Post budget stock picks - Alexander Chia, Head of RHB Research

RHB Research Institute

1

RHB Research Institute

2 October 2014

Post Budget Stock Picks

MALAYSIA

Ensuring fiscal sustainability

RHB Research Institute 3

Strategy put forth to ensure a smooth transition to the 11th Malaysia

Plan (11MP) and advance up the value chain.

Developing human capital & entrepreneurship.

Encouraging research and innovation.

Nurturing the growth of SMEs.

Promoting the growth of the services sector.

Indeed, a new approach known as the Malaysia National Development

Strategy (MyNDs) is being formulated and will be a key basis to

planning and preparation of programmes and projects under the 11MP.

Emphasis on using limited resources optimally.

Focus on high-impact projects and programmes at low cost.

Efficient and rapid implementation.

11MP will cover the final crucial leg in the country’s transformation into

high-income nation by 2020.

2015 Budget: Strategy to move up value chain


A well-balanced 2015 Budget combining commitments to achieve greater fiscal

prudence but mindful of the impact of the higher costs of living.

Greater fiscal prudence will be achieved with the introduction of GST in April 2015

that will broaden the tax and partially help to bring down the fiscal deficit to 3% of

GDP.

The impact of higher costs of living will be cushioned with a proposed reduction in

income tax by 1-3% from YA2015 and corporation income tax by 1% from YA2016, a

MYR300 hike in BR1M handouts to MYR950, and a new petroleum subsidy

mechanism in the pipeline

A multi-tiered fuel subsidy rationalisation scheme to cut fuel subsidy and contain

operating expenditure.

Good progress in the implementation of the Economic Transformation Programme

and building economic resilience.

The budget specifically mentioned several expressways coupled with MRT2

(MYR23bn) and LRT3 (MTR9bn), as well as the Pan-Borneo Highway (MYR27bn).

The property and sin sectors (brewery, tobacco and gaming) are spared this time,

while pump-priming efforts will continue with a 15% increase in gross development

expenditure to MYR48.5bn.

2015 Budget: Pro growth and ensuring fiscal sustainability


Federal Government’s financial position

2013 20141 20152

MYRbn % change MYRbn % change MYRbn %

change

Revenue 213.4 2.6 225.1 5.5 235.2 4.5

Total Expenditure 253.5 0.4 263.3 3.9 271.9 3.3

Operating Expenditure 211.3 2.8 221.1 4.7 223.4 1.1

Gross Development Expenditure 42.2 -10.1 42.2 0.03 48.5 14.9

Less: Loan Recoveries 1.5 0.9 1.0

Net development expenditure 40.7 -8.2 41.3 1.4 47.5 15.0

Overall Balance -38.6 -37.3 -35.7

% to GDP -3.9 -3.5 -3.0

Sources of financing:

Net domestic borrowing 39.5 37.6 -

Net external borrowing -0.2 -0.4 -

Change in assets -0.7 0.2

Debt to GDP % 54.7 54.1 53.1

1: Revised estimates by MOF 2: Budget forecasts, excluding 2015 tax measures Note: Total may not add up due to rounding Source: Economic Report 2014/2015, Ministry of Finance


Revenue boosted by GST MYR23bn

A sharp increase of 15% in development expenditure in 2015 (+1.4%

estimated for 2014), which has a larger multiplier impact on the economy.

Housing, education, trade & industry and transportation.

Operating expenditure being contained at a marginal rise of 1.1% in 2015

(+4.7% estimated for 2014)

Rationalising fuel subsidies.

Federal Government financial position

Operating expenditure moderating but still at uncomfortable level

Operating expenditure will

still take up 95% of

government revenue in

2015 (98.2% in 2014).

Step in the right

direction, but still at an

uncomfortable high

level.


… 2015 Budget’s Impacts


Consumer spending growth though

slowing, remains resilient

GST will add to compliance cost and push up inflation.

Reeling from the impact of policies over the last 2 years.

Measures to rein in household debt (86.8% of GDP in 2013). Measures to cool down property speculation. Fuel subsidy rationalisation and fiscal consolidation.

Domestic demand growth is on a moderating trend

Source: Department of Statistics Source: Department of Statistics

A revitalisation of investment

-30

-20

-10

0

10

20

30

40

50

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5f

% y-o-y

Fixed capital formation

Private investment


2012 responsible lending - Based

on net income instead of gross

Promote a sound and sustainable

household sector in July 2013

Personal loans – max 10

years

Property loans – max 35

years

No pre-approved personal

loans

Measures to control household debt

Source: Bank Negara Malaysia

Rising household debt a concern

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

02 03 04 05 06 07 08 09 10 11 12 13

% o

f G

DP

RM

bn

(RHS

(LHS

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

09 10 11 12 13 J-A14

% c

hange

Approved consumption loans


A sharp slowdown in housing loan

approvals

RPGT to be raised to 30%

Foreigner can only buy property above RM1m

Display detailed sales prices

Ban developer interest bearing scheme

Property cooling measures in 2014 Budget – The

effect will be felt more significantly in 2015

Source: Bank Negara Malaysia

Growth of outstanding housing loan

holding up

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

J10 M S

J11 M S

J12 M S

J13 M S

J14 M

% y

oy

Limit on L-T-V ratio

Macro prudential Macro prudential

measures

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

08 09 10 11 12 13 J-A14

% c

hange

Approved housing loans


Has moderated from 3.5% y-o-y in Fed-March 2014 to 3.2-3.3% in July-August. Effect of the upward adjustments in administrative pricing started to taper

off and a higher base effect set in.

