Malaysia’s Council of Eminent Persons

Reassurance From New Council Of Eminent Persons

The Council of Eminent Persons held a briefing for investors, shedding some light on certain broad-based measures. However, details of fiscal reforms will only be announced in the first 100 days, aimed at raising disposable income. Architects of the PH manifesto reiterate that the government must deliver: a) institutional reforms – including reducing/eliminating corruption, b) strong check and balance, and c) economic reforms – ensuring that money is in the hands of Malaysian households.

WHAT’S NEW
• Council of Eminent Persons instilling confidence. The newly-formed Council of Eminent Persons (Council) held a briefing for investors yesterday with Tun Daim Xainuddin and Tan Sri Zeti Aziz as speakers. Raising disposable income is a key focus. The Council has been actively meeting various representatives from the investment community (eg GLC funds) and regulators (eg MoF, Securities Commission, Chamber of Commerce) and reassured that Malaysia’s fundamentals and financial system remain strong, and that any near-term weakness in the fiscal position due to the abolishment of GST will be short-term in nature as swift execution of its economic and institutional reforms should lead to stronger market confidence and consequently improved fiscal position and ringgit strength.

• Key highlights of the briefing. a) Measures of the comprehensive fiscal reform to be released within the first 100 days will be orderly in nature. b) Comprehensive review of the tax regime with emphasis on GST. c) Emphasis on reducing public wastage (eg government’s procurement cost) and curbing of corrupt practices as well as scrapping certain mega projects will help to partly plug the revenue gap from the abolishment of GST. d) A task force to be set up to recover 1MDB monies and a separate group comprising the MACC, Attorney General and police to investigate scandals and charge relevant people involved in the 1MDB scandal. e) The government’s role will gradually decline and the private sector playing a more prominent role, hence reducing the “crowding out effect” on private investments. f) More transparent open bidding and assessment of mega infrastructure projects. g) Made recommendation to the government that no politicians be involved in GLCs. h) The government will also honour its debt obligations with regard to toll concessionaires.

• Setting up a committee on institutional reforms. The Council has also announced the formation of a committee on institutional reforms, crucial in ensuring a strong follow through and execution of the positive economic reforms

ACTION
• Strategy. While we still favour defensive stocks and apolitical growth stocks, upside for most of these stocks is limited by the recent days’ run-up (eg BAT). We also advocate buying oversold construction stocks. We maintain our end-18 FBMKLCI target of 1,830. Stocks which offer good upside visibility include defensive large caps DiGi, Magnum, the Genting group, E&E stocks Globetronics and VS Industry. growth stocks Bumi Armada and Yong Tai. Some recent run-down stocks appeal, eg CIMB, Gamuda and Gabungan AQRS.

ESSENTIAL
• The Pakatan Harapan manifesto… We had recently attended a forum titled “Keeping The
Promise of Reform” organised by the Jeffrey Cheah Institute on Southeast Asia. Key panelists Wan Saiful and Liew Chin Tong were some of the many architects behind the Pakatan Harapan manifesto.
• ...focuses on the well being of the rakyat and a strong check and balance system. Key takeaways are: a) strong emphasis on the need for institutional reform, and b) economic reforms. The key message on economic reforms is that ordinary Malaysians must benefit from economic growth and it is the role of the government to make sure that the money is in the hands of the households (focusing on productivity and multiplier effect of the economy). It is also the job of the current government to reduce/ eliminate corruption and create a strong check and balance system (including limiting the Prime Minister’s term of office and ensure a strong and viable opposition party by providing funding for them).

source: UOBKayHian – 16/05/2018

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GE14 Results: Market Sell-off To Create Opportunities

GE14 Results: Sweeping Changes

Pakatan Harapan creates history with its surprising sweep of parliamentary and state seats in the most hotly contested elections in Malaysia. While widely expected, post- GE market jitters should create good buying opportunities as the sell-down may not be too deep should the new government quickly assert business-friendly policies. However, 2018’s outlook remains challenging amid expectations of a global liquidity contraction.

DEFENSIVE STOCKS
WHAT’S NEW
 PH paves way for new dawn. Pakatan Harapan (PH) led by the 93-year old former prime minister, Tun Dr Mahathir Mohamad, fulfilled the ‘Rahman’ prophecy by dislodging Barisan Nasional (BN) to win 121 (54.5%) of parliamentary seats inclusive of ally party Warisan’s 8 seats (GE13: 89 seats), and an additional 5 states (in all controlling 7 states).
 In state results, PR successfully defended Penang and Selangor, and won Kedah, Malacca, Perak, Negeri Sembilan and Johor from BN. A surprise, PAS retains control over Kelantan and wrested control of Terengganu from BN.
 Sweeping control over hot seats, reflecting majority of voters’ sentiment. Of the 60 perceived hot seats, PH wrested 19 seats from BN while losing only 5, according to available (but incomplete) information. Many prominent BN leaders lost, including component parties MCA’s and MIC’s presidents, and several ministers.

NOTABLE STOCKS TO ACCUMMULATE ON WEAKNESS

ACTION
 Market sell-off to create opportunities. We are reviewing our end-18 FBMKLCI target of 1,830 for a modest downgrade. While PH brings hope for better transparency, accountability and financial prudence, investors would be sidelined by the current transitory state. Foreign inflows (+RM2.7b ytd) could reverse, potentially causing the ringgit to weaken. Nevertheless, this is not a ‘-1SD’ sell-off. Hopefully, the widely market sell-off may not be as deep as feared should PH quickly obtain the royal pronouncement as the rightful government, while declaring a two-day cooling-off holiday can provide some leeway for PH to ensure the investment community that it would pursue a business-friendly policy. PH has just publicly declared that it would not avenge and its main motivation is to ensure the rule of law.
 Knee-jerk impact. The most impacted stocks could include perceived politically-linked companies (DRB-Hicom, George Kent, MyEG) and selected mega projects’ beneficiaries on concerns that PH may want to review pricing or defer some mega projects. In his final campaign address, Dr Mahathir voiced his displeasure over DRB’s stake sale in Proton. There could also be a knee-jerk impact on AirAsia, given Tony Fernandez’s open support for BN.
 Buy high-yielding defensive stocks with relatively low foreign portfolio ownership and apolitical growth stocks. The former category of stocks should gain prominence, including sold-down BAT, DiGi, Magnum and YTL Power. FMCG stocks (including brewery stocks) also appeal, with the exception of the well-overvalued Nestle. We would accumulate selected export-oriented stocks, particularly E&E stocks Inari, Globetronics and VS Industry. On paper, gaming companies should benefit, given PR’s intention to repeal GST, although pragmatically, these companies may be subject to other forms of new taxes. We would also accumulate on weakness MRCB, which is considered apolitical (as it MRCB’s good welfare benefits EPF contributors).

source:  UOBKayHian – 10/05/2018

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Bursa Malaysia’s KLCI: Fundamental Outlook for May 2018

We found that the historical performance of the KLCI in May has been mixed, registering average mom negative return of 0.1% over the past 10 years and posting positive mom declines in five out of the past 10 years. However, over a 40-year period, it posted an average mom gain of 1.4%.

On the local front, investors will be closely tracking the results of GE14 on 9 May 2018. To recap, Malaysia’s Prime Minister dissolved the parliament on 7 April (Saturday) and the polling date will be on 9 May 2018 (Wednesday). The government has also declared 9 May as a public holiday.

FBM KLCI performances before and after General Elections (click to enlarge)
The 11-day campaigning period for GE14 has started following nomination day on 28 April 2018 (Saturday). According to press reports, 687 candidates will be vying for the 222 parliamentary seats and 1,646 candidates will be eyeing the 505 state seats. This represents an increase of 20% compared to GE13. This time around, ruling coalition Barisan Nasional (BN) has fielded candidates in all 222 parliamentary and 505 state seats, while the Opposition coalition Pakatan Harapan, under the banner of PKR, has placed its bets on 191 and 448 candidates for both parliamentary and state seats respectively. Meanwhile, PAS becomes the third leading contender in GE14 by fielding 158 candidates for parliamentary and 393 for state seats.

A recent presentation by Merdeka Centre on 26 April 2018 to the press, revealed that although there is a swing of Malay support towards Pakatan Harapan in certain states, it will not be sufficient to put the opposition coalition in power. He added that for Pakatan Harapan to take Putrajaya, it needed 14% more Malay support in addition to its current 20%. The centre also predicted that the opposition would retain Penang and Selangor comfortably, but would be unlikely to see much gain in other states. The survey was conducted among 1,206 voters across all states of Peninsular Malaysia, Sabah and Sarawak through telephone interviews between 3 and 9 April.

Since the dissolution of parliament on 7 April 2018, the KLCI has gained 1% to 1,870 points as at 30 April 2018. We predict that market will remain volatile until the election and the results of the election could depend on turnout rate, how successful the candidates are in persuading the undecided voters and the outcomes of the three-cornered fights in many seats in GE14 following PAS’s departure from the opposition coalition after GE13, which is expected to split the Malay opposition votes.

