BY RHB WEALTH RESEARCH

Positive Feedback But Not a Game Changer

An upbeat post-Budget forum. The Budget 2020 Forum held yesterday was officiated by Minister of Finance YB Lim Guan Eng, followed by three moderated panel sessions. Forum participants were generally upbeat on the proposals tabled in Parliament last Friday that were relatively market-friendly, containing pro-growth initiatives and other measures to address structural shortcomings in the economy. While forum panellists highlighted execution risks, we reiterate that the Budget proposals are no panacea to cure the ills constraining the market and the broader economy.

As much as could be expected. We are of the view that the Budget 2020 proposals were as much as could have been expected, given the limitations. It was a people-centric budget, with multiple proposals supportive of the B40 segment, in addition to initiatives to pump-prime the economy via the construction sector. We are also encouraged by wide-ranging proposals to kick-start labour reform and move industries further up the value chain. In our view, the construction and consumer sectors are the biggest winners, while measures are also mildly positive for plantations, property and telcos. We make no change to stock recommendations and sector weightings.

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An expansionary budget in 2020
. Despite a slight deviation from the medium-term fiscal consolidation path, it is deemed as necessary by the Ministry of Finance, given the challenging global economic environment that poses downside risks to the domestic economy. This, in our view, is unlikely to prompt international agencies from cutting Malaysia’s sovereign credit rating, as the Government’s fiscal consolidation track remains intact and is now more transparent in its debt and liability commitments. We laud the MOF’s emphasis on spending to derive value for money, with the right outcomes. This could help to instil confidence among investors, despite an increase in the fiscal deficit to 3.2% of GDP from the medium-term target of 3%. It is also a well-thought-through pro-growth budget, given the allocations to promote investment, create jobs, and improve the efficiency of the economy through digitalisation.

A trader’s market in a low-yield, low-growth world. The local market has lagged on growth concerns and unattractive valuations, exacerbated by various external and domestic worries. A likely US-China trade truce looks far from being comprehensive, and leaves in place existing punitive tariffs that will weigh on global growth in 2020. Bottom-up stock-picking will be key, focusing on quality laggards, resilient yield plays and defensive stocks as tactical options. Small- and mid-caps offer more robust growth at sensible valuations. We are OVERWEIGHT on construction, gaming, rubber gloves, NBFIs and REITs. We make no change to our end-2019 FBM KLCI target of 1,620 pts.

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Analyst
Alexander Chia | +603 9280 8889
alexander.chia@rhbgroup.com
Economist
Peck Boon Soon | +603 9280 2163
bspeck@rhbgroup.com
Keynote address:Finance Minister YB Lim Guan Eng
Moderator:Wong Sue Wan
Topic:Budget 2020 Overview

Finance Minister Lim Guan Eng kick-started his Budget 2020 overview speech by highlighting the prevailing trade war between the US and China, which has had a significant impact on trading countries such as Malaysia.

YB Lim pointed that the reorientation of the global supply chain has boosted interest in Malaysia, where investment and trade diversion were concerned.

“Malaysia is reindustrialising by digitalising our economy, by integrating with the global supply chain better, and by incentivising honest work,”

he said, pointing out that Budget 2020 was designed to cope with the entrenched uncertainties in the global environment.
- One way to achieve this is to attract high-quality investments from multi-national corporates. With incentives valued at MYR5bn over five years, this could create 150,000 high-quality jobs and help enrich the Malaysian supply chain.

- Concurrently, the Government is also aiming to upgrade high-potential local companies to become global champions in exports through incentives valued at MYR5bn over five years, which could create 100,000 jobs locally.

- Another key area: Embracing the digital economy to improve competitiveness. Private sector adoption of the digital revolution could create significant breakthroughs, but would require significant investments in infrastructure. YB Lim said the Government is building the digital backbone by implementing the National Fiberisation & Connectivity Plan (NFCP) over the next five years.

The second thrust of Budget 2020 emphasises on the equitable sharing of wealth among Malaysians. This includes encouraging the hiring of workers to encompass women, the youth, and unemployed graduates, as well as reducing the dependency on low-skilled foreign workers through the Malaysians@Work initiative.

During the Q&A session, the moderator put forth the first tough question: The ability of the Government to execute its policies and budget tabled, given some of the unresolved matters proposed during Budget 2019. This question delighted the crowd.

YB Lim acknowledged some of execution time lags for a number of Budget 2019 proposals, but highlighted the intent of the Government to “walk the talk” – this could be seen in some of its accomplishment, including the public declaration of assets by Members of Parliament, he said.

