated recovery towards the latter part of 2H21 as “back to normalcy” sentiment strengthens is likely to be less exuberant than previously anticipated. Hence, we moderate our end-2021 KLCI target to 1,720 or 15x forward earnings (-0.5 standard deviation vs. historical trading mean; Fig 72) – this compares to our previous target of 1,830 (16x forward earnings per historical trading mean for the KLCI). For portfolio positioning, we continue to recommend a mix of value and growth stocks, as well as a yield focus. A snapshot of MKE’s recommended sector weightings are per Fig 69 below, with key recent developments being as follows:
Banks/financials: reinforcement of the sector overweight for banks/financials with the upgrading of AMMB to BUY (the worst deemed over post-recapitalisation), and broadly-robust 1Q21 reporting/guidance, especially with regards credit cost (undershooting) and NIM (recovering). Banking analyst Desmond Ch’ng, in his sector update note dated May 30 (“Higher credit cost risk”), details that if we assume credit costs in 2021 remain as elevated as they were in 2020 due to the continuing lockdowns, bank sector aggregate earnings would be lowered by a relatively modest 10%/7% in 2021/22E. As detailed in sector update note “Another blanket loan moratorium”, dated June 29, re the new loan moratorium for individuals, in the worst-case scenario, which assumes a modification loss of similar quantum to 2020’s modification loss, the impact to earnings would be relatively manageable, at 0-6% for most banks. Top sector picks are RHB, HLBK and Allianz;
Plantations: upgrading of plantation sector earnings outlook on higher CPO price expectations; while MY palm oil is losing its price competitiveness as evidenced by creeping imports and declining exports, CPO prices have averaged a much higher-than-expected MYR4,061/t YTD. As such, we have revised 2021 CPO ASP forecast to MYR3,100/t (+15%; price decline seen over 2H on recovering production and weaker demand), while keeping 2022 forecast unchanged at MYR2,600/t. We also note rising M&A activity, per recent all-cash acquisition of IJM’s stake in IJM Plantations (followed by a general offer to minorities) by KLK. Top sector picks are KLK, SOP and BPlant.
Gaming: domestic newsflow remains weak – due to continuing MCO-
related closures since Jan, casino operator Genting(M) reported a loss in
1Q21 while the NFO sector (Magnum and BToto) generated only marginal
profits. With the full lockdown since June 1, the casino and all NFO
outlets were shut again from 1 June, and remain closed. Gaming analyst
Shao Yang expects the casino to close for 3 months this time, with the
NFO outlets to shut for a similar period. However, underpinning sector
upgrade to Overweight, discounted valuations already reflect this
scenario and foreign newsflow is favourable, especially for the casino
stocks - we believe GENM’s Resorts World New York (RWNY) has a good
chance of being converted into a downstate commercial casino which will
be allowed to deploy table games. New York State Gaming Commission
will launch RFPs for 3 downstate commercial casinos on or before 1 Jul
2021 and award licenses before end this year. Further, GENT’s 53%-owned
GENS is in a JV with Sega Sammy Holdings (6460 JP, Not Rated) to bid
for a Yokohama IR license. Yokohama will award an IR license between
now and Aug 2021, and we believe that the GENS-Sega Sammy JV will win
it. Top sector picks are GENM and BToto.
Construction: in downgrading the sector to Neutral, we note new public infrastructure spending has been slow YTD due to pandemic management, with core earnings delivery in the construction/infra sector to be weak in 2Q/3Q21, with 2Q21 to potentially revisit 2Q20 levels. We expect this sluggishness to persist into most of 2H21 as focus will remain on mitigating livelihood impact from the FMCO, with full opening of economic and social sectors anticipated only from November. In the interim, newsflow is unlikely to excite. From a bottom-up perspective,
July 4, 2021 67
Strategy Research
we had downgraded our calls on SCGB to HOLD in Apr 2021 due to limited upside to our PER-based TP, and CMS to HOLD too, as we incorporate a governance risk factor into valuations pending outcome of an independent investigation relating to its Group CFO. Amid a challenging backdrop, we prefer stocks with strong balance sheet and delivery track record – picks are Gamuda, IJM and LTK.