We believe the stock market performance immediately after elections will be largely determined by 1) the degree of selling pressure during the campaigning period and 2) the actual polling results. If selling pressure is intense in the few days before the polls, it would mean that most of the potential bad news would already be factored in the share prices. Also, the market is likely to stage a relief rally if the incumbent wins, leading to continuity of existing policies. However, if polling results were in line with market expectations and there were no selling pressures prior to the polling date, we expect the KLCI performance post polling results to be muted and to be driven largely by external events.

Based on the past eight election results, our analysis found that the market tends to perform better, on average, post general elections than pre-general elections. The exception was in 2008 when the market fell post GE, due partly to the global financial crisis and in 2004 when the market succumbed to profit- taking following its strong performance pre-GE. (Figure 16)

Apart from GE14, investors will be tracking the 1Q18 results of Malaysian corporates in May, where banks in Malaysia will reveal the impact of the new accounting standard MFRS9 on their earnings. Plantation companies are expected to see weaker earnings in 1Q due to lower CPO prices. On the macro front, all eyes will be on the 1Q18 GDP figure due out on 17 May 2018. We are projecting 1Q18F GDP for Malaysia to come in at around 5.4%.

One of the key events to watch out for in the international market is how the ongoing trade spat between the US and China develops. The US Retail Federation, Consumer Technology Association and other trade groups have been working together and separately to lobby the US administration to strike a deal with China that avoids tariffs, and otherwise to exclude specific products from the list. Companies are making requests to have products removed
or added, with a public hearing set for 15 May in Washington.

Another event to watch is the development in the crude oil market and its impact on crude oil prices. Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), re-emerged as a major oil exporter in January 2016 when international sanctions against Tehran were lifted in return for curbs on Iran’s nuclear programme.

The United States, however, has expressed doubts over Iran’s sincerity in implementing those curbs and President Donald Trump has threatened to re- impose sanctions. If US President Donald Trump decides to reimpose sanctions on Iran on 12 May, it may lead to a removal of more than 1 mbd of crude oil supplies or 1.4% of global oil demand. This may trigger a very strong upward movement in oil prices.

The Federal Open Market Committee (FOMC) is set to meet on 2 May 2018. Most investors are not expecting the central bank to tighten its policy. We maintain our end-2018 KLCI target of 1,880 pts which is based on 15.9x 12M forward P/E. We have also identified the consumer and construction sectors as potential winners from BN’s GE14 manifesto. We maintain our top three picks for Malaysia, which are Axiata, Dialog and Westports.

FBM KLCI Monthly Chart (click to enlarge)

Technical outlook for the longer term
Based on the last three stock market crashes (1987 Black Monday, 1997 Asian Crisis, and 2008 Global Crisis), it looks like a crisis ‘happens’ once every 10- 10.5 years. The current situation, where the FBMKLCI index has broken out of its triangle formation, is similar to the triangle breakout that took place during the 1997 Asian Crisis.
If history repeats itself, the current movement would likely have trouble taking out the all-time intra-day high of 1,896. 1,708 is the critical support level and a decisive breach below this level suggests that the 10-year cycle bearish phase is likely under way. Price movements in the next few weeks or months would likely give us a better idea as to which direction the market will take for the future.

source: CIMB Research – 02/05/2018

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Malaysia’s Stocks Immune To a Trade War

Many stocks have been caught up in the sell-off, which include domestic-centric stocks that should not have been directly impacted by a limited trade spat. We highlight four such stocks: Genting Malaysia, Mynews Holdings, Petron Malaysia and WCT.

US And China Trade Tariffs
There is no trade war yet….
… but the rhetoric on both the US and Chinese sides had been escalating until President Xi Jinping’s conciliatory speech at the Boao Forum for Asia on Apr 10, where he pledged “new phase of opening up” for China’s markets.

So far, the proposed measures over the past three months have been as follows:
● Jan 22: President Donald Trump approved a 30% tariff on solar panels and a 20% tariff on washing machines which affect China and South Korea the most.
 ● Feb 16: The United States Department of Commerce presented several options to combat China’s trade practices, including tariffs of 24% on all steel imports (and 7.7%
on aluminium) which are widely seen as aimed particularly at China, the world’s largest steel maker.
 ● Mar 7: Europe pushed back as the EU officials threatened to place tariffs on American-made goods if the US would impose such tariffs on imported steel and aluminium.
●  Mar 8: The US approved 25% tariffs on steel and 10% on aluminium; Mexico and Canada were granted initial exemptions.
 ● Mar 22: President Trump announced a plan to impose annual tariffs on USD50bn worth of goods from China.
 ● Mar 22: China made its own threat stating it would impose tariffs on USD3bn worth of American-made goods. The move was in response to the earlier decision in March by the Trump administration to impose steel and aluminium tariffs; this announcement came shortly after President Trump had disclosed his USD50bn tariff plan.
 ● Mar 22: The US decided to grant more exemptions on its steel and aluminium tariffs by offering temporary exemptions to the EU, South Korea and others.
 ● Apr 2: China imposed tariffs of up to 25% on 128 American-made products (including wine, pork, pipes, etc.) in response to the US-imposed tariffs on steel and aluminium. This action would mainly affect the US farm land and the rust belt communities, which have been politically important for President Trump.
 ● Apr 3: The US targeted electronics and it formally proposed tariffs on USD50bn worth of Chinese-made products, including flat-screen TVs, medical devices, aircraft parts and batteries.
 ● Apr 4: China countered with tariffs on soybeans, cars and chemicals and proposed USD50bn in tariffs on additional American-made products.
 ● Apr 5: President Trump doubled down and said he was considering imposing additional tariffs on USD100bn worth of goods, in response to China's retaliation.
 ● Apr 10: While speaking at the Boao Forum, President Xi promised a new round of opening up in China. Chinese officials were quick to emphasise that these measures were always a part of China’s economic plans and were not in response to the US threats.

There is an important reason to take this war of words seriously. For many years, before he became President, Mr Trump has been critical about the global trade system being unfair to the US economy and it is one area where he has been consistent. President Trump has always felt the US was not getting a fair deal from its trading partners. China has been singled out as the most “unfair” partner of all as it ran the largest trade surplus with the US at USD375bn in 2017 2 .

Regardless, there is a reason to predict this won’t go much beyond words. After all there are no winners in this war and this fact alone makes one believe that an actual trade war may not actually materialise. The issue really comes down to what each party hopes to achieve, what tools they have at their disposal, and ultimately what each is willing to compromise.

To be fair, the US complaints do have a certain amount of legitimacy, since China is not as open to imports from the US as the US is to imports from China. Just a couple of examples: the tariff China applies on US-made cars is 25% while the US imposes only a 2.5% tariff on Chinese-made autos; also, there is a forced transfer on technology that is imposed by China on the US firms, when setting up of joint ventures, as there are limits on ownership.

However, making the trade deficit the poster child is probably the way to go. The US current account deficit largely reflects a shortfall of domestic savings to investments, and unless the savings or investments rates change, the trade deficit will largely remain unchanged. If the US imposes tariffs on China, it may reduce its deficit with China but it may also in turn increase its deficit with some other countries. Therefore its overall deficit (as a percentage of GDP) would probably remain unchanged. There may also be a secondary effect - if the overall cost of imports rises, it would in turn affect the exchange rate, and hence the magnitude of the deficit.

In any case, if the US does go down the tariff route, the main impact on ASEAN is likely to
be through the value chains, and most likely be felt on electronics and electrical appliances sectors which we have addressed before.

The Chinese tariffs are likely to have a different effect as there isn’t really a value chain that uses intermediate inputs from the ASEAN which ends in the US. In any case, the Chinese tariffs are directed at agricultural products and more likely, the main result will be through a rise in the price of certain global commodities.

If matters get bad, there could be a rise in risk aversion, and markets may move to a “risk
off” setting. The Fed, despite its claims that its actions will not be affected by tariffs, is likely to take the rise in policy rates to a flatter trajectory than what we are predicting. At the very least, the Fed may take on a "wait and see" approach and which case the safe haven ssets, such as the US Treasuries and currencies such as the JPY, are likely to rally.
If things get really worse, it is possible that China may use other methods which it has at its disposal and the US doesn’t. For instance, there is already speculation that China may hoose to devalue the CNY 3 . There also is a possibility that China could threaten to sell or
even outright sell part of their holdings of US Treasuries, even at a loss.

Ultimately, how this pans out will depend on what both sides really want. In our view, if the US wants a greater access to the Chinese markets, it is likely to obtain it. If, on the other hand, this is actually a battle for the future of technology, such as robotics, electric cars, aerospace, or for cutting edge investments in artificial intelligence, the US may find a China that is not malleable. If restrictions are applied on Chinese acquisitions, then we may really be seeing a trade war.

For now, our expectations are that the war of words may continue with occasional threats
and occasional concessions and the markets may dance in step. This matter should probably stop at a certain stage, before it actually becomes a war of action. In such a scenario, various opportunities present themselves, both in defensive stocks or in stocks
where there has already been an over-correction.

Malaysia

Of the stocks under our coverage, about 71% have seen an YTD decline, battered not only by negative sentiment arising from the US-China trade tantrums but also by caution over the impending 14 th General Election (GE14). Both the US and China are important trading partners for Malaysia, while the electrical & electronic (E&E) segment is a major component of Malaysia’s exports. Naturally, technology sector names have been the worst affected as investors price in the potential negatives. However, many other stocks have been caught up in the sell-off and include domestic-centric stocks that should not be directly impacted by a limited trade spat. We highlight four such stocks.