The 9.5-10% increase in retail petrol and diesel prices with effect from 2 Oct

could add about 0.7ppt to headline inflation in the immediate term (full-year

impact: <0.2ppt), but this will likely be subdued by the higher base effect.

Headline inflation to spike up in 2015

Inflation accelerating

Source: Department of Statistics

Full-year 2014 inflation

likely to be around 3.4%

(2.1% in 2013).

The 6% GST will add

about 1.8ppts to inflation;

9-month impact for 2015:

+1.4ppts. 2015 headline

inflation is likely to be

close to 4.2%


Expand scope of goods and services that are not subject to GST

Electricity consumption exempted from GST to be increased from

first 200 to 300 units

No GST on retail sales of RON95, diesel and LPG

Restructure individual income tax for year of assessment 2015

Individual: reduced by 1-3%

Tax payers with family & income of MYR4,000/month: no tax

liability

Maximum rate of chargeable income: increased from exceeding

MYR100,000 to exceeding MYR400,000

Current maximum tax rate: 26% reduced to 24%, 24.5% & 25%

Increase tax reliefs for certain categories

Reduce income tax rates for Companies (2016), SMEs (2016)

& Cooperatives (2015) by 1-2%.

Provide incentives & assistance to businesses on training, &

purchase of equipment and software relating to GST

Mitigating the impact of GST


Strengthen food supply chain, establish 65 permanent farmers’

markets; 50 fish markets (2015 – 2017)

Provide intercity bus services to those residing outside of but

working in KL with 30% discounted monthly fare

Financial assistance for poor families, children, senior citizens &

OKU

Increase living allowance for fishermen MYR200-300 per month

Half month bonus to civil servants; MYR250 for pensioners

MYR100 to all primary and secondary students;

MYR250 1Malaysia Book Voucher

Bantuan Rakyat 1Malaysia (BR1M) Programme

Consumer spending to be cushioned by BR1M

Category Monthly Income BR1M Value

Household Below MYR3,000 MYR950 (2014: MYR650)

MYR3,000 -MYR4000 MYR750 (2014: MYR450)

Individual MYR2,000 and below MYR350 (2014: MYR300)


PR1MA:

Construction of 80,000 units: MYR1.3bn

Rent-To-Own scheme

Extend 50% stamp duty exemption on instruments of transfer

and loan agreements and increase purchase limit to MYR500,000

until 31 Dec. 2016

Improve Skim Rumah Pertamaku under Cagamas

Youth Housing Scheme

Monthly assistance MYR200 for 2 years to ease installments

burden

50% stamp duty exemption on instruments of transfer and loan

agreements

10% loan guarantee to get full financing

Housing in 2015 Budget to help lower income group


Construction/upgrading of infrastructure projects:

Sungai Besi – Ulu Klang Expressway (SUKE): MYR5.3bn

West Coast Expressway from Taiping to Banting: MYR5bn

Damansara – Shah Alam Highway (DASH): MYR4.2bn

Eastern Klang Valley Expressway (EKVE): MYR1.6bn

East Coast railway line: MYR15mn

MRT Line 2 from Selayang to Putrajaya (56 km): MYR23bn

LRT 3 linking Bandar Utama to Shah Alam & Klang: MYR9bn

Pengerang Integrated Petroleum Complex (PIPC): MYR69bn

Build Pan-Borneo Highway (MYR27bn): Sarawak (936 km),

Sabah (727 km)

High-Speed Broadband (HSBB) - Build 1,000 new

telecommunication towers & lay undersea cables: MYR2.7bn

Construction of Air Langat 2 Water Treatment Plant: MYR3bn

Sustainable Mobility Fund to develop the electric vehicle

manufacturing industry: MYR70m.

More infrastructure spending to support private

investment


Income tax exemption for industrial area management

100% exemption for less developed areas (5 years)

70% exemption for other areas (5 years)

Capital allowance to increase automation in labour-intensive

industries

High labour-intensive industries: 200% on the first MYR4m

expenditure (2015-2017)

Other industries: 200% on the first MYR2m expenditure (2015-

2020)

Introduce customised incentive package to increase MNCs

global operation centres

Setting up Services Sector Guarantee Scheme: MYR5bn

Reintroducing Services Export Fund (SEF): MYR300m

Export duty exemption for CPO extended until December 2014

Regulatory price mechanisms for rubber smallholders (MYR100m

allocation)

Some incentives for business in 2015 Budget


The Central Bank might have done with the rate hike for the

year.

Policy shifted to focus on the strength of the economic

growth.

Still a challenging global economic environment.

Inflation will spike up after the GST comes into effect from April

2015 with real interest rates turning more negative. No rush but

another 25bps rate hike cannot be ruled out in 1Q2015.

Raising the OPR will provide some support to the ringgit

and enable the Central Bank to manage a more orderly

outflow of short-term capital at a time when domestic

consumer spending will likely spike up ahead of the GST

implementation.

No rush for monetary tightening


… External front fraught with challenges


Global ISM new orders and industrial

production on a rising trend

Stall-speed recovery in the major world economies, although the broad picture

still points to sustained, albeit uneven growth in the period ahead.

Supported by the uptrend in global ISM new orders and industrial production.

And the fact that ECB has responded with significant policy measures to revive

growth, while Japan and China have room for policy easing.