On the capacity of the country to move into Industrial Revolution 4.0 or IR4.0, he said the Government was trying to push for special bodies to take charge. For example, the Malaysians@Work initiative is being led by the Employees Provident Fund.

A question from the floor was made with regards to the optimistic projections for Malaysia’s 2020 GDP forecast, amidst the external global uncertainties currently. YB Lim acknowledged the global uncertainty – where global trade was expected to slow if the US-China trade war continued on – but noted that the Government is taking proactive measures, as seen by the slightly expansionary Budget 2020.

When asked on the Samurai bond and its hedging practice, YB Lim pointed out that the 0.5% rate offered by Japan is one of the lowest offered, in part due to the latter’s confidence in Malaysia, as well as the good relationship between the two countries.

He also expected more loans to be undertaken by the Government, in view of the infrastructure projects that will take place in 2020. Among some of those mentioned include the Light Rail Transit, Mass Rapid Transit, and East Coast Rail Link projects.

As for the minimum wage increase for major cities, YB Lim pointed out the increase limited for such areas is to give the economy breathing space, especially for employers, given the current economic situation. When asked on the definition of “major cities”, he said an announcement would be made in due course by the Human Resource Ministry.

On the question of inheritance tax, and whether the Government will impose more taxes on the super-rich, YB Lim said no plans for either are on the table, much to the relief of the crowd.

The crowd clapped as he ended the session by stating that Budget 2020 was meaningful, as it put Malaysian businesses and the ordinary man on the street back to work.

Economist
Billy Toh | +603 9280 2184
toh.kian.hin@rhbgroup.com

Ahmad Nazmi Idrus | +603 9280 2179
ahmad.nazmi.idrus@rhbgroup.com
Panel 1 - Harnessing Economic Opportunities For Growth In a New World Order
Panel members:
Johan Mahmood Merican (Director, National Budget Office of the Ministry of Finance),
Dr Richard Record (Lead Malaysia Economist, World Bank),
Andrew Wood (Director, Standard & Poor’s),
and Dr Veerinderjeet Singh (Non-Executive Chairman, Axelasia Taxand),
Moderator: Dato’ Ho Kay Tat (Publisher and Group CEO, The Edge Media Group)

Johan Mahmood Merican: A key challenge for Budget 2020 is expanding expenses YoY, with revenue growth lower than the GDP growth rate.

The objective of the digital service tax stated in Budget 2020 is to level theplaying field between foreign digital and local brick-and-mortar services providers
– the latter is currently paying service tax to the Government, but the former is not.

Johan also said that one of the initiatives being undertaken by the Government to recoup lost revenue is the increased focus by the Royal Malaysian Customs Department on contraband cigarettes.

Dr Richard Record: Malaysia is currently ranked 15th in the World Bank’s Doing Business 2019 report. Note that the ranking here refers to business regulations, as well as the ease of doing business within a specific country.

Dr Record felt encouraged that Budget 2020 is focused on the labour market, especially the target to increase the labour force participation rate (LFPR) for women.

He also commented on the Government’s proposal to increase the tax on top income earners, by setting the tax rate of 30% for taxable incomes in excess of MYR2m. Dr Record stated that this 30% bracket is still behind Malaysia’s other peers, eg Thailand, Vietnam, and the Philippines.

Andrew Wood: Standard & Poor’s (S&P) currently has a rating of A- for Malaysia, which is considered a strong one. The outlook for the rating is stable, which means that S&P did not expect a change in ratings for the next 24 months.

Wood said that, while 2019’s revenue had become more petroleum-dependent, Budget 2020’s quality of revenue has improved – because the country’s income sources are now more diversified.

The important criteria that S&P is focusing on are improvements of the debt to GDP, which was expected to decline from 2020 to 2022.

Dr Veerinderjeet Singh said Budget 2020 is well-crafted and inclusive. He believed that the Sales and Service Tax’s scope should be widened.

Dr Veerinderjeet said enforcement should be tighter – to ensure higher government revenue collection.

Analyst
Alan Lim | +603 9280 8890
alan.lim@rhbgroup.com
Panel 2 - Levelling Up: Industries & Human Capital
Panel members:
Allen Ng (Chief Economist, Securities Commission Malaysia),
Tan Sri Datuk Soh Thian Lai, (President, Federation of Malaysian Manufacturers),
M R Chandran (Senior Advisor, 27 Advisory),
Dato’ Ir Soam Heng Choon (President, Real Estate and Housing Developers’ Association),
Noor Azmi Mat Said (CEO, SME Corp)
Moderator: Jagdev Singh (Tax Leader, PWC Malaysia)

Allen Ng (Chief Economist, Securities Commission Malaysia)
The share of high-tech manufacturing as a percentage of GDP has plateaued since 2010 while the degree of reliance on foreign workers has remained flat since 2015.