Genting Malaysia (GENM MK, BUY, TP: MYR5.94)
We like Genting Malaysia’s earnings resiliency from its casino operations, which in our view could prove to be one of the best defensive picks amidst current US-China trade friction. While the share price has underperformed the benchmark FBM KLCI YTD, we advise investors to accumulate on weakness as we continue to see the opening of its 20 th Century Fox outdoor theme park by end-2018 to be a major visitation re-rating catalyst. This could then spur patronage to its hilltop casinos and hence improve profitability in the long run.

To briefly recap, the new facilities under its Genting Integrated Tourism Plan (GITP) would continue to open progressively over the next 6-12 months. Management reaffirmed that the 20 th Century Fox outdoor theme park is set to open later this year, while the Skytropolis indoor theme park would commence operations in 2H18. Out of the MYR10.4bn capex allocation, the group has thus far spent MYR6bn to date, with the remaining likely to be utilised by 2018/2019. Overall, 4Q17 visitor arrivals to the hilltop resorts grew to 6.7m (+34% YoY) and we expect further upside come 2H18 upon opening of new facilities.

Mynews Holdings (MNHB MK, BUY, TP: MYR2.03)
Mynews’ prospects are largely driven by the domestic market, and we think it is unlikely to be affected by the trade friction. This is given that all of its Mynews convenience store outlets are based in Malaysia and all of the products are sourced locally. We like Mynews for its attractive value proposition of exciting earnings growth, ambitious multi-pronged expansion plans, as well as the leadership of an entrepreneurial and driven management team. Its earnings growth would be underpinned by the outlet expansion as well as the rising demand for convenient ready-to-eat (RTE) food, which would be captured by its food manufacturing plant.

Petron Malaysia (PETRONM MK, BUY, TP: MYR10.70)
The group’s products are mainly sold in Malaysia (largely gasoline and diesel products) and pricing is pegged to weekly changes in Means of Platts Singapore (MOPS), therefore a trade war would not affect the group’s business directly. We like this stock because we think it has been oversold on overblown concerns of weaker refining margins. After factoring in significantly weaker (27% lower) gross margin/bbl in 2018, the implied FY18F P/E is at 8.9x, still an attractive level for a mid-cap. In addition, its petroleum product sales are also strong, with high single-digit growth (market growth was close to nil) achieved in FY17 due to effective marketing strategies. Petron Malaysia focuses on refining and distribution of petroleum products, concentrating largely on the Malaysian domestic market.

WCT (WCTHG MK, BUY, TP: MYR2.18):
A potential breakdown in trade negotiations between the US and China, in our view, would have little bearing on the Malaysian construction industry. High impact public transportation projects that have been announced or awarded such as the Mass Rapid Transit Line 3 MRT3), KL-Singapore high speed rail (HSR) and the East Coast Rail Link (ECRL) sit atop the Malaysian government’s list of priorities due to their social and economic benefits. In addition, funding for the projects has either been identified (HSR, ECRL) or is in the final stages of being determined (MRT3).

The Malaysian stretch for the HSR project is to be funded by the Malaysian Government, while the ECRL project would be funded by a soft loan provided by China Exim Bank. The MRT3 project, meanwhile, is expected to be funded by a consortium of local and international banks. A potential breakdown in trade negotiations between the US and China is unlikely to significantly shift China’s commitments on its One Belt One Road (OBOR) initiatives – and ECRL’s soft loan from China Exim Bank – in our view.

For exposure to the construction sector, we recommend that investors buy WCT. The company was one of only a handful of contractors that secured work packages for both the MRT2 and Light Rail Transit Line 3 (LRT3) – where It was the only company to secure three packages totalling MYR1.7bn. Hence, we see WCT as a good proxy to the bulge in government spending for domestic public transportation projects. The stock is underappreciated, in our view, having retraced 25% YTD. This is despite the company sitting on an outstanding orderbook of MYR5.6bn, which is a record for the company, and underpins our forecasted 3-year earnings CAGR of 21%.

source: RHB Research Institute – 13/04/2018

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GE14 Election Themed Stocks

The upcoming general election could be a moderate market sway factor; 2H18’s market outlook would be cautious regardless of the outcome. While ruling coalition BN is set to retain the parliamentary majority in a three-way contest, there are still uncertainties relating to popular vote count and hotly-contested states. We expect the FBMKLCI to mildly trend up towards polling day, although the market remains divergent (amid deep profit-taking in small/mid caps).

WHAT’S NEW
• Possibilities explored in GE14. The consensus is for Barisan Nasional ( BN) to retain its majority in parliament (albeit at a lower popular vote count) in the country’s 14 th general election (GE14), which is widely expected to take place in early-May 18. A big positive factor for BN is Pan-Malaysian Islamic Party’s (PAS) splinter from the main opposition coalition Pakatan Harapan (previously named Pakatan Rakyat), which creates a three-corner fight that opens up the possibilities of BN regaining a two-third majority in parliament (currently 59.9%) and regaining control of the states of Kelantan and Selangor. On the other hand, Pakatan Harapan is raising its challenges in BN’s incumbent states of Kedah, Johor and East Malaysia, boosted by the joining of former prime minister Tun Dr Mahathir Mohamad (who counts in his support sacked deputy prime minister Tan Sri Muhyiddin Yassin, a strongman in Johor). Meanwhile, sacked United Malays National Organisation (UMNO) vice president and Sabah strongman Datuk Seri Shafie Apdal formed a new opposition party, Sabah Heritage Party (WARISAN), in 2016.

• Mild uptick anticipated, but cautious environment post GE14. Despite the current caution, FBMKLCI should mildly firm up as we head towards the polling date, in line with most previous pre-GE market behaviour. However, expect more mixed performances in the small/mid-cap space, as investment sentiment has turned defensive much earlier than expected. Our base-case scenario of post-GE result reaction remains market neutral to slightly negative, and we continue to brace for a more subdued investment climate post GE14 particularly in 2H18 (although should the market continue to languish, there would be a temporarily rebound post-GE), as global liquidity contraction remains the over-riding issue. We maintain our end-18 FBMKLCI target of 1,830 which implies a forward PE of 15.3x (+0.4SD to the historical mean).

ACTION
• Valid GE plays. Although the current cautious investment sentiment implies fewer beneficiaries and shallower returns, our key GE14 beneficiaries identified should still deliver attractive stock returns – MRCB, Felda Global Ventures, KPJ Healthcare and Affin Bank. Other notable beneficiaries (although some are loosely linked to the theme) include some construction companies (eg Gabungan AQRS) and index heavyweights (particularly banks like CIMB).

• Top picks in this theme are BUY-rated large caps CIMB Group and Gamuda , and small/mid caps Cahya Mata Sarawak , Gabungan AQRS , and Protasco , and HOLD- rated MRCB . These stocks also offer upside post-GE

ESSENTIAL
• The journey towards GE14 has been accompanied by spectacular political news and developments, namely: a) the second sodomy charge and jailing of prominent Opposition leader Datuk Seri Anwar Ibrahim, b) revelation of massive corruption in the Ministry of Finance’s unit 1MDB (which gained international notoriety), c) sacking of prominent UMNO leaders who had criticised the 1MDB cover-up (Deputy Prime Minister Tan Sri Muhyiddin Yassin, Vice President Dato’ Seri Shafie Apdal and Kedah chief minister Dato’ Seri Mukhriz Mahathir) along with the country’s attorney general, d) management tussle at Federal Land Development Authority (Felda), and e) controversial reading of Hadi’s Bill (referring to PAS president Tuan Guru Dato' Seri Hadi Awang’s proposal which will empower states to implement Islamic laws). Meanwhile, Sarawak has set up state-owned oil and gas exploration firm Petros as part of its efforts to significantly raise its share of the state’s oil revenue (it currently receives only a 5% royalty).

• Base case: BN to maintain a simple majority in parliamentary seats... In our base- case scenario of a three-way fight between BN, Pakatan Harapan and PAS in Peninsular Malaysia, BN should maintain a simple majority of parliamentary seats (of around 60%). However, regaining a two-third control remains an uphill task, given the likelihood of slipping popular votes.

• …amid slipping popular votes. While the consensus view is for BN’s popular votes to slip a few percentage points (GE13: 47.4%), BN should maintain above the 40% commonly-thought threshold that would allow it to retain a simple majority in parliament. However, this situation is less certain in various state elections.

• Election factor a short-term sway phenomenon. While unexpected election results can be a significant market sway factor in the near term, such market reactions have been short-lived in the past. For example, when BN’s control of parliamentary seats surprisingly slipped below two-thirds during GE12, the FBMKLCI plunged by as much as 9.5% in a day, triggering a trading circuit breaker at the worst level. However, the FBMKLCI recouped most of the losses within a couple of weeks, once investors were assured of the continuity of political stability and business-friendly policies. Both BN and Pakatan Harapan are mindful of maintaining business-friendly policies; Pakatan Harapan has on various occasions highlighted that it will generally uphold the sanctity of government contracts should it win the election. Eventually, equity markets will be dictated by external and domestic economic fundamentals and liquidity considerations.