Advanced economies in a “stop-and-go” recovery mode

Source: Bloomberg Source: Bloomberg

Advanced economies in a “stop-and-go”

recovery mode

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

-8

-6

-4

-2

0

2

4

6

8

10

12

11 12 13 14

% annualised

US (LHS) Japan (LHS)

Eurozone (RHS) UK (RHS)

% annualised

-100

-80

-60

-40

-20

0

20

40

60

80

100

30

35

40

45

50

55

60

65

70

05 06 07 08 09 10 11 12 13 14

Index %, y-o-y

ISM new orders (LHS) Global Industrial Index (RHS)


US capital goods new orders and equipment

investment bouncing back

On a steadier recovery path. Shale gas revolution.

Sustained jobs creation.

The strength hinges on the US economy

Source: FHFA (Federal Housing Finance Agency) Source: Bureau of Labour Statistics

US : Sustained manufacturing & services

activities,

but on a weakening bias

Housing price recovery.

Lack of a fiscal drag by itself is a big plus.

US housing price on recovery path Sustained jobs creation critical for consumer

spending and growth

Source: Bureau of Labour Statistics Source: US’s Institute for Supply Management (ISM)

100

110

120

130

140

150

160

50,000

60,000

70,000

80,000

90,000

100,000

110,000

05 06 07 08 09 10 11 12 13 14

USD bn USD bn Capital goods

(RHS)

Equipment

investment

(LHS)

-1000

-800

-600

-400

-200

0

200

400

600

05 06 07 08 09 10 11 12 13 14

m-o-m, thousand 12-mth MA 6-mth MA

(Private non-farm)

-10.0

-5.0

0.0

5.0

10.0

15.0

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

% y-o-y (House price index)

48

53

58

63

12 13 14

Index

ISM

manufacturing

ISM

Non-manufacturing


Eurozone’s inflation below target

Economy ground to a halt in the 2Q.

ECB has responded twice on 5 June and 4 Sept – to counter the downtrend of

the economy. Cutting interest rates. Providing cheap funds to spur bank lending. Buy asset-backed securities and covered bonds issued by Eurozone banks.

Draghinomics countering the Eurozone’s deflation threat

Source: European Central Bank Source: European Central Bank

Economic recovery in the Eurozone

stalled in the 2Q

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

2011 2012 2013 2014

% q-o-q

0.0

(Q2)

-1

0

1

2

3

4

5

05 06 07 08 09 10 11 12 13 14

% y-o-y

CPI

Core CPI


Japan’s manufacturing activities and

retail sales bouncing back

Fear of consumption tax hike derailing the economic recovery.

Abenomics has brought down unemployment to just 3.8% and the GDP deflator

has narrowed to close to zero.

Beginning to make headway in its “Third Arrow” in implementing the

fundamental restructuring of the economy.

Abenomics’ structural reforms have just started

Source: Markit Economics Source: Japan Statistics Bureau

Japan’s economy plunged into a sharp

contraction after a sales tax hike

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

05 06 07 08 09 10 11 12 13 14

% annualised

-7.1%

(Q2)

-6

-4

-2

0

2

4

6

8

10

12

40

42

44

46

48

50

52

54

56

58

11 12 13 14

Index % y-o-y

Retail sales

(RHS)

PMI

Manufacturing

(LHS) PMI

Services

(LHS)


China industrial production, fixed asset

investment and retail sales slowing down

Still struggling with its debt burden while undergoing transformation.

But there is a strong political will to steer its economy for a soft landing. Selective policy easing.

Managing debt burden relatively well.

Tail risk could potentially emerge from the large commodity-dependent

economies, but will unlikely degenerate into another major crisis, in our view.

China start-stop economy creates jitters, but growth

will likely hold up

Source: China’s National Bureau of Statistics Source: China Federationof Logistics & Purchasing (official PMI),

Markit Economics (HSBC PMI)

China’s HSBC and official

manufacturing PMIs still weak

47

48

49

50

51

52

53

54

55

2011 Jul 2012 Jul 2013 Jul 2014 Jul

Index

Official PMI

HSBC PMI

15

17

19

21

23

25

27

29

31

33

35

0

5

10

15

20

25

05 06 07 08 09 10 11 12 13 14

%, y-o-y %, y-o-y

Retail sales (LHS)

Industrial production (LHS)

Fixed asset investment (RHS)


Reflected in divergent trends of PMI new orders and manufacturing

activities of the major world economies.

Causing another cycle of disinflation in 3Q 2014, led by the

absence of inflation in the Eurozone.

Advanced economies, nevertheless, will unlikely be able to

transition from a recovery to an economic boom anytime soon

Divergent trends of manufacturing activity in the major world economies

Source: Markit Economics

44

46

48

50

52

54

56

58

60

2012 Jul 2013 Jul 2014 Jul

Index

US

Japan China Euro


Policies in the major world countries will remain very

accommodative and supportive of equities.

The inability of the developed countries to transition from a

recovery to an economic boom suggests that there is no risk of

significant policy tightening that will cause the uptrend in global

equities to reverse course anytime soon.

It is just that it is more susceptible to a short-term setback due

to the occurrence of an unexpected event.

What is also worth highlighting, in our view, is that in a

subdued growth environment, corporates do not have much

pricing power and with weak demand, inflation will well behave.