Malaysia’s working-age population – measured by the percentage of population between ages 25 to 54 to the total population – is projected to peak at above 45% by 2030. Therefore, we are left with one decade to grow the economy before it becomes more challenging.

Malaysia is moderately more complex than expected for its income level, and is positioned to take advantage of many opportunities to diversify production. That said, our country has yet to fully deliver its full growth potential (5.5% growth expectation) based on our current economic structure.

Tan Sri Datuk Soh Thian Lai (President, Federation of Malaysian Manufacturers)
According to the 11th Malaysia Plan, the services sector is expected to contribute 56.5% to GDP in 2020, while the manufacturing segment is to contribute 22.1% in 2020.

The manufacturing sector is still relevant as a significant source of employment and investment. It continues to be the main catalyst for growth, and linkages for services and other economic sectors.

Currently, domestic direct investment (DDI) appears to be dwindling and must be addressed. DDI has dropped to MYR121.1bn in 2018 from MYR171.3bn in 2014. Total DDI in 1H19 is at MYR42.5bn, of which 18.8% is attributable to the manufacturing sector.

Overall, Malaysia is still competitive but should capitalise on opportunities from the escalating US-China trade war to bring in more investments.

M R Chandran (Senior Advisor, 27 Advisory)
MYR810m to upgrade infrastructure and programmes for the welfare of Felda communities will help to increase the earnings of settlers, who have suffered due to poor FFB yields and depressed CPO prices.

Implementation of B20 for the transport sector in 4Q20 is expected to lift local palm oil consumption by 500,000 tonnes per year. However, execution is the key as the previous track record has not been great.

Transformation of the agriculture sector is vital to improve upstream productivity, by inducing technology adoption and focus on downstream expansion for better yields. There is huge growth potential in personal care products (PCP) and pharmaceutical segments.

As for the minimum wage increase to MYR1,200 from MYR1,100 in major cities, it should be immaterial to the upstream plantation sector, as workers are located in rural areas.

Reduction in CPO export duty is a good move, but duties should be removed altogether in the light of the rising cost for the industry.

There is no more suitable land resource available in Malaysia and the Government should limit the total planted area of palm oil at 6m ha, instead of 6.5m ha to stop deforestation.

Dato’ Ir Soam Heng Choon (President, Real Estate and Housing Developers’ Association)
Mainly existing initiatives on property sector have been extended including rent-to-own schemes, youth ownership housing schemes, etc.

Meanwhile, there are some concerns on the lowering of the foreign buying threshold to MYR600,000, as developers could potentially increase house prices to allow foreigners to purchase those units. However, there is a minimal possibility for such an occurrence, as approvals are needed from the authority for developers to increase prices. The implementation of such measures is also subjected to state governments. All in all, a long-term framework needs to be established to ensure consistent in policy implementation.

Overall, with the increased spending in infrastructure, buying sentiment may improve.

Noor Azmi Mat Said (CEO, SME Corp)
There are currently 907,065 SMEs registered in Malaysia, of which 76.5% are micro-enterprises (sales turnover of below MYR300,000 or employees number less than five). 89.2% of SMEs are in the services sector, while 11% is in agriculture.

SME GDP grew 6.2% in 2018 and continued to outperform the overall economy since 2004.

The 19 strategies and 62 initiatives that have been laid out in the National Entrepreneurship Policy 2030 are expected to empower the B40 group and inculcate entrepreneurship culture, while providing more job opportunities.

The contribution to GDP is expected to increase to 41% in 2020, from 38.3% in 2018, while SME exports to overall exports are targeted to improve to 23% in 2020 from the current 17.3%.

Analyst
Sean Lim Ooi Leong | +603 9280 8867
sean.lim@rhbgroup.com
Panel 3 - Digital Economy Accelerated
Panel members:
Dato Seri Wong Siew Hai (Chairman of Malaysian American Electronics Industry), Bawani Selvaratnam (Chief Development Officer, Malaysian Communications and Multimedia Commission), Tengku Dato’ Sri Azmil Zahruddin Raja Abdul Aziz (Deputy Managing Director, Khazanah Nasional), Dato’ Ir Soam Heng Choon (President, Real Estate and Housing Developers’ Association), Chin Wei Min (Exceutive Director, Digital Strategy and Innovation, Securities Commission Malaysia), Sean Goh (Country Head, Grab Malaysia)
Moderator: Surina Shukri, CEO of Malaysia Digital Economy Corporation

Average rating of 7 out of 10. All panelists gave an average rating of 7 out of 10 on the initiatives for the digital economy in Budget 2020. This Budget lays a foundation and contains good ingredients to spur growth. However, execution would be the most important aspect.