• Trading plays. GE14 beneficiaries should deliver attractive returns to government-linked companies Felda Global Ventures (FGV), KPJ Healthcare and Affin Bank (which interestingly has delivered good returns in most pre-polling periods). • Defensive BUY-rated stocks should gain prominence post GE14 . They include BUY- rated Berjaya Sports Toto , DiGi.Com, Petronas Dagangan, TM and Tenaga Nasional. FMCG companies continue to appeal as a safe haven, and among these, downtrodden BUY-rated BAT should appeal for its c.8% prospective yield. Likewise downtrodden Astro Malaysia (HOLD).

• Opportune time for long-term investors to accumulate selected mid caps. We feel the sell-offs related to global liquidity tightening, US-China trade war and GE fear factors are overdone for many mid caps (although we would generally avoid small caps). Although many of these stocks have still retained their past years’ huge capital returns even after the recent rundown, they continue to promise solid growth prospects through the intermediate term. Conviction stocks in this space continue to be Ann Joo Resources, Inari Amertron, and VS Industry.

source: UOBKayHian – 10/04/2018

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DBS: Underweight On Malaysia

Malaysia (Underweight)
“Earnings growth still intact”, 5 5 March Bernard Ching,

Macro conditions in Malaysia remain encouraging
4Q17 GDP growth of 5.9% was ahead of expectations, which brings full-year growth to 5.9%. Going into 2018, Alliance DBS’s economist has pencilled in a 5.4% growth.
The moderation in economic expansion reflects the high-base effects and a tighter monetary regime, both domestically and globally, which could put a lid on growth. Yet, 1H18 GDP growth should remain robust given the fiscal pump-priming ahead of the 14th general elections. Private consumption recovery as well as robust exports will remain the key drivers
of growth.

Volatility driven by external and domestic factors
Having said that, market volatility will likely remain elevated in the near term on concerns of faster-than-anticipated inflation and monetary tightening in the US. Furthermore, the imposition of anti-dumping tariff by the US administration on the import of steel and aluminium has stoked fears of retaliatory actions by affected major trading partners such as China and Europe.

On the domestic front, we believe risk aversion has picked up towards small- and mid-cap stocks as election noises have ratcheted up in recent weeks. Furthermore, the 4Q17 earnings season had failed to spring any positive earnings surprise particularly for the small- and mid-cap stocks. As a result, the FBM Small Cap and FBM ACE indices, which are gauges of small- and mid-cap stocks in Malaysia, have underperformed blue chip stocks as represented by the benchmark FBMKLCI.

Valuation is undemanding
The valuation of FBMKLCI is undemanding as it is currently trading near its historical mean at CY18 PE of 16.4x based on our forecasts. Relative valuation against regional markets is
also not demanding following its laggard performance in 2017. The KLCI 12-month forward PE premium over MSCI SEA is currently at 1.0x, which is below the historical high of 1.2x.

Rally sustainable
We believe that the market rally can still be sustained by solid macro conditions, both domestically and globally, as well as rebound in earnings growth. We view the current market correction as an opportunity to accumulate on weakness.

Regional markets’ earnings growth and PE valuations

KLCI target raised to 1950
Following the recent earnings revision, we have raised our end- 2018 FBMKLCI target from 1,870 to 1,950 (implied 17.2x PE), which is derived using a bottom-up valuation approach.

Investment themes
Our key investment themes remain unchanged, i.e. (1) cyclical recovery in loan growth and interest-rate hikes, (2) cyclical global oil & gas capex recovery, (3) sustained E&E exports, and (4) tourism benefitting from discretionary spending recovery and an influx of Chinese tourists.

Our top banking picks to ride the cyclical recovery in loan growth and interest-rate hikes are Maybank and CIMB. We are adding Hong Leong Bank to the fray now following its stronger-than-expected quarterly results.

For the oil & gas sector, Hibiscus is the best proxy for crude oil price recovery, given that it is a pure upstream exploration and production player. We also like Wah Seong and Bumi Armada which have a significant overseas footprint to capitalise on the global oil & gas capex recovery.

Our preferred proxy for E&E exports is the electronic manufacturing services sector, given its cheaper valuation and higher growth than the technology sector. SKP Resources remains our pick for this theme. The strengthening of the Ringgit is not a concern for SKP Resources as its revenue is denominated in MYR and it enjoys a full cost-pass through an arrangement with its key customer.

On the tourism theme, Yong Tai is our sole pick, which is poised to benefit from the influx of Chinese tourists once its Encore Melaka theatre opens in May 2018. We have dropped AirAsia as a top pick as its share price has rallied to our target price, leading us to downgrade it to HOLD. We have also dropped MAHB (although it remains a BUY) as we believe regulatory uncertainty will cap its near-term performance.

There is no change to our sector call. We are reiterating our Overweight calls on banks, EMS, healthcare, and oil & gas sectors. We are also reiterating our underweight calls on the
building materials (cement) and glove sectors.

Maintaining Underweight
We are maintaining the market as Underweight as we believe foreign flows may still be lacking in this market over lingering concerns. Sentiments could continue to be positive towards the elections, but any further delay in elections could see more political volatility unravelling.

source: DBS Group Research  – 13/03/2018

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Malaysia: Technical, Currency and Feng Shui Outlook for 2018F

■ We hosted three speakers at our 2018 Technical, Currency and Feng Shui Day.
■ Our technical chartist indicate that the KLCI uptrend remains intact and could test the
1,900-1,950 level.
■ Our treasury team recently upgraded its end-2018 ringgit forecast to 3.85/US$.
■ Fengshui master said the 3 rd and 10 th lunar months are good for the stock market
■ We maintain our end-2018 KLCI target of 1,880 pts (based on 15.9x P/E).

Technical, currency and feng shui outlook for 2018F
We hosted a half-day conference today, featuring (1) Ray Choy, Head Treasury Strategist, CIMB; (2) Master Bo Xu, a feng shui consultant; and (3) Nigel Foo, our very own regional technical chartist. Their views on technical, currency and fengshui outlook point to a volatile equity and currency markets in 2018F.

Technical: KLCI uptrend still intact
Nigel Foo, our technical chartist, is of the view that the KLCI is currently on an uptrend and could test the 1,900-1,950 level over the next few months. He sees the recent decline in the KLCI as just a correction and that once the local bourse stabilises, the KLCI index should continue its uptrend. Smallcap index could outperform the KLCI index in 2018F. After trading sideways over the past two years, the Bloomberg Dollar Index could bottom soon from a technical chart point of view, Nigel predicts.

FX: Fundamentals intact but brace for near-term volatility
Ray Choy, Head Treasury Strategist at CIMB, believes the fundamental outlook for EM Asia FX remains constructive for 2018F. CIMB Treasury Research recently upgraded its end-2018 ringgit forecast to 3.85/US$, citing macro improvements and spillovers from increased trade and investment inflows. However, Choy warns that the recent market volatility and excessive short positioning in the US$ may precipitate a short-term technical correction in the ringgit, given the extended rally last year.

Feng shui: A more volatile year for the stock market
2018 is the year of the “Earth Dog”. Fengshui consultant Master Bo Xu predicts that the economy will stagnant or slowdown in 2018 and that the stock market would be more volatile vs. 2017. He believes the Malaysian economy will do better if it enters into alliances with other countries. He thinks the good months for the market are the 3rd (16 Apr-14 May 2018) and 10 th (8 Nov-6 Dec 2018) lunar months while negative months are the 1 st (16 Feb-16 Mar 2018) and 7 th (11 Aug-9 Sep 2018) lunar months.

Feng shui: Prospects of various sectors in 2018
From a fengshui perspective, Master Bo Xu revealed that gold element businesses such as banks, insurance and finance industry will do well. However, wood (furniture, timber, and education), earth (real estate, mining and direct selling) and water (hotel, hospital and shipping) element businesses will not do so well. Businesses in the fire element (palm oil, oil & gas, chemical and shopping mall) will see a lot more activities, he predicts.

Technical KLCI view more positive than fundamental analysis
Our technical view that the KLCI could potentially touch 1,900 to 1,950 is more bullish than our fundamental view that the market would end the year at 1,880 points. Our treasury team is more positive on the long-term ringgit outlook compared to our technical chartist. We have identified auto, airlines and F&B players as the biggest winners should the ringgit continue to strengthen, due to their lower operating costs. Our top picks for the stronger ringgit theme are AirAsia, Berjaya Food and DRB Hicom.

Recap of last year’s event
How our expert speakers’ predictions fared in 2017?
Technical charts view for 2017
In our 2017 Technical, Currency and Fengshui event in Feb 2017, Nigel Foo presented his view that the KLCI was then on a rebound rather than in a bullish phase. He expected the market to weaken and potentially bottom sometime in 3Q before rebounding in late- 2017. He predicted that the ringgit will appreciate against the US$ in 2H17 and that this could help kickstart a sustainable medium-term uptrend for the local bourse in the later part of the year.
Nigel also mentioned that since the KLCI's inception, there appeared to be a 10.5-year or
126-month cycle for the local bourse, with the KLCI finding a significant low close to the
end of each of this major cycle (+/– 3 months). Basically, in the first half of the cycle, the
wind seems to be behind the bull’s sail while the second half tends to favour the bears.
The 1,896 high for the KLCI in Jun 2014 was four months after the mid-point of the
current 126-month cycle. If this cycle continues to play out, then the next major low for the
KLCI can be expected in mid-2019F, he had said.