Utilities: with the renewed lockdown and anticipated extended recovery phases, earnings concerns have again resurfaced for heavyweight Tenaga – coupled with Gas(M)’s rating downgrade to HOLD on full valuations and reduced likelihood of positive earnings surprises, we downgrade the sector to Neutral. Thus far, Peninsular Malaysia generation has contracted by c.8.5% since the FMCO was imposed on 1 Jun 2021. This is significantly less severe than the first round of FMCO in Mar-May 2020, when generation had declined by c.24%. We estimate every month of FMCO would lower FY21 demand by c.0.7%, all else equal. HOLD-rated Malakoff missed expectations due to outages at some of its foreign associates, and major unscheduled plant outages remains a risk, potentially leading to missed capacity payments and lower profitability. Our picks are Tenaga (attractive valuations, >5% yield) and MFCB (at only c.10x PE, renewables push).
Gloves: despite record profits in 1HFY21, share prices of glove players have de-rated significantly YTD in anticipation of the normalization of ASPs (and hence, reduced profitability) on softening demand urgency due to expanding supply and higher vaccination rates, especially in the US and European countries which are the key markets for Malaysian gloves companies. ESG risks are also weighing on the sector in the wake of the import ban imposed by the US on Top Glove’s products due to allegations relating to the mistreatment of its foreign labour force. We cut our sector weighting to Neutral, noting intensifying competition among the existing and new players (especially the rapidly-expanding China glove producers) that could further pressure ASP. Our preferred sector pick is Hartalega which has the qualitative and ESG credentials to weather the sector’s numerous headwinds, we believe.
Fig 69: Recommended sector weightings
Overweight Neutral Underweight
Automotive Construction Aviation
Gaming (Casinos) Consumer Mid-cap Oil & Gas
Gaming (NFOs) Healthcare/Gloves
Large-cap Oil & Gas Large-cap Banks
Mid-cap Financials / Banks / Insurers Media
Plantations Petrochemicals
Technology / Semicon Ports & Shipping
Property
REITs
Telcos
Utilities
Source: Maybank KE
July 4, 2021 68
Strategy Research
Re our Top Buys stock list (Fig 70), we flag the following deletions and additions
vis-à-vis the top buy pick recommendations in our 4Q20 results roundup report
(“Broad resilience = positive bias”, dated March 2):
Deletions:
Petronas Chemicals (PCHEM MK): while 1Q21 results beat expectations,
as articulated in quarterly results update “ASP softened since Apr 21”,
dated May 28, petrochemicals sector analyst Yen Ling notes that ASPs
peaked in Mar 21 - the exceptionally strong 1Q ASPs was mainly due to
supply tightness (US plant outages, regional plant turnarounds, ME
feedstock shortage) even as demand strengthened with the reopening of
economies. ASPs have been trending lower since April as the supply
tightness eases with production resumption in the US and North Asia, as
well as new supply from China. With 2H21 thus expected to see weaker
earnings and narrowed upside to TP, rating is downgraded to HOLD.
PChem’s net cash stood at MYR11.3b or MYR1.41/share as at end-1Q21.