The good news is:


Source: Dept. of Statistics

The bad news is:

Exports started to turn sluggish in July-Aug, partly ex-rate factor partly high base

effect (MOF forecast 2.1% in 2015 vs 3.5% in 2014)

Dragged down by uneven global economic growth

Geopolitical tensions in Eastern Europe and the Middle East

Uncertainty over global interest rate normalisation and policy adjustments in

advanced economies

Slower growth in emerging economies

Malaysia’s exports moderating in the 2H


200

250

300

350

400

450

500

550

600

650

1-J

an-0

8

1-A

pr-

08

1-J

ul-

08

1-O

ct-0

8

1-J

an-0

9

1-A

pr-

09

1-J

ul-

09

1-O

ct-0

9

1-J

an-1

0

1-A

pr-

10

1-J

ul-

10

1-O

ct-1

0

1-J

an-1

1

1-A

pr-

11

1-J

ul-

11

1-O

ct-1

1

1-J

an-1

2

1-A

pr-

12

1-J

ul-

12

1-O

ct-1

2

1-J

an-1

3

1-A

pr-

13

1-J

ul-

13

1-O

ct-1

3

1-J

an-1

4

1-A

pr-

14

1-J

ul-

14

Index

End of QE3 in the US.

Complicated by changing expectations of the timing and

speed of US rate-hike cycle.

Strength of the major world economies.

Risk of a geopolitical shock.

When will the US raises interest rates?

QE 3 (Sep12 -31Oct14)

QE1 (Dec 08-Mar10)

QE2 (Nov10-Jun11)

MSCI Asia ex-Japan index corrected both after end of QE1 and QE2

Source: Bloomberg


Foreign holdings in equity remain high

High foreign ownership of MGS and money market instruments

Foreign ownership of equity trending down

Susceptible to US interest rate hike

High foreign holdings of financial assets in Malaysia

Source: Bursa Malaysia; * estimates Source: Bank Negara Malaysia

20

21

22

23

24

25

26

27

28

Jan

-07

Jul-0

7Jan

-08

Jul-0

8Jan

-09

Jul-0

9Jan

-10

Jul-1

0N

ov-1

0Jan

-11

Ma

r-11

Ma

y-1

1Jul-1

1S

ep-1

1N

ov-1

1Jan

-12

Ma

r-12

Ma

y-1

2Jul-1

2S

ep-1

2N

ov-1

2Jan

-13

Ma

r-13

Ma

y-1

3Jul-1

3S

ep-1

3N

ov-1

3Jan

-14

Ma

r-14

Ma

y-1

4Jul-1

4*S

ep-1

4

%

High foreign holdings of MGS and

short-term money market papers


High foreign holdings of financial assets

Could weaken back to around MYR 3.30/USD or even exceeding that level

temporarily in the short term. When expectations of a US rate hike build up.

Will eventually strengthen back to around MYR 3.15/USD when the

situation normalises, in our view.

Ringgit still susceptible to capital flow

* Up to August 2014; Source: Bank Negara Malaysia, Bursa Malaysia Source: Bloomberg

MYR/USD: Recovered some lost ground

before weakening back

20

21

22

23

24

25

26

27

0

10

20

30

40

50

60

70

80

90

2008 2009 2010 2011 2012 2013 2014*

% %

MGS (LHS) Money market (LHS) Equity (RHS)

2.90

2.95

3.00

3.05

3.10

3.15

3.20

3.25

3.30

3.35

Jan

-13

Fe

b-1

3M

ar-

13

Ap

r-13

Ma

y-1

3

Jun

-13

Jul-

13

Au

g-1

3

Se

p-1

3O

ct-

13

Nov-1

3D

ec-1

3

Jan

-14

Fe

b-1

4M

ar-

14

Ap

r-14

Ma

y-1

4

Jun

-14

Jul-

14

Au

g-1

4

Se

p-1

4O

ct-

14

MYR/USD

3.2585


Low risk of it falling into a deficit over the next 1-2 years.

Current account surplus in the balance of

payments bouncing back with export recovery

Current account surplus in the balance of payments

Source: Department of Statistics Malaysia

-25

-20

-15

-10

-5

0

5

10

15

20

25

0

5

10

15

20

25

30

35

40

45

05 06 07 08 09 10 11 12 13 14

% y-o-y

MYR bn

Exports (RHS)

Current account

balance


Slower economic growth in the 2H and 2015 is

to be expected

Real GDP growth accelerated to 6.3% y-oy in 1H2014, lifted by strengthening

export growth.

Growth, though resilience, is envisaged to slow to 5.3% y-o-y in the 2H, but the

full year growth of 5.8% is still likely to be the strongest in the SEA region.

2015 growth is projected to be weaker at 5.3%

GDP by expenditure components (at constant 2005 prices)

MOF RHBRI

2012 2013 2014 (p) 2015 (f) 2014 (e) 2015 (f) 2016 (f)

(% growth in real terms)

Domestic demand1 10.6 7.4 6.4 6.2 6.4 5.8 6.1

Consumption

Public Consumption 5.0 6.3 2.1 3.8 4.0 3.1 3.9

Private Consumption 8.2 7.2 6.5 5.6 6.8 5.2 5.3

Fixed capital formation 19.2 8.5 8.3 8.5 6.9 8.2 8.5

Public Investment 14.6 2.2 2.6 4.7 0.4 3.4 4.0

Private Investment 22.8 13.1 12.0 10.7 11.2 11.0 11.0

Exports2 -1.8 0.6 3.5 2.1 4.5 4.8 4.4

Imports2 2.5 2.0 3.5 4.0 4.8 6.4 5.0

Gross Domestic Product 5.6 4.7 5.5-6.0 5.0-6.0 5.8 5.3 5.5

1Excluding stocks 2Goods & non-factor services

(p): Preliminary (f): Forecasts

Source: Economic Report 2014/2015, Ministry of Finance


A Fiscally Responsible Budget 2015

Well balanced Budget – Fiscal prudence but people centric

Commitment to fiscal reform – the Government has adhered to its pledges

New GST regime in April 2015

Limited impact on the market

Income tax and corporation tax rate reductions are not new and already announced last year