Feng shui master’s view in 2017
Feng shui consultant Master Bo Xu said 2017, being the year of the “Fire Rooster”, should be good for long-term investors with a 3- to 5-year investment horizon. Wood element businesses such as furniture, pulp and paper, textile, timber and education should flourish while fire element businesses (oil & gas, and restaurant) will not do so well, he said. Stock market wise, the good months for the market would be in 4 th (26 Apr- 25 May), 10 th and 11 th (18 Nov 2017-16 Jan 2018) lunar months.

KLCI’s performance in 2017
The market has panned out broadly in line with Nigel’s expectation for 2017 as the market corrected towards the end of 3Q17 before rebounding in late-2017. The ringgit also appreciated against the US$ in 2H17. Our cycle prediction has yet to play out. Master Boxu’s predictions on the good months for the market were broadly in line with KLCI’s performances as well.

source: CMB Research 05/02/2018

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Malaysia 1H18 Outlook - Regaining Some Lustre In 1Q18

Malaysian equities should trend higher in 1Q18, fulfilling the historically good correlation between ringgit deposit growth and market performance. However, we continue to expect a duller performance post GE14, which is widely expected in Mar-Apr 18. We advocate a trading-oriented, mid- to large-cap-biased investment strategy for 1Q18, with a focus on mega infrastructure, E&E, tourism-related and selective GE14 plays.

WHAT’S NEW
• Sparkles to broaden in 1Q18. We continue to expect the broader Malaysian equities to market to trend up in 1Q18 (although there could be a temporary trend reversal in the FBMKLCI following the last few trading days’ hefty 3.0% window-dressing gains), amid the anticipation of GE14, firm domestic economic indicators, and ample global/domestic trading liquidity. Improved domestic liquidity is well proxied by the growth in ringgit- deposit growth since Sep 17 (+4.5% vs +0.5% for 2016).
• End-18 FBMKLCI at 1,860. While we continue to peg the market at an above-historical mean PE multiple, we assume the premium will ease in 2018 (+0.6SD vs 2017’s expected +0.7SD). Our bottom-up FBMKLCI target is 1,860.
• Strategy and investment themes. We advocate focusing on beta stocks in 1Q18 before turning defensive thereafter. Market conditions still generally favour mid-caps, which continue to sustain superior earnings growth. Multi-year investment themes include: a) mega infrastructure (benefitting the construction and building material sectors; large-cap construction companies clawing back 2017’s losses), and b) electronics and electrical (E&E), followed by the situational GE14 and tourism-related picks.

ACTION
• OVERWEIGHT building materials, construction, E&E, gaming, technology and utilities The construction and building material sectors will be supported by more contract awards and implementation of mega projects, with construction activities perhaps only reaching the peak in 2019. The defensive and high-yielding utilities should outperform post GE14. However, UNDERWEIGHT cyclical sectors like automobile and plantation.
• Our top picks include large-caps Bumi Armada , CIMB Group , Gamuda , Genting Malaysia , and Tenaga Nasional , and small/mid-caps Ann Joo Resources , Choo Bee Metal Industries , Gabungan AQRS , Globetronics Technology , Hume Industries , Serba Dinamik, Tune Protect , VS Industry and Yong Tai . Other notable picks include Magnum and YTL Power , while potentially interesting election trading plays include FGV and MRCB. However, SELL the pricey Hartalega Holdings (unsustainably stretched valuations) and UMW Holdings.

ESSENTIALS
• Improving domestic liquidity to help lift equities. The growth recovery of the ringgit deposit growth (+5.8% in Nov 17 from 2016’s +0.5%), an important indicator of domestic liquidity, should eventually lift equities – historically the FBMKLCI is positively correlated to ringgit deposits (0.85 correlation in the past 10 years). Foreign equity fund flows have reversed in December (RM860.3m) from September’s year low of RM737.3m net outflow.
• Near-term positives ahead of GE14: a) the FBMKLCI has generally yielded positive returns in the three-month periods up to the past election polling dates, b) robust headline economic indicators (refer to RHS table) which support the ringgit and investment sentiment, and c) minimal risk in a portfolio sell-down of Malaysian bonds in 2018, given the more moderate maturity schedule vs that in 2017.
• However, investment sentiment may turn cautious after GE14, reflecting continuing political uncertainties (which could lead to policy vagaries that affect corporate profits), and lack of domestic consumption growth sparks despite firm headline economic growth indicators. Corporate earnings could be revisiting the downgrade phase, albeit at milder magnitudes compared to the 2013-16 period (where growth was almost non-existent). Finally, Malaysia’s regional appeal remains mediocre, based on the expected PE-to- corporate earnings growth valuation matrix (see RHS), and taking note of the World Bank’s projection for Malaysia’s GDP growth to ease by 0.2ppt to 4.8% in 2019, slightly weaker than that of Thailand (-0.1ppt) and in contrast to the sustained GDP growth of neighbouring Indonesia, the Philippines and Vietnam.

MAJOR KEY INVESTMENT THEMES & FEATURED BENEFICIARIES
Company& Catalyst
(A) MEGA INFRASTRUCTURE
Ann Joo Resources
Substantially stronger 4Q17 earnings, coupled with the rise in the latest published domestic steel price. Significant rollout of mega projects by mid-18.

Gabungan AQRS
Potential contract wins in 1Q18 from ECRL and Sabah Pan Borneo Highway worth >RM1b.

Gamuda
Clinching a mega project subcontract award (ECRL, MRT3) will positively surprise amid market skepticism.

Hume Industries
Cement prices should firm up significantly in 2018 as mega projects reach high construction activity levels.

(B) E&E TREND RIDERS
Globetronics
Earnings doubling in 2018; further upside on potential commercialization of sensors under development.

Inari Amertron Good visibility in doubling revenues in 3 years, driven by RF packaging segment and Broadcom’s clientele.

VS Industry High growth visibility and potential contract wins to fill up capacities at its new plant (commencing mid-18).

(C) GE-14
FGV
Improved earnings via cost rationalisation could be another positive.

MRCB
Potential sale of EDL will significantly strengthen balance sheet and lift earnings outlook. Has historically traded up to +2SD during GE periods.

(D) TOURISM-RELATED
Genting Malaysia
Normalisation of luck factor post 3Q17, opening of 20th Century Fox theme park by end-18.

Tune Protect
Strong turnaround story with relatively attractive valuations.

Yong Tai
Opening of Impression theatre in Mar 18.

(E) SELECTED CORPORATE DEALS
Magnum
Monetisation via potential listing of 6.3%-owned U-Mobile allows restoration of generous dividend payout.

Tropicana
Potential monetisation of various properties which collectively account for >30% of market cap.

source UOBKayHian – 02/01/2018

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Malaysia 2018: Challenges and Opportunities

■ We expect 2018 to be a more volatile and challenging year for the Malaysian market  compared to 2017.
■ The key challenges include slower GDP growth in 2018, potential cost pressures for businesses, impact from disruptive technologies, and potential earnings risks.
■ We expect these concerns to be priced-in in 1H18, and the market should improve in 2H18 due to stronger fund flows, better corporate earnings, and IPO activities.
■ We have identified five themes for 2018: 1) beneficiaries of ringgit strength; (2) GE14 plays; (3) BRI and rail theme; (4) PNB transformation; and (5) small-mid cap sectors.
■ We lower our KLCI index target for end-2018 to 1,880 from 1,920, based on 15.9x  forward P/E (in line with its 3-year mean) after adjusting for the new KLCI constituents.
■ We prefer construction, utilities, oil and gas, gloves and small-mid cap sectors for 2018.
■ Top three picks for 2018 are Axiata, Dialog and Tenaga.

More challenging and volatile 2018?
We expect 2018 to be a more volatile and challenging year for the Malaysian market  compared to 2017. We expect the market to be choppy in 1H18, before rising in 2H18. The key challenges include slower GDP growth in 2018, potential cost pressures for Malaysian businesses, impact from disruptive technologies and potential earnings risks for banks and utilities due to changes in accounting standards (MFRS9 for banks) and
regulations (utilities).

Opportunities beckon in 2H18
We expect the market to price in most of the above concerns in 1H18, and local and foreign direct investments should improve in 2H18, post-GE14. Factors that could boost market prospects in 2H18 are: (1) potential relief rally and increased foreign funds inflow into Malaysia post GE14; (2) better corporate earnings; (3) slew of construction job awards and potential Chinese investments; and (4) IPO activities picking up pace post
GE14 in 2018.

Five key themes for 2018
We have identified five themes for 2018: 1) beneficiaries of ringgit strength – auto, airlines and consumer sectors; (2) GE14 plays – government-linked companies; (3) China’s Belt Road Initiative (BRI) and rail theme – construction; (4) PNB transformation – plantation and property; (5) small-mid cap sectors – small-mid cap stocks.