Top Glove (TOPG MK): as detailed in sector downgrade report (“Entering
a phase of declining ASP trend”, dated July 2), we are now anticipating
ASP declining trend from 3Q21 onwards. Gloves sector analyst Wei Sum,
in her Top Glove results note “Hurt by USA ban”, dated June 10, notes
that ASP seemed to have peaked in Feb 2021 and declined 16% QoQ in
3QFY21 (Aug YE), and order lead time has reduced to 90-120 days. After
imputing lower blended ASP (partly contributed by the continuing ban by
US Customs of the group’s products) and higher raw material costs, as
well as a lower number of shares (793.5m, -39% vs. initial indication) for
its planned Hong Kong listing (no timeline), FY21-23E EPS is reduced by -
2% to -26%. Additionally, in view of aggressive capacity expansion by
Chinese glove makers - much faster than global demand growth - and
primarily in medical gloves (vs. non-medical gloves focus in the past)
which means head-on competition with Malaysian players, we moderate
Top Glove’s assumed LT growth to 3.5% (from 4.5%). This results in a
reduced DCF-based TP of MYR3.98 (from MYR8.65 as at end-2020), and
rating downgrade to HOLD. Our preferred gloves exposure is Hartalega
(HART MK), which is also a constituent of our ESG Portfolio (Fig. 61).
Sunway (SUN MK): property analyst Wei Sum, in her 4QFY20 results note
(“Earnings on track”, dated April 1), notes broadly robust delivery, with
4Q20 net profit being in-line, while FY20 property sales of MYR1.3b beat
expectations. Management has set a higher MYR1.6b sales target for 2021,
driven by MYR2.8b worth of new launches, the latter including two
overseas projects (in China and Singapore, respectively). Further, 55%-
owned Sunway Construction (SCG) secured MYR2.3b worth of jobs in FY20,
lifting its outstanding order book to MYR5.1b as at end-2020. Nonetheless,
we lower RNAV/share to MYR2.46 (-40sen) after rolling forward valuation
and imputing issuance of 978m ICPS as well as reduced TPs for 41%-owned
SunREIT (-5 sen) and SCG (-13 sen). With upside to revised MYR1.70 TP
negligible, we downgrade to HOLD. Our preferred exposure in the
property sector is now SP Setia (SPSB MK; see below).
Additions:
SP Setia (SPSB MK): as detailed in update report “2021 will be a better
year”, dated April 14, property sector analyst Wei Sum flags positive
management guidance per i) higher dividend payments to ordinary
shareholders post-completion of Battersea Power Station Phase 2 and 3A
(note dividends were suspended in FY20 after an annual loss due to
inventory impairments); ii) capital restructuring to better leverage the
current low interest rate environment; and iii) upside to FY21 sales target
of MYR3.8b (1QFY21 actual sales was a robust MYR1.2b). In addition, the
group had identified 1,295 acres of non-core landbank for divestment, of
which 960 acres in Johor was sold for MYR518m in early-May. We have a
BUY rating on SP Setia, with a MYR1.39 TP (on 0.4x FY21 PBV).
July 4, 2021 69
Strategy Research
Genting Malaysia (GENM MK): gaming sector analyst Shao Yang forecasts
GENM to make losses in FY21 but, as articulated in his update note dated
April 20 (“Pick a card, any card”), believes underlying earnings recovery
momentum is intact and identifies five potential catalysts for the stock,
namely: i) history suggests GENM’s share price will rally pre-opening of
Genting SkyWorlds in 2H21; ii) FY21E DPS will likely be flattish YoY and
offer >5% dividend yield; iii) Resorts World New York City (RWNYC) is well-
positioned to be awarded a lucrative downstate commercial casino license;
iv) 49%-owned Empire Resorts will be less of an earnings drag going
forward; and v) the Mashpee Wampanoag (MW) promissory notes may be
written back. The crystallising of iii) and v) would boost FY23E earnings
by c.MY800m or +63%, and boost our DCF-based TP by MYR0.85 (+25%), to
MYR4.30. Coupled with c.5% cash yield, TSR would be >50%.
MFCB (MFCB MK): as detailed in upgrade report “Building a RE brand”,
dated March 4, where rating was raised to BUY with a higher pre-bonus
MYR8.60 TP (+8%; following 1-for-1 bonus, adjusted TP is now MYR4.30),
utilities sector analyst Chi Wei is positive on management’s recently-
unveiled ambitions to become the largest and most profitable renewable
energy (RE) company in Malaysia. With Don Sahong’s c.USD100m of annual
enterprise FCF, we estimate MFCB has the ability to fund at least USD500m
of RE projects in coming years. Nonetheless, opportunistic acquisitions
outside the RE space will also be pursued - in May, MFCB’s growing
packaging division expanded upstream via proposed acquisition of 100%
of Stenta Films (M) for MYR205m cash – deal multiples are fair, and the
acquisition will be modestly earnings accretive.