Initiatives to increase the BR1M handouts were largely expected

The property and sin sectors were unscathed

Infrastructure and construction projects were strongly featured


Commitment to fiscal reform

Government’s promise to maintain fiscal prudence has been kept

Fiscal deficit to be cut to 3% of GDP in 2015

GST regime to broaden the tax base will be implemented as

scheduled in April 2015

Commitment to introduce a targeted petroleum subsidy

mechanism in 2015 (no details as yet)

Minimal risk of a sovereign rating downgrade


A people centric Budget

GST exemption list was widened

Reduction in income tax rates by 1-3 ppts

Chargeable income subjected to the maximum rate will be

increased from MYR100,000 to MYR400,000

The current maximum tax rate at 26% will be reduced to

24%, 24.5% and 25% based on three tax bracket tiers

Increase in BR1M handouts (payable in three installments)

Various affordable housing initiatives

Half month bonus for civil servants


Key initiatives:

Gross development expenditure for 2015 at MYR48.5bn, up 15% from the MYR42.2bn estimated for 2014, with the

biggest recipients being rural infrastructure, water projects (including the MYR3bn Langat 2 water treatment plant),

affordable housing and property/facility maintenance.

Implementation of several highways: Pan-Borneo Highway (MYR27bn), Sg Besi – Ulu Klang Expressway (SUKE)

(MYR5.3bn), West Coast Expressway (WCE) (MYR5bn), Damansara – Shah Alam Highway (DASH) (MYR4.2bn)

and Eastern Klang Valley Expressway (EKVE) (MYR1.6bn).

Implementation of MRT Line 2 (Selayang – Putrajaya) (MYR23bn), LRT Line 3 (Bandar Utama – Shah Alam –

Klang) (MYR9bn) and upgrading of the East Coast railway line (Gemas - Mentakab, Jerantut - Sungai Yu and Gua

Musang – Tumpat) (MYR150m).

Housing Facilitation Fund for 2015 at MYR1.3bn, up 30% from MYR1bn for 2014.

While the budget specifically mentioned several major expressway and rail projects, they are not recipients of the

allocation. The expressways (other than the Pan-Borneo Highway) will be carried out on a build-operate-transfer (BOT)

basis, while funding for MRT Line 2 and LRT 3 will come from special purpose vehicles (SPVs).

Specifically, construction names that are likely to benefit from the budget are:

i. Gamuda – MRT Line 2 is reiterated

ii. Protasco – Higher Housing Facilitation Fund

iii. AZRB – Langat 2 and EKVE reiterated.

We believe the current strong momentum of activities in the sector will sustain. We are not perturbed by the

construction resources to be disengaged from the MYR23bn Line 1 of the Klang Valley MRT project on its completion in

mid-2015. We believe they will find their homes in the MYR25bn Line 2 of the Klang Valley MRT project (scheduled to

start work in mid-2016), or a host of other mega projects that have already hit the ground, particularly the MYR89bn

Refinery And Petrochemical Integrated Development (RAPID) project in Pengerang, Johor, the MYR5bn WCE and

various public housing projects, particularly, the PR1MA backed by a MYR1.3bn facilitation fund under the budget.

Overweight. Our three top themes and their proxies are: i) the Klang Valley MRT - Gamuda, ii) piling - Pintaras, and iii)

public housing – Protasco.

Construction Overweight


Consumer

Key takeaways from the Budget 2015:

increased cash assistance (Bantuan Rakyat 1Malaysia or BR1M)

individual income tax reduction of 1-3ppts for all taxpayers for year of assessment 2015.

chargeable income subject to the max rate will be increased to >MYR400,000 from

>MYR100,000

a half-month bonus for civil servants and special financial assistance of MYR250 for government

pensioners

High labour-intensive industries (such as rubber products, plastics, wood, furniture and textiles)

are entitled to an automation capital allowance of 200% on the first MYR4m expenditure incurred

within the 2015-2017 period

On GST. Favourable to F&B players, as most of their products are now zero-rated, allowing them to

claim their GST input costs. For retailers, such implementation will be relatively insignificant as GST

imposed will be passed on to consumers. However, they may see lower sales volume as prices of

their goods becomes higher due to the GST, causing consumers to turn cautious on spending

While the proposals mentioned may lessen the burden of middle- to lower-income households, we

believe they may be insufficient to offset the inflationary pressure arising from the: i) rising costs of

living, ii) rationalisation of government subsidies, and iii) upcoming implementation of the GST. We

remain UNDERWEIGHT on the sector due to: i) lofty valuations with limited earnings growth, ii)

compressed dividend yields, and iii) earnings risk from a reduction in spending.

At this juncture, we prefer consumer packaging companies, such as SKP Resources (SKP MK, BUY,

MYR0.85), Scientex (SCI MK, BUY, FV: MYR8.64) and Thong Guan Industries (TGI MK, BUY,

MYR2.60).

Underweight


Key incentives:

The Government has extended the 50% stamp duty exemption on instruments of transfer

and loan agreements and increase the purchase limit from MYR400k to MYR500k. The

stamp duty exemption is only eligible for Malaysian who has never owned a residential

property, and will be given until 31 December 2016.

The Youth Housing Scheme offers a funding limit for a first home priced below MYR500k.

This is for married youth aged 25-40 years with household income not more than MYR10k.

The maximum loan period is 35 years. The Government will also provide a 10% loan

guarantee to enable borrowers to obtain full financing. Borrowers can also withdraw from

EPF Account 2 to top up their monthly instalment and other related costs.

Affordable housing players are the key winners. Tambun Indah, Matrix Concepts and Hua Yang

are the key beneficiaries.