Our top sector picks
Our top sector picks are construction, utilities, rubber gloves, oil and gas, and small caps. We like utilities for their defensive earnings, construction for potential job rollouts and award of projects, rubber gloves for strong demand growth, oil and gas for the earnings
recovery story, and small caps for Bursa’s on-going research scheme to discover
undervalued gems.

Preferred stocks
Our top big cap picks are Tenaga Nasional for utilities exposure, Dialog for its robust earnings growth, and Axiata on our expectation of an earnings rebound in 2018 and 2019. Our top 3 smaller caps are CCK on its plan to improve its margin by moving into a more profitable product mix as well as a beneficiary of the stronger ringgit, Berjaya Food on its plans to dispose its loss-making overseas entities as well as benefitting from a stronger ringgit, and Bonia on earnings recovery from closure of loss-making boutiques.

Maintain 2017 KLCI target but lower 2018 target to 1,880 points
We reiterate our end-2017 KLCI target of 1,790 pts based on 16x P/E, which is in line with its three-year moving average. However, we lower our 2018 target from 1,920 to 1,880 to reflect recent changes in KLCI constituents. We project that market earnings will rebound by 6% in 2017 and 2018 before accelerating to 9% in 2019.

source: CIMB – 20/12/2017

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Winners And Losers Of A Stronger Ringgit Malaysia

● CS' FX strategy team has raised USDMYR forecast to 4.0 in three months and 3.80 in 12 months (from 4.10 and 4.0 previously). RM has appreciated 8% vs the USD YTD and is currently at the strongest level so far this year.
● In our view, companies most materially affected would be (1)  those with mismatch in USD-denominated revenue and cost, (2)  companies with majority of profits derived from offshore operations, (3) companies with sizeable foreign currency denominated debt.
● Key beneficiaries of a stronger RM in our view are TNB, Air Asia  and Astro. Meanwhile, our screen seems to suggest that there is a longer list of potential losers which include: telecommunication companies (Axiata, TM, TimeDotCom), rubber, petrochemical  companies, Inari, IHH and plantation companies.
● The adverse impact of a stronger RM on corporate earnings could be among the key factors suppressing street's corporate earnings estimates (Malaysia is the only market in Asia with no 2017E EPS growth) despite the improving economic growth outlook.

We take a look at the possible winners and losers of a stronger RM vs USD.

Winners
● TNB - Tenaga’s USD-denominated debt as at 31 August 2017 amounted to RM6 bn (16% of total borrowings). Our rough estimates show that a 10% strengthening in MYR against USD should have an approximate 12% impact on earnings, all else constant. Nevertheless, we understand that TNB has hedged at least 50% of its foreign currency exposure up to 12 months, hence possibly reducing the quantum of the earnings impact.
● Air Asia - AirAsia has a significant portion of borrowings which is USD-denominated (RM8.4 bn or 86%) as at 30 June 2017. Bulk of its operating cost (fuel and maintenance) is also dominated in USD; although AirAsia has hedged 50% of its USD opex up to December 2017, the unhedged portion coupled with the expiry of these hedges beyond 2017 would have a positive impact on earnings. Assuming foreign-denominated cost is not hedged, a 5% appreciation in RM would lead to a 5% boost in net profit.
● Astro - The stronger RM is positive for Astro as its content cost is denominated in USD. We estimate that Astro’s bottom line in FY19E and FY20E will improve by 3.1% and 6.5%, respectively should the ringgit improve to RM3.80 (less impact in FY19E as Astro has hedged 80% of its annual USD exposure today).

Losers
● MY telcos - mobile: The stronger RM is unlikely to impact MY  telco’s IDD business anymore, given that they are now pricing their services using the ‘cost plus’ method to avoid the pitfalls in 2016 (it became a loss-making business). That said, the scenario will likely be negative for Axiata, given that ~70% of its FY18E EBITDA is denominated in foreign currency. We estimate that if  RM trades at RM3.80 vs USD, it would have an approximate
5%/15% impact on Axiata’s FY18E EBITDA/net profit, all else equal; earnings exposure to foreign business will be partially offset by some modest interest savings due to Axiata's sizeable USD debt. However, management could take pre-emptive steps (such as re-negotiate interconnect fees, reduce traffic in impacted areas) to mitigate the impact.
● MY telcos – fixed line: Within the fixed line space, both TM and Time Dotcom’s submarine cable business will be impacted if RM strengthens, given that the contracts are generally priced in USD. However, the impact is modest, based on our estimates given that if RM trades at RM3.80 vs USD, only 7-10% of TM and Time’s revenue will be impacted (~3% of EBITDA).
● Rubber companies such as Top Glove and Karex whose revenue is USD-denominated would be negatively impacted by a stronger MYR. We estimate a 10% strengthening in MYR will have a 25% earnings impact on Karex, ceteris paribus. Meanwhile, the same sensitivity on Top Glove will impact earnings by approximately 7%. Nevertheless, we highlight that the exporters typically adjust selling prices to reflect any adverse forex movements, albeit with a slight 1-2 months’ time lag.
● Petrochemical companies tend to lose out in a strong RM environment as revenue is denominated in USD (product prices linked to international prices). Though majority of its costs are in USD (feedstock, energy costs, etc), some portions of its costs are in RM. We estimate 8% and 12% negative earnings impact for every 5% appreciation in RM for PCHEM and LCT, respectively.
● Plantation – Plantation companies tend to be adversely affected as stronger RM would lead to lower revenues (palm oil traded in USD) while the bulk of cost is denominated in RM.
● Inari: A stronger RM is negative for Inari as it bills its client in USD.  We estimate that there could be 8-10% downside to our net profit estimates in FY19-20E assuming USD-RM at RM3.80.
● IHH - IHH Healthcare’s growth would be negatively impacted in the scenario of stronger RM as it generates >80% of total core revenues outside of Malaysia. If the currency appreciated to RM3.80 relative to USD in FY18, revenue and EBITDA could be affected by ~4%-5%, everything else equal.

source: Credit Suisse – 26/11/2017

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Preview of Possible Changes In KLCI Constituents

■ Press Metal and Hartalega may have qualified for inclusion into KLCI.
■ BAT and IJM will most likely be deleted from KLCI to make way for the new inclusions.
■ SD Plantations will most likely be included in KLCI post the demerger of Sime Darby;
Sime Darby Properties and Sime Darby may not make the cut.
■ Maintain KLCI index target of 1,790 points for 2017F and 1,920 points 2018F.

KLCI review will use data from yesterday’s closing
FTSE Russell is due to announce the results of its upcoming semi-annual review of FTSE Bursa Malaysia Index Series on 30 Nov 2017. We provide our analysis below on potential inclusions and deletions of FBM KLCI constituents, based on our study of the FTSE Bursa Malaysia Index Series ground rules and latest market cap data of the top 40 largest listed companies on 20 Nov (on which the review will be based). All constituent changes in the review will take effect on 18 Dec 2017.

Press Metal and Hartalega qualify for inclusion into KLCI
Under the rules, a security would be inserted in the FBM KLCI during the periodic review if its market cap has risen to 25 th position or above among the eligible main market securities. Based on yesterday’s market cap and omitting Nestle from the list (as it does not satisfy the eligibility criteria), we found Press Metal and Hartalega Holdings in the 24 th and 25 th rank, respectively, which would qualify both companies for insertion into the KLCI index.

None of the constituent members met deletion criteria
According to the rules, a security would be deleted at the periodic review if it has fallen to 36 th position or below among the eligible main market securities. Based on yesterday’s market cap and after removing Nestle from the list of companies, we found that none of the companies in the KLCI constituents are in this camp.

BAT and IJM will most likely be deleted from KLCI
The rules specify that should a greater number of companies qualify to be inserted in an index than those that qualify to be deleted, the lowest ranking constituents presently included in the index will be deleted. Based on this, our analysis reveals that BAT and IJM could be deleted from KLCI at the upcoming periodic review.

How will this impact the soon-to be listed Sime Darby entities?
Sime Darby Plantation and Sime Darby Property are scheduled to list on 30 Nov. Following their listings, there will be 32 constituents in the KLCI index. After the market closes on first day of trading, index constituents of KLCI will be ranked by full market cap and the two smallest constituents in the KLCI will be deleted. Based on the mid-range scenario of indicative reference price, Sime Darby Plantation should be included in the KLCI while Sime Darby Properties and Sime Darby may not make the cut.

Potential changes in the reserve list
The reserve list for KLCI, which represents the top five highest ranking potential constituents not included in the index, will be used for selection for inclusion into KLCI should one or more constituents are deleted. Based on yesterday’s closing, companies that could qualify for the new reserve list are Malaysia Airport, Dialog, Gamuda, AirAsia and IOI Properties Group.