Fig 70: Malaysia: Stock Recommendation
Source: Maybank KE, FactSet (as of 2 Jul)
Re our Top Sells (Fig 71), the list had shortened considerably through 4Q20
reporting, and it has shortened further in post-1Q21 results. The combination of
operating outperformance and improved earnings outlooks vis-à-vis sluggish share
prices continues to see ratings changes having a positive bias, with notable
upgrades from SELL to HOLD being i) Lotte Chemical (TTNP MK) where 1Q21
July 4, 2021 70
Strategy Research
results were exceptionally strong due to supply disruptions in the petrochemicals
industry – while we see earnings trending lower over 2H21, petrochemicals analyst
Yen Ling nonetheless raises FY212-23E EPS by 190%/55%/66% on higher spread
assumptions, while TP is raised to MYR3.10 (+48%) – refer “Spread may weaken but
still healthy” results/upgrade report dated April 30; ii) Tan Chong (TCM MK)
where 1Q21 results also beat expectations, with auto sector analyst Thong Jung
believing the worst is over for the company per disputes with the Royal Malaysian
Customs Department being resolved, overseas operations showing gradual recovery
and domestic operations benefitting from new models and the SST exemption –
refer results/upgrade report “1Q21 results surprised positively”, dated May 25;
and iii) ViTrox (VITRO MK), per aforementioned inclusion into ESG Portfolio.
Added to the list is Sunway REIT (SREIT MK) per aforementioned removal from the
ESG Portfolio. We have also ceased coverage of previously SELL-rated Glomac.
Fig 71: Malaysia: Sell-rated stocks
Source: Maybank KE, FactSet (as of 30 June)
Fig 72: KLCI‘s 12M forward PER at 13.7x @ 30 Jun 2021, or -1.2SD of LT mean (mean = 15.9x, 1SD = 1.9x)
Fig 73: KLCI’s trailing P/B at 1.55x @ 30 Jun 2021, at -0.7SD of LT mean (mean = 1.78x, 1SD = 0.31x)
Source: Bloomberg, Maybank KE Source: Bloomberg, Maybank KE
July 4, 2021 71
Strategy Research
Fig 74: Maybank KE Equity Research Stock Universe
Ticker
Company FYE Price Market TP Rec Core Net Profit EPS CAGR PER ROE Div Yld PBV Px chg 30 Jun Cap CY20 CY21E CY22E CY20 CY21E CY22E 20-22 CY20 CY21E CY22E CY20 CY21E CY20 YTD
MYR MYR m MYR |---------- MYR m ----------| |--------- MYR sen --------| (%) |------------- (x) ------------| (%) (%) (x) (%)
12MP in 3Q/4Q? We expect the details to be made known once Parliament sitting
reconvenes. We expect the KVMRT3 project to feature, and the HSR too; MyHSR
Corp Chairman had said on 19 May that the HSR plan is still ‘on track’.
NEUTRAL sector call. Newsflow over the near term is unlikely to excite. Coupled
with the considerations outlined above, we revise down our top-down sector view
from POSITIVE. From a bottom-up perspective, we had downgraded our calls on
SCGB to HOLD in Apr 2021 due to limited upside to our PER-based TP, and CMS to
HOLD too in May 2021, as we incorporate a governance risk factor into valuations
pending outcome of an independent investigation relating to its Group CFO, and
clarity relating to recent abrupt movements in its Board of Directors.
Sector BUYs. Amid a challenging backdrop, we prefer stocks with strong balance
sheet and delivery track record.
