• Asian economies reeling from the novel Coronavirus. As the death toll and number of infections rise, fears are mounting on the extent of the economic damage to China and other Asian economies. The big unknown is the outbreak’s extent and duration. Accordingly, the Ministry of Finance has floated the prospect of an economic stimulus package to address the anticipated negative economic repercussions. We expect it to have a nominal allocation of c.MYR10bn to mitigate the impact on the tourism, hospitality, aviation, gaming and consumer sectors.

• Need antivirus measures. China’s 2020 economic growth rate could be impaired by 1 ppt, arising from the draconian containment measures in Hubei province and extended Lunar New Year shut down in other parts of the country. China is Malaysia’s largest trading partner and a significant source of foreign tourists (9M19: 12% of tourist arrivals). We pointed out in our recent economic report (Pandemic: Lessons From SARS) that Malaysia could see GDP growth shaved by 0.2 ppt if the viral outbreak becomes an extended crisis. Malaysia is highly reliant on the tourism industry, which accounts for 15.2% of GDP (2018). A decline in tourism, both domestic and international, would be most felt in the accommodation, restaurants, retail, and transport sectors. This is also where we think the focus of the Government stimulus should be aimed.

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FBM KLCI 7-year forward consensus P/E
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• Speed is of the essence.
 Judging from the SARS experience, we think it is in the Government’s interest to come up with a package of measures swiftly, not only to be proactive, but also given the speed at which consumer panic spreads, surpassing that of the virus itself. Nevertheless, the stimulus also needs to be comprehensive and effective in addressing the right targets. Already there is anecdotal evidence of a slowdown in various segments of the economy. These include lower airline passenger traffic, fewer tourists, reduced foot traffic at shopping malls and hotel booking cancellations.

• Fiscal comparisons. In May 2003 the Government put in place a MYR7.3bn package of pro-growth measures as the SARS virus peaked in 2Q03. We think the quantum of the current stimulus ought to be bigger than in 2003 to the tune of MYR10bn after adjusting for inflation and growth of the tourism sector. We expect key initiatives to include reducing EPF contribution, targeting tax incentives, and accelerating the implementation of key infrastructure projects to achieve the maximum multiplier effect.

• Market friendly. The ensuing market volatility ties in with our existing strategy to trade the market and accumulate on dips on the back of our base case assumption that the outbreak will be contained and dissipated over the coming months. Note that during the SARS episode between Oct 2002 and May 2003, the FBM KLCI was range bound, with a V-shaped recovery occurring after the announcement of the 2003 economic stimulus package. Investors should look into accumulating bashed down blue chips and stocks in the gaming, construction and consumer sectors.

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Keep Calm, The Stimulus Is Coming
Figure 1: KLCI movements since 2001-2004
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Figure 2: Tourism-related sectors bore the brunt of the SARS outbreak, but limited impact to overall GDP
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Potential support measures

What the Government would end up doing is anyone’s best guess. But if history is any predictor, we could likely see a repeat of some of the measures introduced during the SARS period especially on efforts to cushion the adverse impact to the affected sectors and bring confidence back.

In addition, new measures, especially using the support of electronic and internet platforms as well as taking advantage of the Fourth Industrial Revolution could likely be introduced.

Fiscal neutral measures
i. Accelerate implementation of infrastructure projects with a short gestation period ie rural infrastructure in Sabah & Sarawak, refurbishment of old schools, and upgrading of clinics and hospitals;
ii. Temporary reduction in employee EPF contribution (in 2003, it was lowered to 9% from 11% for a year);
iii. Reduction in utility bills for hotel and restaurant operators (in 2003, 5% discount was given for hotel operators for six months)
iv. Special Relief Guarantee Facility (SRGF) a financing and credit guarantee of RM1bn under Bank Negara Malaysia (BNM), especially for working capital, provided to travel agents, hotel operators, restaurants and shopping centres;
v. Restructuring of loan packages for those who are affected by the virus as well as for retrenched workers in tourism-related sectors;
vi. Reduce levy on Human Resource Development Fund for both tourism and hotel operators;
vii. Price controls for selected drugs;
viii. Working with e-wallet companies, online shopping platforms and logistical services to promote greater online purchases.

Fiscal negative measures
i. Temporary reduction in personal and income tax rates (in 2003, Pioneer Status’ companies received 70% income tax exemption for five years);
ii. Reduction in road tax for taxis, with possible extension to e-hailing drivers (in 2003, road tax for taxis was reduced by 50%);
iii. Additional allowances for doctors and medical staff to be paid until the outlook is eradicated (in 2003 doctors were paid MYR400/month, medical staff paid MYR200/month);
iv. Partial reimbursement of business-related losses for tourism industries (ie accommodation, transport and retail);
v. Service tax exemption for hotel and restaurants;
vi. Incentives and packages for businesses to promote working from home.


Figure 3: Impact of proposed stimulus package

Sector: Auto
Impact: Neutral
Comment: While the stimulus unlikely would have a direct impact to the sector, recovery in consumer sentiment would give a boost to discretionary spending.

Sector: Aviation
Impact: Positive
Comment: Reduction in utility bill for hotel/restaurant operators and lower levy on Human Resource Development Fund should translate into lower all-in price for hotel/restaurant. This should encourage more people to travel, hence higher demand for air travel.