Dato Seri Wong Siew Hai
Budget 2020 puts E&E in an important position, as initiatives are pro-growth. The digital economy covers both services and manufacturing, as it will make this industry more competitive and agile.

Market access remains the biggest challenge to SMEs, not the access to financing. Investors are unaware of some SMEs due to the lack of visibility. He proposed to establish a virtual platform for SMEs to gain better market access.

Responses from SMEs on adopting Industry 4.0 are still low, as they are worried about embarking on this path. That said, efforts are being made such as having workshops to create awareness about Industry 4.0, and results have been encouraging.

There has to be a published plan/road map/country direction, in a manner like what and how the National Fiberisation and Connectivity Plan (NFCP) was put into action. The Government needs to let digital initiatives be made known to the public, and the private sector must be willing to embrace it.

The Government should not complicate the process of incentive applications. Also, greater transparency is required and processes should be efficient. All incentives are given for everyone to improve cost and competitiveness.

Tengku Dato’ Sri Azmil Zahruddin Raja Abdul Aziz
Public private partnership (PPP) is the key to succeed for building an ecosystem in a digital economy, through providing incentives and grants. The initiatives are in the form of matching grants – and are dependent on companies’ willingness to embrace them.

Budget 2020 may be meant for year 2020, but implementation will usually take more than a year. Normally, it is difficult for a government to maintain the course after 2-3 years into it.

Large companies often struggle with the digital transformation despite having better access to their markets. For this, GLCs need to step up, and there are a lot of opportunities for large companies to accelerate growth.

Malaysia is still behind globally, such as in the big data space. There is a limited number of companies that are really adopting big data analytics, such as Grab.

Larger GLCs lack ambition and are too content with where they are. They should look to improve. For example, Bursa Malaysia always has the same largest 30 stocks across the years, whereas in the U.S, this has changed over the years. This shows Malaysia lacks ambition to grow and change. As such, GLCs will need to step up and not tolerate management teams that are unambitious.

Sean Goh
SMEs form the backbone of the digital economy. They are likely to adopt frontend changes with a multiplier effect, especially if they are shown how digital initiatives are able to help generate extra revenue. For digitalisation to be realised, SME should focus on end-to-end digitalisation, which is more powerful and inclusive.

Stop using buzzwords (such as “digitalisation”) as it misled people into the “technology”– it has to be always a problem-driven solution rather than a focus on what technology is being used.

Bawani Selvaratnam
Other than infrastructure, mindset is key. There has to be a shift in mindset. For example, the telecommunications industry should not focus on just connectivity, but rather come up with value-added services to remain relevant.

Everyone also needs to transform and adapt to this dynamic environment. Hence, regulators also play an important role in innovating and accelerating the deployment of infrastructure, unlike the days of 3G deployment.

The road map for the digital infrastructure plan under the MYR21.6bn NFCP is expected to be implemented within the next five years.

Chin Wei Min
Market-based funding has provided more options for SMEs. MYR550m has been generated through crowd-funding over the past 2.5 years. SMEs usually require MYR30,000-500,000 in funding.

In general, SMEs have trouble accessing financing. Hence, the need for market-based financing and P2P lending will broaden the value chain, while creating a platform for younger people to invest, because no one size fits all.

Human capital needs to keep up with the digital transformation. Innovation comes from the people, not the technology.

Analyst
Lee Meng Horng | +603 9280 8866
lee.meng.horng@rhbgroup.com

Loo Tungwye | +603 9280 8683
loo.tungwye@rhbgroup.com

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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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RHB Investment Bank Berhad, its subsidiaries (including its regional offices) and associated companies, (“RHBIB Group”) form a diversified financial group, undertaking various investment banking activities which include, amongst others, underwriting, securities trading, market making and corporate finance advisory.

As a result of the same, in the ordinary course of its business, any member of the RHBIB Group, may, from time to time, have business relationships with or hold positions in the securities (including capital market products) or perform and/or solicit investment, advisory or other services from any of the subject company(ies) covered in this research report.

While the RHBIB Group will ensure that there are sufficient information barriers and internal controls in place where necessary, to prevent/manage any conflicts of interest to ensure the independence of this report, investors should also be aware that such conflict of interest may exist in view of the investment banking activities undertaken by the RHBIB Group as mentioned above and should exercise their own judgement before making any investment decisions.