IJM’s balance sheet will strengthen considerably post its sale of 56.2% IJMP,
with net gearing falling to 0.24x from 0.44x end-FY21. With 48% of the
MYR1.53b net cash proceeds from the sale to be set aside for investment/
capex and working capital, IJM is in a strong position to take on PFI projects.
As for Gamuda, management has alluded to balance sheet capability to take
on PFI projects alongside the PSI reclamation (its net gearing was 0.22x end-
Apr 2021). We expect Gamuda to be a tier-1 beneficiary of the KVMRT3 roll-
out, riding on its track record.
For LITRAK, Gamuda’s affirmation of a proposal to sell its highway concessions
at fair market value to an independent entity, to be funded entirely by the
private debt capital market, should help to unlock value.
Risks. (i) Prolonged movement restriction/lockdown affecting the work pace of
construction and property projects, and traffic at the toll highways; (ii) Slow
orderbook replenishment due to delays in major infra projects roll-outs; (iii)
Continuous rise in construction material cost (steel bar: +21% in 2020; copper:
+28%) and labour shortages (due to pandemic travel restrictions), which will cut
into margins for jobs already secured.
Outstanding orderbook @ end-Mar/Apr 2021 (MYR b) Foreign shareholding
As of end-Mar for IJM, SCGB, CMS; Apr for GAM; Source: Companies Source: Companies
Traffic at Gamuda’s toll highways (compared against pre-MCO levels)
Highways Mid-Mar to mid-Apr ‘20
(1st mth of MCO 1.0)
Jun 2020
(during CMCO 1.0)
Sep 2020
(during RMCO)
Mid-Oct to Dec 2020
(during CMCO 2.0)
End-Feb 2021
(during MCO 2.0)
End-Apr 2021
(during CMCO 3.0)
End-May 2021
(during MCO 3.0)
KESAS 10-20% 90% 100% 71% 85% 95% 65%
LDP 10-20% 90% 100% 88% 90% 97% 69%
SPRINT 10-20% 90% 98% 61% 70% 90% 52%
SMART 10-20% 80% 88% 38% 50% 81% 37%
Source: Gamuda’s results announcements
4.9
4.0 5.0
1.0 1.2
2.1
3.0
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-0.5
0.5
1.5
2.5
3.5
4.5
5.5
6.5
GAM IJM SCGB CMS
Orderbook (MYR b, LHS) Per 12M trailing revenue (x, RHS)
10%
20%
30%
40%
50%
Jun-1
1
Jan-1
2
Aug-1
2
Mar-
13
Oct-
13
May-1
4
Dec-1
4
Jul-
15
Feb-1
6
Sep-1
6
Apr-
17
Nov-1
7
Jun-1
8
Jan-1
9
Aug-1
9
Mar-
20
Oct-
20
May-2
1
Gamuda IJM
July 4, 2021 83
Strategy Research
Pandemic induced movement restrictions in the Klang Valley
2020 2021
18 Mar – 3 May MCO 14 Oct 2020 – 12 Jan CMCO 2.0
4 May – 9 Jun Conditional MCO (CMCO) 13 Jan – 4 Mar MCO 2.0
10 Jun – 13 Oct Recovery MCO (RMCO) 5 Mar – 5 May CMCO 3.0
14 Oct – 12 Jan 2021 CMCO 2.0 6 May – 31 May MCO 3.0
1 Jun – mid Jul Full MCO (FMCO) Phs 1 *
Jul - Aug FMCO Phs 2 *
Sep – Oct FMCO Phs 3 *
Nov – Dec FMCO Phs 4 *
* Length of Phase 1-4 is dependent on how well the pandemic is contained/controlled
Source: Compiled by Maybank KE
Major infrastructure projects pipeline
Project Estd Value
(MYR b) Updates
Digital
National Digital Infrastructure Plan (JENDELA)
21.0 Phase 1 (2020-22): 96.9% mobile coverage (from 91.8%), 35 Mbps speed (from 25 Mbps) and 7.5m premises passed.
Phase 2 (2022-25): Full deployment of 5G, thus boosting digital connectivity nationwide.