Maintain KLCI target of 1,790 for 2017F and 1,920 for 2018F
We maintain our KLCI target of 1,790 points and 1,920 points for 2017F and 2018F, respectively. We project the market to be range-bound till the end of the year as market participants await for fresh catalysts to drive it. The ongoing 3Q17 results season has so far been slightly disappointing, as the ratio of underperformers (29% of those that have reported their results) exceed the ratio of outperformers (26.7%).

source: CIMB Research –21/07/2017

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Malaysia Budget 2018 and Stock Picks

Infra pump priming and consumer spending led 2018E GDP growth of 5.2%
Prime Minister Najib set an upbeat tone in 2018 Budget by forecasting 5.2% to 5.8% GDP growth. The pillars of 2018 GDP growth YoY are construction (+7.6%), services (+5.8%) and manufacturing (+5.3%). The winners of this budget are contractors (IJM & GAM), airport operator (MAHB), tourism (GENM) and consumer-centric proxies, such as Astro, telco and convenient stores (Bison). Outlook for tobacco players, such as ROTH, is gloomy as the government merely estimated excise duty collection growth of 4.5%.

Infra pump priming continues and Malaysia aims to create 3.3mn new jobs
The re-affirmation of key projects (MRT 3, High-Speed Rail, East Coast Railway, LRT) worth MYR175bn coupled with MYR6.5bn for rural development and plans to upgrade and expand airports, plus many to-be confirmed projects should keep Malaysia contractors busy until 2026. Besides the major players, we expect smaller contractors, such as Sunway Con, George Kent, AZRB, Muhibbah and WCT, to benefit too. The sector will support job creation.

Personal income tax cut to spur consumer discretionary spending
The 2ppt reduction in taxable income ranges from MYR20-70k should lift disposable income by MYR300-1000 against household income of MYR43k. Further, the infra projects’ estimated multiplier effect on CY18-20E on M2 by a magnitude of MYR2.5-5bn per year (+4-6% YoY) might have a positive impact on consumer discretionary proxies. The influx of foreign labour should benefit telco players in the prepaid market and convenient stores such as Bison.

Malaysia Budget 2018 Allocation:

Visit Malaysia 2020, to host APEC, WCIT and CHOGM
Budget forecasts a modest 28mn tourist arrivals (+5% vs. 2016) in 2018. But in 2020 Malaysia will host many world events, such as World Congress of IT and Commonwealth Heads of Government Meeting. The inbound and domestic tourism is expected to be buoyant and benefit Malaysia Airport (MAHB). The gaming tax collection is projected to rise by MYR340mn. Assuming no change to the gaming tax, this implies a 11% YoY growth or MYR2bn gross gaming revenue growth – a good read-through on Genting Malaysia (GENM).

Top picks: GENM, IJM, KLK and MAHB; remove ROTH

While illicit cigarette clamp-down has been successful (down 4ppt to 56%), the irrational price war initiated by PMI and JTI Malaysia should erode margins, leading us to remove ROTH from our top picks. The recent sell-down of GENM, in our view, has fully priced in the risk of Mashpee write-off, gaming tax hike and bad 3Q17 results. We remain highly convinced about its growth prospects. KL Kepong’s (KLK) valuable 6600 acre land bank (40km outside of KL City) should benefit from the growing economic development in the capital. Note the entire land bank is worth its current market cap. We also like MAHB for its
exposure to inbound and domestic traffic growth prospects. Moreover, it offers an option to Malaysia’s e-commerce logistics play via Alibaba’s investment.

Last, we add IJM into our top picks. IJM represents a strong proxy to China-led growth, using increased investment from China as a part of its strategic One Belt, One Road initiative and being one of the first beneficiaries of China’s ambitions in Malaysia via the Kuantan Port. The port now stands to be China’s gateway for raw and finished materials from Malaysia.

Valuation and risks
Genting Malaysia
Our target price for Genting Malaysia is based on sum-of-the-parts (SOTP) valuation comprising 20x 2017 P/E for domestic, UK and US gaming operations. While the pegged target is higher than the historical trend, we believe that it is justifiable given the growth is sustainable for next three years. We have pegged 1x historical PB to investment properties. Downside risks include the possibility of further controversial M&A activity, intensifying regional competition and regulatory tightening in operating and potential markets and lower-than-expected return for new investments in the US. Given the lack of clarity in operational data, profit forecast accuracy is thus at risk.

IJM Corporation
We value IJM based on SOTP. We value the construction segment based on a 16x FY19E P/E, in line with the industry average multiple, but also taking into account the growing order book. Meanwhile, we value the industry segment based on a 15x P/E, given the strengthening demand for building materials due to the increased infrastructure investment. We value the property development business using a DCF of its land bank, using a WACC of 6.8%, a 15% development margin and the infrastructure space using a WACC of 6.8%. IJM plantation and Scomi are valued based on market value. A 10% Holdco discount is assumed to arrive at our one-year forward TP. Key risks for IJM include: 1) Execution risk on its construction order book. We assume an average annual replenishment of c. S$3bn. An inability to secure or replenish its order book would be a downside risk. 2) A downturn in the property sector would have a significant impact on valuations, which accounts for 22% of our RNAV estimates. 3) A slower-than-expected ramp-up and expansion of Kuantan port; we forecast the port to reach capacity by 2020, and for the second phase to be completed by 2024. Delays in completion or ramp-up would affect valuations.

KL Kepong
Our target price is based on a sum-of-the-parts valuation, as its earnings are derived from palm oil-based profit and the property development segment. On the earnings front, we apply a 17E 15x P/E (mean valuation). On the property front, we apply a 65% discount to RNAV given the long gestation on unlocking value from the large land bank. Key industry downside risks: a major downturn in CPO or soybean prices; Indonesia's government halts the biodiesel policy; environmental issues that might lead to a revocation of land bank; and a ban of CPO usage in certain countries. Key company downside risks: earnings-dilutive acquisitions; worse-than-expected production; and labour shortages.

Malaysia Airports Holding
We use a two-stage DCF methodology to value MAHB. The first stage is for the initial 10 years based on our financial forecast, and the second stage is from the 11th year to end-of-concession-life at a FCF growth rate of 2% (below IATA long-term growth forecast of 3.5%). Our WACC is 9.1%, with 4.6% rfr, 5.1% CoD, 23% tax rate, 6.5% erp, 1.2x beta, and 65% target d/e ratio. At our TP, FY17E EV/EBITDA would be 12x, lower than 13x Asian average. Risks: 1) PSC revenue based on the 2009 OA does not materialize; and 2) translation losses if the MYR appreciates and depreciates against the EUR and TRY, respectively.

source: Deutsche Bank Markets Research – 27/10/2017

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Malaysia Budget 2018 - Potential Beneficiaries

■ We expect Budget 2018, due to be tabled on 27 Oct, to be mildly positive for market.
■ The consumer sector is a likely beneficiary of social assistance from government.
■ Property developers could gain via push for affordable housing.
■ Technology companies could benefit from government plans to grow digital economy.
■ Sin taxes unlikely to be raised and contractors to benefit from infrastructure projects.

Preview of Budget 2018

We expect Budget 2018, due to be tabled on 27 Oct 2017, to be the last budget before the 14 th General Election (GE14) as the latter has to be called by Aug 2018. We are of the view that Budget 2018 will address key concerns of the population, without negating the government’s commitment to fiscal prudence.

Mildly positive for consumer sector
We expect Budget 2018 to lift social assistance and cash transfers to the civil service, lower income households, households employed in the agriculture sector, Felda settlers and army veterans, among others. The government may also look to ease the financial burdens of families and dependents via personal income tax reliefs. This may benefit the consumer companies under our coverage like Nestle, F&N, Kawan Food, CCK, QL Resources, Bison, Berjaya Food and 7-Eleven.

Property developers could benefit from push for affordable housing
We expect the government to address the lack of affordable housing supply by expediting the 1Malaysia People’s Housing Programme (PR1MA). Other potential measures include improving access to end-financing for affordable housing via the Rent-to-Own scheme to affordable non-PRIMA property developments, extension of full waiver of stamp duty for first time home buyers and setting up an agency to coordinate the provision of affordable housing. This may benefit Mah Sing, SP Setia, LBS Bina, Sime Darby and Lafarge.

Education and healthcare may benefit from higher allocations
Government allocations for education and healthcare may be boosted given its far- reaching benefits for broad population. We also expect education assistance (student debit card, schooling assistance programme) to be extended. This could benefit the pharmaceutical companies under our coverage like Pharmaniaga, YSP and Hovid. A higher education spend could benefit Sasbadi.

Beneficiaries of potential incentives to grow digital economy
We expect Budget 2018 to provide tax incentives, investment grants and capital allowances to assist in the development of an ecosystem for the digital economy, including the Digital Free Trade Zone (DFTZ), e-commerce, high tech manufacturing, robotics, automation, big data and artificial intelligence. This is likely to benefit companies in the manufacturing, logistic and technology sectors like Inari, DRB Hicom, Malaysia Airport and rubber glove players (Top Glove, Hartalega, Supermax, Kossan).

Construction to benefit from rollout of infrastructure projects
Contractors are expected to benefit from the pipeline of infrastructure/construction projects which we expect to be mentioned in the Budget 2018. New contracts which have not been awarded and are slated for implementation in 2018 include the East Coast Rail Link (ECRL), MRT 3 Circle Line, and KL–Singapore High Speed Rail (HSR). Potential beneficiaries under coverage include Gamuda, IJM Corp, YTL Corp, WCT and SunCon.