Malaysia
Save as disclosed in the following link (RHB Research conflict disclosures – Oct 2019) and to the best of our knowledge, RHBIB hereby declares that:
1. RHBIB does not have a financial interest in the securities or other capital market products of the subject company(ies) covered in this report.
2. RHBIB is not a market maker in the securities or capital market products of the subject company(ies) covered in this report.
3. None of RHBIB’s staff or associated person serve as a director or board member* of the subject company(ies) covered in this report
*For the avoidance of doubt, the confirmation is only limited to the staff of research department
4. Save as disclosed below, RHBIB did not receive compensation for investment banking or corporate finance services from the subject company in the past 12 months.
5. RHBIB did not receive compensation or benefit (including gift and special cost arrangement e.g. company/issuer-sponsored and paid trip) in relation to the production of this report.

Thailand
RHB Securities (Thailand) PCL and/or its directors, officers, associates, connected parties and/or employees, may have, or have had, interests and/or commitments in the securities in subject company(ies) mentioned in this report or any securities related thereto. Further, RHB Securities (Thailand) PCL may have, or have had, business relationships with the subject company(ies) mentioned in this report. As a result, investors should exercise their own judgment carefully before making any investment decisions.

Indonesia
PT RHB Sekuritas Indonesia is not affiliated with the subject company(ies) covered in this report both directly or indirectly as per the definitions of affiliation above. Pursuant to the Capital Market Law (Law Number 8 Year 1995) and the supporting regulations thereof, what constitutes as affiliated parties are as follows:
1. Familial relationship due to marriage or blood up to the second degree, both horizontally or vertically;
2. Affiliation between parties to the employees, Directors or Commissioners of the parties concerned;
3. Affiliation between 2 companies whereby one or more member of the Board of Directors or the Commissioners are the same;
4. Affiliation between the Company and the parties, both directly or indirectly, controlling or being controlled by the Company;
5. Affiliation between 2 companies which are controlled, directly or indirectly, by the same party; or
6. Affiliation between the Company and the main Shareholders.

PT RHB Sekuritas Indonesia is not an insider as defined in the Capital Market Law and the information contained in this report is not considered as insider information prohibited by law. Insider means:
a. a commissioner, director or employee of an Issuer or Public Company;
b. a substantial shareholder of an Issuer or Public Company;
c. an individual, who because of his position or profession, or because of a business relationship with an Issuer or Public Company, has access to inside information; and
d. an individual who within the last six months was a Person defined in letters a, b or c, above.

Singapore
Save as disclosed in the following link (RHB Research conflict disclosures – Oct 2019) and to the best of our knowledge, RHB Securities Singapore Pte Ltd hereby declares that:
1. RHB Securities Singapore Pte Ltd, its subsidiaries and/or associated companies do not make a market in any issuer covered in this report.
2. RHB Securities Singapore Pte Ltd, its subsidiaries and/or its associated companies and its analysts do not have a financial interest (including a shareholding of 1% or more) in the issuer covered in this report.
3. RHB Securities, its staff or connected persons do not serve on the board or trustee positions of the issuer covered in this report.
4. RHB Securities Singapore Pte Ltd, its subsidiaries and/or its associated companies do not have and have not within the last 12 months had any corporate finance advisory relationship with the issuer covered in this report or any other relationship that may create a potential conflict of interest.
5. RHB Securities Singapore Pte Ltd, or person associated or connected to it do not have any interest in the acquisition or disposal of, the securities, specified securities based derivatives contracts or units in a collective investment scheme covered in this report.
6. RHB Securities Singapore Pte Ltd and its analysts do not receive any compensation or benefit in connection with the production of this research report or recommendation.

Hong Kong
The following disclosures relate to relationships between RHBHK and companies covered by Research Department of RHBSHK and referred to in this research report:
RHBSHK hereby certifies that no part of RHBSHK analyst compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
RHBHK had an investment banking services client relationships during the past 12 months with: -.
RHBHK has received compensation for investment banking services, during the past 12 months from: -.
RHBHK managed/co-managed public offerings, in the past 12 months for: -.
On a principal basis. RHBHK has a position of over 1% market capitalization of: -.

Additionally, please note the following:

Ownership and material conflicts of interest: RHBSHK policy prohibits its analysts and associates reporting to analysts from owning securities of any company covered by the analyst.

Analyst as officer or director: RHBSHK policy prohibits its analysts, and associates reporting to analysts from serving as an officer, director, advisory board member or employee of any company covered by the analyst.

RHBHK salespeople, traders, and other non-research professionals may provide oral or written market commentary or trading strategies to RHB clients that reflect opinions that are contrary to the opinions expressed in this research report.

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