Rail
JB-SG Rapid Transit System (RTS) 3.715
(MY’s portion)
G-to-G agreement inked on 30 Jul 2020.
Ground-breaking ceremony held on 22 Nov 2020. [link]
Under public inspection (15 Mar – 15 Apr 2021).
Construction to be in full-swing in 2021; target completion in 2026.
KV Double Track Phase 2 (KVDT2) 4.475 An earlier award to Dhaya Maju LTAT S/B was cancelled in Aug 2020.
An independent checking consultant will be appointed before the appointment of a new contractor via an open tender.
KV Mass Rapid Transit 3 (KVMRT3) 45.0 (original);
22.5 (rev 1.0)
30.0 (rev 2.0)
2021 Budget Speech said that the project will proceed.
Potential 50% reduction to its original cost of e.MYR45b.
Cabinet has given the go-ahead to proceed with the project in Mar 2021; MRT Corp to update earlier studies with a view to kick-start works in 2H 2021. [link]
The tender call is delayed by 2-3 months (from an earlier target of Aug 2021) due to changes in the project scope.
High Speed Rail (HSR) 70.0 G-to-G decision to cancel the project (on 1 Jan 2021) due to disagreement on some changes proposed by MY.
MY has paid SG SGD102.8m/MYR320m for costs incurred (per joint announcement on 29 Mar 2021).
MyHSR Corp Chairman said on 19 May 2021 that the HSR plan is still on track. [link]
Kuching Autonomous Rapid Transit (ART)
6.0 The ART system was proposed in Sep 2019 in favour of the LRT.
Funding from the 12MP.
Target commercial operations by 2025. [link]
Highways
Sarawak Coastal Road & 2nd Trunk Road
11.0 Coastal Road: Package 5 (MYR467m) awarded to a CMS led JV.
2nd Trunk Road: Tenders are believed to have opened.
Sabah-Sarawak Link Road 1.2 Decision on Federal vs. State funding is pending.
Others
Penang Transport Master Plan (PTMP)
32.0 PDP agreement between SRS Consortium (40% held by Gamuda) and Penang State inked on 1 Jul 2020.
Federal Government had declined a MYR2b loan guarantee for the Bayan Lepas-Komtar LRT component.
Island A development to be undertaken via a PFI structure (vs. PDP); SRS to enter into 2 JVs with the Penang State as Project Developer and Turnkey Contractor with Gamuda to take on Phase 1 reclamation works (announcement on 25 Mar 2021).
Reclamation of Island A Phase 1 (1,200 acres) targeted to start in Aug 2021 after approval of its Environmental Management Plan (EMP).
Simple Average 18.3 17.5 3.1 2.9 23.1% 14.9% 3.7% 4.3%
Source: Maybank KE, FactSet (as of 30 June)
Abbreviations TC – time charter VAS – value-added services VLCC – very large crude carrier VLEC – very large ethane carrier FPSO – floating production storage & off-loading unit
Note: Highlighted/shaded are stocks which have foreign shareholding close to, or above 20% (based on latest data available) There may be a one-month difference for % foreign holdings for some stocks
Sources: Companies, compiled by Maybank KE
July 4, 2021 113
Strategy Research
Research Offices
ECONOMICS
Suhaimi ILIAS Chief Economist Malaysia | Philippines | Global (603) 2297 8682 [email protected]
CHUA Hak Bin Regional Thematic Macroeconomist (65) 6231 5830 [email protected]
LEE Ju Ye Singapore | Thailand | Indonesia (65) 6231 5844 [email protected]
Linda LIU Singapore | Vietnam | Cambodia | Myanmar | Laos (65) 6231 5847 [email protected]
APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES
DISCLAIMERS This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.
The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives”) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice.
This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances af ter the date of this publication or to reflect the occurrence of unanticipated events.
MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related there to. In addition, it may make markets in the securities mentioned in the material presented in this report. One or more directors, officers and/or employees of MKE may be a director of the issue rs of the securities mentioned in this report to the extent permitted by law.
This report is prepared for the use of MKE’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 MKE and MKE and its Representatives 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. 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. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report.
Malaysia Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis.
Singapore This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Research Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank 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 i nstitutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank 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.
Thailand Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of Maybank Kim Eng Securities (Thailand) Public Company Limited. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) accepts no liability whatsoever for the actions of third parties in this respect.
Due to different characteristics, objectives and strategies of institutional and retail investors, the research products of MBKET Institutional and Retail Research departments may differ in either recommendation or target price, or both. MBKET reserves the rights to disseminate MBKET Retail Research reports to institutional investors who have requested to receive it. If you are an authorised recipient, you hereby tacitly acknowledge that the research reports from MBKET Retail Research are first produced in Thai and there is a time lag in the release of the translated English version.
The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. MBKET does not confirm nor certify the accuracy of such survey result.
The disclosure of the Anti-Corruption Progress Indicators of a listed company on the Stock Exchange of Thailand, which is assessed by Thaipat Institute, is made in order to comply with the policy and sustainable development plan for the listed companies of the Office of the Securities and Exchange Commission. Tha ipat Institute made this assessment based on the information received from the listed company, as stipulated in the form for the assessment of Anti-corruption which refers to the Annual Registration Statement (Form 56-1), Annual Report (Form 56-2), or other relevant documents or reports of such listed company. The assessment result is therefore made from the perspective of Thaipat Institute that is a third party. It is not an assessment of operation and is not based on any inside information. Since this assessment is only the assessment result as of the date appearing in the assessment result, it may be changed after that date or when there is any change to the relevant information. Nevertheless, MBKET does not confirm, verify, or certify the accuracy and completeness of the assessment result.
US This third-party research report 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 Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer 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 Maybank KESUSA in the US shall be borne by Maybank KESUSA. This report is not directed at you if MKE 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 Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security mentioned within must do so with: Maybank Kim Eng Securities USA Inc. 400 Park Avenue, 11th Floor, New York, New York 10022, 1-(212) 688-8886 and not with, the issuer of this report.
July 4, 2021 115
Strategy Research
Disclosure of Interest
Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Singapore: As of 4 July 2021, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report. Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report. Hong Kong: As of 4 July 2021, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report. India: As of 4 July 2021, and at the end of the month immediately preceding the date of publication of the research report, KESI, authoring analyst or their associate / relative does not hold any financial interest or any actual or beneficial ownership in any shares or having any conflict of interest in the subject companies except as otherwise disclosed in the research report.
In the past twelve months KESI and authoring analyst or their associate did not receive any compensation or other benefits from the subject companies or third party in connection with the research report on any account what so ever except as otherwise disclosed in the research report.
MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.
OTHERS
Analyst Certification of Independence
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.
Reminder
Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to soph isticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and politic al factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase.
No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.
Definition of Ratings
Maybank Kim Eng Research uses the following rating system
BUY Return is expected to be above 10% in the next 12 months (including dividends)
HOLD Return is expected to be between 0% to 10% in the next 12 months (including dividends)
SELL Return is expected to be below 0% in the next 12 months (including dividends)
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.
UK This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Conduct 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.
DISCLOSURES
Legal Entities Disclosures Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938- H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This report is distributed in Singapore by Maybank KERPL (Co. Reg No 198700034E) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Maybank Kim Eng Securities (“PTMKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the Financial Services Authority (Indonesia). Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities Limited (License Number: 117/GP-UBCK) is licensed under the State Securities Commission of Vietnam. Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited and the Bombay Stock Exchange and is regulated by Securities and Exchange Board of India (“SEBI”) (Reg. No. INZ000010538). KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) and as Research Analyst (Reg No: INH000000057) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Conduct Authority.