The higher ceiling price of MYR500k is now more realistic given that house price has

appreciated over the last 2-3 years, and hence more first-time home buyers can enjoy the 50%

stamp duty exemption..

Based on our calculations, buyers for MYR500k worth of properties will be able to save about

MYR5,750 or 1.15%, which could be a meaningful amount for middle-income earners

Maintain Overweight. No news is good news to the property sector, as we already mentioned

that we expect neither more drastic measures to be imposed nor relaxation of policies.

Overweight Property


The Government will introduce a new shariah-compliant investment product in 2015 called the

Investment Account Platform (IAP). IAP will provide opportunities to investors in financing

entrepreneurial activities and developing viable SMEs. At the same time, IAP will be a platform to

attract institutional and individual investors including high net worth individuals to invest in the

Islamic financial market. Initially, IAP will be implemented with a startup fund of MYR150m. The

Government proposes individual investors be given income tax exemption on profits earned from

qualifying investment for three consecutive years. Additionally, there will be further tax deduction for

expenses incurred for issuance of sukuk.

Our view: The IA platform will be an innovative product - linked to the banks’ financing portfolio like

project and entrepreneurial financing - that provides customers of Islamic banks opportunity to earn

investment returns and tax incentives.

The IA (a liability item in the banks’ balance sheet) will also benefit the Islamic banks with i) zero

capital charges, ii) exclusion from SRR.

However, we are NEUTRAL on BIMB Holdings (BIMB MK, NEUTRAL, TP MYR4.75) despite the

fact that it could spur its fee income stream. We are still concerned over the uncertainties on the

implementation and the customers’ reception and the industry has yet to update on the possibilities

of off-balance sheet accounting. Given that IA is not a form of deposit, it may affect the Islamic

bank’s ability to retain depositors (and hence its LDR) who may switch to IA for potential higher

returns. Ultimately, we expect operational costs to rise in the near term.

Neutral Banking


Investment strategy: An opportunity to accumulate

The current market sell off is a temporary retracement

We believe there will not be a major crisis to derail the global economic

recovery

No significant risk of significant monetary policy tightening

Central banks in US, EU, China and Japan have the ability to do more

to overcome deflationary risks

Market valuations are not excessive

Liquidity levels are still high

Domestic earnings growth to accelerate in 2015

Stock picking will be important

Identify growth stocks

Mid caps have the growth potential

Large caps with good fundamentals – Buy on weakness


Earnings growth is poised to improve from 2.8% in FY2014 to 7.6% in 2015 and trend

higher in FY2016 on account of the 1% pt. reduction in corporate income tax rate.

Largely from capacity expansion, execution of new orders, M&As, etc.

Stronger earnings growth for FY2015 fairly broad-based, from construction, telcos,

banking, gaming, healthcare and shipping.

Outlook improving:

Note: Excludes FBM KLCI stocks not under RHBRI’s coverage, i.e.,HLFG, PPB, Pet Dagangan, RHB Cap and YTL.

*Exclude MAS’ earnings for 2012-2015.

EBITDA Growth (%) 11.2 2.3 6.4 7.9 11.0 2.4 7.7 8.7

Pre-Tax Earnings Growth (%) 13.8 (2.0) 7.6 6.2 12.4 (1.0) 6.9 5.5

Normalised Earnings Growth (%)* 10.7 2.8 3.9 8.3 9.7 3.4 5.0 11.5

Normalised EPS (sen)* 42.6 42.9 44.1 47.5 29.6 29.4 30.2 33.2

Normalised EPS Growth (%)* 7.9 0.8 2.8 7.6 0.8 (0.7) 2.7 10.1

Normalised EPS Growth ex-TNB (%)* 3.6 1.4 1.1 7.1 (3.0) (0.5) 1.6 10.0

Prospective PER (x)* 18.0 17.5 16.8 15.5 17.8 17.2 16.4 14.7

Price/EBITDA (x) 10.0 9.8 9.2 8.5 9.9 9.7 9.0 8.3

Price/Bk (x) 2.5 2.3 2.2 2.0 2.4 2.1 1.9 1.8

Price/NTA (x) 3.2 2.8 2.6 2.3 2.9 2.5 2.3 2.1

Net Interest Cover (x) 16.6 12.0 13.0 13.8 11.9 11.6 11.4 12.4

Net Gearing (%) 28.3 34.5 31.6 30.9 33.4 31.8 30.1 32.7

EV/EBITDA (x) 7.3 7.4 6.9 6.4 8.2 8.3 7.8 7.2

Div Yld (%) 2.7 3.2 3.3 3.4 3.0 3.1 3.2 3.4

ROE (%) 14.1 13.3 12.8 12.9 13.3 12.3 11.8 12.3

COMPOSITE INDEX 1,767.77 FBM KLCI RHBRI BASKET

16th October 2014 2012A 2013A 2014F 2015F 2012A 2013A 2014F 2015F


Sector weightings and valuations

(MYRbn) (%) FY13 FY14F FY15F FY13 FY14F FY15F

* Exclude MAS’ earnings for FY 13-15

Note : RHB universe of stocks.