Status quo for sin taxes?
We are of the view that the government is unlikely to raise sin taxes for the tobacco, brewery and gaming sectors as further increase in taxes will only divert the trades to smugglers and underground operators. This will be neutral for gaming (Genting, Magnum and Berjaya Sports Toto), tobacco (BAT) and brewery stocks (Carlsberg and Heineken
Malaysia) under our coverage.

Mildly positive for market. Maintain KLCI target of 1,790pts
Overall, we expect Budget 2018 to be mildly positive for the market via boost in consumer sentiment. We maintain our KLCI target of 1,790pts (16x P/E) and top three picks.

source: CIM Research – 06/10/2017

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Bursa’s New LEAP Market

Taking the first “LEAP”
■ The LEAP market is Bursa’s third market, after the Main and ACE markets.
■ Cloudaron will be the first company to list, with market cap of RM85m.
■ LEAP offers SMEs fund raising access, but limits participants to sophisticated
investors.
■ A strong share price performance by Cloudaron could attract more SMEs to list.

First listing on LEAP market on 3 Oct 2017
Bursa Malaysia’s new Leading Entrepreneur Accelerator Platform (LEAP) Market will see its first listing tomorrow, just slightly over two months after the Prime Minister launched it during Invest Malaysia KL. The LEAP Market is a new market offered by Bursa to provide SMEs with greater fund raising access and visibility via the capital market, though the market will only be accessible to sophisticated investors.

Third market in Bursa Malaysia
The LEAP market is Bursa Malaysia’s third market after the Main and ACE markets. The Main market is mainly for established companies with track records to raise funds. The ACE Market which stands for ‘Access, Certainty, Efficiency’, formerly known as MESDAQ, is an alternative sponsor-driven market designed for companies with growth potential. The ACE Market was derived together with the unification of the Main and Second Board into the Main Market of Bursa Malaysia on 3 Aug 2009.

Cloudaron to be the first listing on the market
Singapore-based IT solution provider Cloudaron Group will become the first company to list on LEAP market. The group is issuing 50m new shares, representing 6.4% of the company’s enlarged share capital, at an issue price of 11sen for a total value of RM5.5m, ahead of the listing. It plans to use the funds raised for working capital and expansion of its business to Indonesia and the Philippines. Based on its IPO price, Cloudaron will have a market cap of RM85.3m.

Profitable company that generates bulk of revenue from Singapore
Cloudaron is controlled by its managing director and chief executive officer, Ong Chang Jeh, who owns a 34.3% stake, and chairman Datuk Larry Gan Nyap Liou, who holds an 8.1% stake. For FY3/17, Cloudaron posted a net profit of S$1.72m (RM5.2m), on revenue of S$22.9m (RM69.6m). The group generates 81% of its revenue in Singapore and has an orderbook of S$4.1m as at end-Jun 2017.

The advantages of LEAP market
The LEAP market offers small and medium enterprises (SMEs) in the early growth stages a way to raise funding through the capital market due to its less stringent listing requirements compared to the Main and ACE markets. Bursa Malaysia is the single approving authority for listing, which could accelerate the processing time to raise capital and list. The market could also serve as a feeder to the ACE or Main markets.

Potential challenges facing the LEAP market
The key challenges facing the LEAP market in our view, is liquidity, as the market is restricted to sophisticated investors, such as high net worth individuals that own assets of more than RM3m or with an annual income of more than RM300,000 or a combined RM400,000 for husband and wife, and corporate bodies with net assets of more than RM10m. This will reduce the number of investors that can participate in the market.

Figure 1: Number of companies listed on the Main and ACE market

Minimal impact on KLCI
A strong share price performance by Cloudaron tomorrow could attract more SMEs to list on LEAP and liven up the Malaysian stock market. However, it is not expected to have a major impact on the market, as the LEAP market is small relative to the combined market capitalisation of all the companies listed on the main and ACE markets of RM1.83tr. Maintain KLCI target of 1,790 points (16x P/E) and our top three picks continue to be Axiata, Tenaga and Gamuda.

source: CMB Research –  3/10.201

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Malaysia Strategy: Which Stocks Have Foreigners Been Buying?

Foreigners have returned in 2017.
Stocks with big change in foreign shareholdings and top stock ideas

● The latest release of fund flows data showed that foreign institutions added another RM0.4 bn (US$0.1 bn) to their holding in Malaysia in July 2017. We have now seen US$2 bn of net
foreign buying in Jan-July 2017. Foreign ownership of the market has recovered to 23.0%.
● Stocks which have seen the biggest increase in foreign shareholding (as a % of share capital) in 2017 so far are MAHB (+13.7 pp), GAM (+8 pp), MAY (+5.4pp), CIMB (+4.8 pp) and SIME (+2.7 pp). Foreigners reduced holdings in AirAsia (-9.6 pp), Karex (-3.0 pp), Tenaga (-2.4 pp), IOI (-0.5 pp) and TM (-0.5 pp).
● When comparing current foreign ownership levels with the post- GFC average, we find that foreign shareholding levels for MAHB, PBK, Tenaga, MAY and GENM are above post-GFC average. Stocks with foreign shareholding below post-GFC average include
Axiata, IJM, AirAsia, SP Setia, and CIMB.
● Stocks that are under-owned by foreigners where we have OUTPERFORM calls include CIMB, IJM, AirAsia and SP Setia. As for stocks that are over-owned by foreigners where we have UNDERPERFORM calls, we highlight Tenaga and Public.

Figure 1: Current foreign shareholding vs post-GFC average

Foreigners have returned in 2017
The latest release of fund flows data showed that foreign institutions added another RM0.4 bn (US$0.1 bn) to their holding in Malaysia in July 2017. Having seen consistent net foreign fund outflows over 2014-16 amounting to US$7.5 bn (RM29 bn), we have seen US$ 2bn of net foreign buying in Jan-July 2017. Foreign ownership of the market declined from a peak of 24.4% in 2012 to a low of 22.3% in Feb-17 but has recovered since then to 23.0%. However, foreign ownership remains below the levels recorded in 2012-15 prior to the emergence of news over 1MDB scandal (mid-2015).

Stocks with big change in foreign shareholdings
By value. Stocks which have benefitted most from foreign buying YTD in 2017 (ranked according to USD of net inflows) are MAY, CIMB, SIME, MAHB, Gamuda and Maxis. Meanwhile, foreigners have sold down their holdings in Tenaga, Air Asia IOI, TM and Karex.

Changes in foreign shareholding in stocks (% of share capital). Looking at movements in foreign shareholding (change in % ownership, pp), the stocks which have seen the biggest increase in foreign shareholding (as % of share capital) in 2017 so far are MAHB (+13.7 pp), GAM (+8 pp), MAY (+5.4 pp), CIMB (+4.8 pp) and SIME (+2.7 pp). On the other hand, foreigners reduced holdings in AirAsia (- 9.6 pp), Karex (-3.0 pp), Tenaga (-2.4 pp), IOI (-0.5 pp) and TM (-0.5 pp). Surprisingly, we have not seen a pickup in foreign shareholding in Genting Malaysia despite the improvement in earnings outlook and a marked pick-up in requests from foreign clients to visit Genting Highlands in recent months.

Deviation of foreign ownership from historical average. When comparing current foreign ownership levels with the post-GFC average, we find that foreign shareholding levels for MAHB, PBK, TNB, MAY and GENM are above post-GFC average. Stocks with foreign shareholding below the post-GFC average include Axiata, IJM, AirAsia, SP Setia, and CIMB.

Crowded trade and foreigners weightings
We now examine the percentage breakdown of foreigners' aggregate holdings in Malaysia into the various stocks and compare it with MSCI's prescribed weighting to gauge if foreigners are overweight or underweight on each stock.

OVERWEIGHT stock positions. Not surprisingly, this list is dominated by banks (Public, Maybank, CIMB), construction (Gamuda), high yield stocks (BAT, Astro) and PNB restructuring stocks (Maybank, SIME). Foreigners had a bigger overweight position on Tenaga in 2016 but have since trimmed to just a touch above MSCI weight. Top five stocks where foreigners' weighting is above MSCI weight are AirAsia, Genting Malaysia, Genting Bhd, BAT and CIMB.

UNDERWEIGHT stock positions. Again it is no surprise that this list comprises mostly sectors with bleak earnings outlook such as plantation stocks (IOI, KLK, FGV, Genting Plantation), oil and gas (Dialog, Sapura) and telecommunication stocks (Axiata, Maxis, DIGI).
We are somewhat surprised to see IJM in the list given the positive outlook for the construction business.

Top stock ideas

Stocks that are under-owned by foreigners – In this category, we highlight OUTPERFORM calls which are under-owned (either vs historical average or vs MSCI weight). Stocks that we like where foreign ownership is below the post-GFC average include CIMB, IJM, AirAsia and SP Setia. Incidentally, foreigners' estimated weighting on IJM is also below the prescribed MSCI weighting.

Stocks that are over-owned by foreigners. In this category, we highlight UNDERPERFORM calls which are over-owned (either vs historical average or vs MSCI weight) where there could be potential catalysts that could trigger further selldown by foreign investors. We highlight Tenaga and Public as stocks where foreign ownership is above the post-GFC average and also foreigners' estimated weightings are above the MSCI weighting.

source: Credit Suisse – 04/08/2017

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