Sector: Banks
Impact: Positive
Comment: Acceleration and revival of infrastructure projects would spur economic activities and improved business sentiment. This would in turn lead to a recovery in investor confidence and a pick-up in demand for credit. Measures to relieve consumers via lower income tax or EPF contributions should result in higher consumption spending. Although this would not boost lending to the household sector, namely residential mortgages or auto financing, a recovery in consumption spending would help the wholesale and retail segments. More importantly, we believe the measures would mitigate pressures on asset quality, and any significant increase in credit costs.

Sector: Basic Materials
Impact: Positive
Comment: A ramp-up in the implementation of approved infrastructure projects and/or revival of shelved projects should boost demand for building materials over the near- to medium-term.

Sector: Construction
Impact: Positive
Comment: We think the roll out of stimulus package will be able to bring forward positive news flow to the sector. Accordingly, this will shed brighter light to the sector’s recovery, which previously saw broad-based slowdown in 2019. The package also gives an added kicker, whereby the process of government approval to kick-off restored infrastructure projects, is expedited.

Sector: Consumer
Impact: Positive
Comment: Most of the measures based on past experiences have been effective in increasing disposable income hence consumer spending. The retail-based business would be prime beneficiaries from the higher discretionary spending and higher tourist arrivals.

Sector: Gaming
Impact: Positive
Comment: Both Genting Malaysia and Genting would benefit from the stimulus packages as it would lead to higher disposable income, which may see an increase in visitor arrivals. Other potential temporary measures such as service tax exemption and reduction in utilities bill for hotel and restaurants would also prevent margins from eroding, especially after the expected reduction in visitor arrivals to Resort World Genting from the novel coronavirus.

Sector: Healthcare
Impact: Neutral
Comment: The additional allowances for doctors/medical staff should affect government hospitals only. Public-listed healthcare companies should have neutral impact.

Sector: Logistics
Impact: Positive
Comment:A ramp-up in the implementation of approved infrastructure projects and/or revival of shelved projects should boost demand for building materials over the near- to medium-term.

Sector: Media
Impact: Neutral
Comment: The stimulus package would be a positive respite for the domestic economy and would further support waning consumer and business sentiments, with positive implications on advertising expenditure (adex) and the Visit Malaysia Year 2020. That said, greater structural issues afflicting the broader media sector remain a concern and could dilute the impact of the stimulus, in our view.

Sector: Non-Bank Financials
Impact: Positive
Comment: Potential stimulus package would help to safeguard and improve asset quality. Measures such as temporary reduction in EPF contribution and income taxes should lift individuals’ disposable income and improve cash flow, which would then better borrowers’ debt servicing capabilities.

Sector: Oil & Gas
Impact: Neutral
Comment: We believe it should be a non-event towards the oil & gas sector as there are no major stimulus measures specifically related to the sector.

Sector: Plantations
Impact: Neutral
Comment: We believe it should be a non-event towards the plantation sector as there are no major stimulus measures specifically related to the sector.

Sector: Property
Impact: Neutral
Comment: The Government’s stimulus package alone is not enough to revive demand for property. Although we welcome the Government’s pump-priming effort by reviving shelved infrastructure projects and reducing income tax rates, the overall impact on the property sector should be quite muted, as the novel coronavirus fear should continue to dampen buying sentiment in the property market. Only stronger economic and income growth will drive demand for property.

Sector: REITs
Impact: Positive
Comment: Mildly positive across the board for REITs. We believe the industrial segment would benefit from the incentives put in place to encourage online retail spending as more space would be required for storage by retailers. For retail REITs, the drop in footfall possibly impacting sales numbers would be partly mitigated by the SRGF so we view this positively for the segment especially as shopping malls may start seeing negative implications of widespread fear-mongering. Hospitality REITs, believed to take the biggest hit amidst the novel coronavirus scare, would be the biggest beneficiaries in seeing its bottomline being held up, given the measures that are in place for hotel operators (utility bill reduction, service tax exemption, partial reimbursement, etc).

Sector: Rubber products
Impact: Neutral
Comment: No specific measures from the Government to affect this sector. However, we expect the demand for rubber gloves to surge in the near term due to rising healthcare awareness.

Sector: Technology
Impact: Neutral
Comment: Could be a boost to payment acquiring companies as online and e-wallet are expected to gain traction. Neutral to exporters as the stimulus package to boost local consumption and economy are not expected to have material impact on them.

Sector: Telecommunications
Impact: Neutral
Comment: The intended measures would have little direct impact on the sector given the safe haven characteristics and perceived defensiveness of the telcos’ earnings. The inclination for yield plays should benefit DiGi.Com given its superior prospective dividend yields.

Sector: Utilities
Impact: Neutral
Comment:The stimulus package could provide minimal support towards industrial and commercial electricity consumption in view of boosting economic activities. A reduction in the utilities bills of hotel and restaurant operators should have limited earnings impact to the sector as Tenaga’s earnings are largely regulated under RAB while IPPs’ earnings are also well kept by PPAs.

Figure 4: Earnings outlook and valuations

 

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Figure 5: FBM KLCI – weightings & valuations
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Figure 6: RHB Basket sector weightings & valuations
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Figure 7: Top BUYs
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RHB Guide to Investment 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

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