1,261.6 100.0 (0.7) 2.7 10.1 17.2 16.4 14.7

Covered Stocks MktCap Weight EPS Growth(%) PER(x) Recommendation

Utilities 125.6 10.0 (8.8) 14.7 4.6 18.7 16.1 15.2 Overweight

Property 50.1 4.0 7.6 (6.1) 13.0 13.1 13.2 11.5 Overweight

Rubber Products 44.3 3.5 6.9 4.9 19.1 18.6 17.5 14.7 Overweight

Construction 26.7 2.1 3.5 15.7 17.6 16.4 13.2 10.8 Overweight

Non-Bank Financials 22.8 1.8 19.9 1.4 8.0 14.3 12.2 11.3 Overweight

Basic Materials 18.5 1.5 19.1 24.9 27.3 20.7 16.4 12.8 Overweight

Logistics 3.0 0.2 1.6 7.0 5.2 8.7 8.1 7.7 Overweight

Banking 268.7 21.3 5.6 0.3 7.2 13.2 12.6 11.4 Neutral

Telecommunications 181.0 14.4 4.9 (0.9) 8.1 23.2 23.4 21.6 Neutral

Plantation 136.2 10.8 (20.7) (7.1) (2.6) 17.4 18.7 19.1 Neutral

Oil & Gas 97.1 7.7 7.7 17.3 12.6 16.6 14.1 12.4 Neutral

Gaming 64.9 5.1 (11.5) (3.3) 11.7 15.0 15.5 13.9 Neutral

Shipping 30.6 2.4 62.7 8.5 28.9 18.5 17.0 13.2 Neutral

Property-MREITs 29.8 2.4 16.0 1.8 6.0 18.8 18.3 16.9 Neutral

Auto 24.4 1.9 (8.1) 13.9 18.3 15.1 13.2 11.2 Neutral

Aviation 20.9 1.7 (43.4) (90.8) 859.2 21.4 230.4 24.0 Neutral

Media 20.2 1.6 1.8 5.50 14.24 25.1 23.7 20.7 Neutral

Healthcare 13.3 1.1 21.0 21.4 45.0 52.3 41.5 28.0 Neutral

Ports 12.2 1.0 13.9 11.2 4.9 20.5 18.4 17.6 Neutral

Technology 5.1 0.4 19.2 74.2 15.4 30.3 13.3 10.0 Neutral

Timber 3.8 0.3 (52.8) 56.4 26.0 27.2 17.4 13.8 Neutral

Consumer 62.2 4.9 (1.1) 2.0 7.2 20.5 20.0 18.6 Underweight


Top picks

Stocks FYE Price Target Mkt Cap EPS Eps Growth PER P/BV P/CF NDY

(16/10/14) Price (sen) (%) (x) (x) (x) (%)

(MYR/s) (MYR/s) (MYRm) 14F 15F 14F 15F 14F 15F 15F 15F 15F

AMMB^ Mar 6.59 8.00 19,863 63.8 68.3 7.9 7.0 10.3 9.6 1.3 n.a. 4.3

SapuraKencana^ Jan 3.16 5.33 18,935 23.1 27.8 24.3 20.1 13.7 11.4 1.4 40.1 0.0

Bumi Armada Dec 1.37 2.24 4,163 14.5 15.1 (1.3) 4.0 9.8 9.4 0.6 2.8 2.7

Dialog Jun 1.48 2.25 8,430 4.2 5.6 16.9 32.3 37.3 28.2 5.1 33.7 1.4

E&O Mar 2.49 3.60 2,948 11.3 15.2 53.9 34.6 22.9 17.0 1.7 13.0 1.4

IOIPG Jun 2.47 3.38 8,000 13.1 15.4 (38.7) 17.0 18.8 16.1 0.7 11.1 3.2

CMS Dec 3.78 5.00 3,890 20.0 25.3 15.0 26.3 18.9 15.0 2.0 12.5 2.0

Press Metal Dec 4.90 8.30 2,592 49.6 68.4 +>100.0 37.7 9.9 7.2 1.3 3.6 2.5

Dayang Dec 2.75 4.80 2,269 25.7 30.5 76.2 18.7 10.7 9.0 2.4 10.3 5.6

Coastal Contracts Dec 3.50 5.90 2,071 32.6 37.3 32.2 14.7 10.8 9.4 1.6 5.5 2.7

Matrix Dec 2.70 3.93 1,262 36.2 40.1 (28.7) 10.7 7.6 6.9 1.7 8.6 5.8

Inari Amerton Jun 2.12 3.82 1,094 19.5 20.0 +>100.0 2.6 10.9 10.6 3.8 7.5 3.8

Tambun Indah Dec 2.06 3.00 839 24.1 28.0 46.2 16.1 8.5 7.4 1.9 10.4 5.0

Naim Dec 2.84 5.06 720 44.0 50.6 +>100.0 14.9 6.5 5.7 0.6 10.6 2.8

Pintaras Jaya Jun 3.85 4.92 616 33.1 36.2 19.7 9.5 11.6 10.6 1.8 10.5 3.9

SKP Resources^ Mar 0.58 0.85 522 5.3 8.3 59.3 56.6 10.9 7.0 1.8 1.0 7.2

^ FY14-15 valuations refer to those of FY15-16

Source: RHB Estimates


High Yield Stocks Table

^ FY14-15 valuations refer to those of FY15-16


Parkson 2.43 7.5 3.8 (40.6) 43.2 18.7 13.0 1.0 7.5

Quill Capita 1.14 7.5 7.5 9.3 8.6 11.8 10.9 0.8 7.3

Protasco 1.42 7.0 7.0 39.9 33.3 8.3 6.2 1.1 19.0

MCIL^ 0.86 7.0 7.2 (7.1) 4.1 10.1 9.7 2.1 21.9

Hektar REIT 1.50 7.0 7.2 (0.5) 5.5 13.1 12.4 1.0 7.8

Magnum Bhd 2.80 6.7 6.8 2.7 1.3 11.9 11.8 1.5 13.2

CapitaMalls 1.39 6.6 6.9 3.4 5.6 16.0 15.2 1.1 7.3

Paramount 1.43 6.3 6.3 7.4 (2.2) 8.4 8.6 0.7 8.2

UOA Dev 2.10 6.2 6.7 (14.4) 4.0 8.8 8.5 1.0 12.5

B-Toto 3.38 6.2 6.3 5.5 2.1 13.8 13.5 6.4 48.8

Maxis 6.50 6.2 4.9 0.2 5.2 23.3 22.1 10.3 45.8

Media Prima 1.94 6.2 6.9 (10.4) 13.3 10.9 9.6 1.2 17.2

Glomac^ 1.05 6.1 6.1 1.9 2.4 6.9 6.8 0.7 11.3

Hua Yang 2.04 6.0 6.7 (2.0) 11.6 5.8 5.2 1.0 21.5

Axis REIT 3.56 5.9 5.6 1.3 9.0 18.5 17.0 1.4 8.3

Padini 1.77 5.6 6.1 6.5 8.1 13.2 12.2 2.9 24.5

IGB REIT 1.25 5.6 5.9 4.7 3.4 19.6 19.0 1.2 6.3

Maybank 9.45 5.5 5.9 (1.0) 7.9 12.5 11.6 1.5 13.9

Carlsberg 10.70 5.5 5.7 (1.9) 3.8 18.3 17.6 12.1 68.6

Matrix 2.70 5.4 5.9 (28.7) 10.7 7.5 6.7 1.6 26.0

Pavilion REIT 1.44 5.4 5.6 4.0 4.6 19.4 18.6 1.2 6.6

Sunway REIT 1.50 5.2 5.6 (4.7) 10.2 19.7 17.9 1.2 6.7

VS Industry 2.29 5.2 5.8 +>100 12.0 8.0 7.1 0.8 11.5

Thong Guan 1.83 5.0 5.9 21.0 18.5 5.6 4.8 1.8 12.3

KLCCSS 6.46 5.0 5.2 2.5 5.7 18.2 17.2 1.0 5.7

Stocks Price NDY Eps Growth PER P/BV ROE

(16/10/14) (%) (%) (x) (x) (x)

(MYR/s) 14F 15F 14F 15F 14F 15F 15F 15F


Top 30 Laggard stocks on RHB Buy List


Price Target Price % Chg in price

(MYR/s) (MYR/s) 1Mth 3 Mth 6 Mth 12 Mth

Inari Amerton 2.12 3.82 (35.0) (35.0) (18.2) 69.5

Press Metal 4.90 8.30 (30.9) 10.1 50.8 108.5

Rev Asia 0.92 1.68 (30.3) (13.2) 10.2 38.3

OCK 1.24 1.65 (30.0) (17.9) (13.8) 54.0

Coastal Contract 3.50 5.90 (29.7) (31.4) (29.3) 19.0

Unisem 1.20 2.16 (29.0) (30.6) 1.7 37.9

Bumi Armada 1.37 2.24 (25.9) (31.8) (43.9) (43.2)

Naim 2.84 5.06 (24.9) (31.4) (30.4) (22.8)

Sapura Kencana 3.16 5.33 (24.8) (28.7) (25.8) (17.7)

Maybulk 1.33 2.00 (21.8) (30.0) (37.3) (27.7)

Dayang 2.75 4.80 (20.3) (26.1) (25.7) (18.3)

TASCO 2.73 3.90 (20.2) 4.2 7.5 36.5

Thong Guan 1.83 2.60 (18.7) (25.3) (15.7) 15.8

Hiap Teck 0.64 1.00 (17.4) (18.5) (16.3) 1.6

Tune Insurance 1.90 3.00 (17.0) (15.2) (14.0) (4.5)

Protasco 1.42 2.43 (17.0) (29.7) (26.0) 7.6

Matrix 2.70 3.93 (16.9) (8.2) (3.1) 40.5

Datasonic 1.52 2.50 (16.5) (21.2) 6.7 215.4

MRCB 1.43 2.05 (15.9) (14.9) (12.3) (3.4)

Dialog 1.48 2.25 (15.4) (21.7) (16.7) 5.8

Tambun Indah 2.06 3.00 (15.2) (18.6) 2.0 43.1

CMS 3.78 5.00 (15.1) (6.4) 13.4 118.1

MAHB 6.50 8.51 (14.7) (23.1) (19.6) (19.6)

Wah Seong 1.55 2.40 (14.4) (18.0) (16.7) (7.7)

Pintaras 3.85 4.92 (14.3) (11.5) 5.8 27.3

Perdana Petroleum 1.53 2.20 (14.0) (17.3) (20.7) 11.0

Hua Yang 2.04 2.74 (13.9) (14.3) 5.2 (10.9)

OldTown 1.65 2.15 (13.2) (25.7) (17.1) (15.1)

Kimlun 1.31 1.68 (12.7) (19.6) (22.0) (23.5)

DRB-Hicom 2.00 3.20 (12.7) (12.7) (21.9) (20.3)


IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB

Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on

generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a

result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the

accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its

associated persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The

securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages

investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither

RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and

financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or

otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and

agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have

been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals

in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including

quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions of third parties in this

respect.


Thank You


Key Contact Information

A member of the RHB Banking Group

RHB Research Institute Sdn Bhd

Lim Chee Sing DL : +603 9285 9693

Email : [email protected]

Alexander Chia DL : +603 92077621


Peck Boon Soon DL : +603 9280 2163


Economy & Finance

Post budget stock picks - Alexander Chia, Head of RHB Research