my 2015 malaysia budget 20141013(mastercopy)rhb · strategy - malaysia 10 october 2014 see...

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Market Strategy, 10 October 2014

Strategy – Malaysia 2015 Budget

A Balancing Act

Top Picks Target Price (MYR/s)

Gamuda

MAHB

Press Metal

SapuraKencana

Unisem

5.61

8.51

8.30

5.33

2.16

Source: RHB estimates

Peck Boon Soon +603 9280 2163 [email protected]

Alexander Chia +603 9207 7621 [email protected]

RHB Research Team +603 9207 7668 [email protected]

The 2015 Budget appears to be well balanced, combining commitments to achieve greater fiscal prudence but mindful of the impact of the higher costs of living on the rakyat. Important elements of the Budget include the implementation of the GST this April, and commitment to a petroleum subsidy mechanism. The property and sin sectors were unscathed, while infrastructure projects were strongly featured.

♦ Commitment to fiscal reform. The Budget reaffirms the objective of

bringing down the fiscal deficit to 3% of GDP in 2015. The goods and services tax (GST) will be implemented as scheduled this April, which will broaden the tax base. A petroleum subsidy mechanism will also be implemented in stages (no details yet) to ensure a more targeted subsidy and to reduce leakages and smuggling. The implementation of these key measures will preserve Malaysia’s sovereign rating although further improvement in the fiscal position will be required before an upgrade can be expected.

♦ A broadening of products groups not subject to GST. The scope of items not subject to GST was widened to include many daily consumables, medicines, books, newspapers as well as the first 300 units of electricity (from 200 units), diesel and RON95 petrol. Nonetheless, we have yet to see a comprehensive list of products that will be either GST-exempted or zero-rated. The proposed reduction in income tax by 1-3% from YA2015 and corporation income tax by 1% from YA2016 was as announced in last year’s Budget. Combined with the hike in BR1M handouts by MYR300 and the absence of additional duties on the brewery and tobacco segments, the consumer sector can breathe a sigh of relief. There were also no additional gaming duties while the property sector also escaped unscathed after the punitive curbs imposed last year.

♦ Construction and infrastructure projects still a key focus to accelerate public and private investment. The Budget proposal specifically mentioned seven large-scale infrastructure projects with a value in excess of MYR48bn. Notably, these include MRT Line 2 and LRT Line 3 to be implemented in 2015, in addition to the MYR27bn Pan-Borneo Highway. While these projects will have long gestation periods, it continues to reaffirm our expectation that the strong momentum of activity in the construction sector will continue to be sustained.

♦ The market pullback is a buying opportunity. There are no changes to our earnings forecasts arising from the Budget announcement. We believe the market pullback is an opportunity to accumulate growth stocks at more palatable valuations. We continue to project a recovery in corporate earnings with net EPS growth for FBMKLCI component stocks rising to 7.6% in 2015 from just 2.8% in 2014, in line with expectations of a better growth outlook in developed economies. We maintain our end-2014 and 2015 FBMKLCI targets at 1,940pts and 2,100pts respectively. Preferred sectors include construction, basic materials, technology and property. Some of our Top Picks include Gamuda (GAM MK, BUY, TP: MYR5.61), SapuraKencana (SAKP MK, BUY, TP: MYR5.33), Malaysia Airports (MAHB MK, BUY, TP: MYR8.51), Unisem (UNI MK, BUY, TP: MYR2.16) and Press Metal (PRESS MK, BUY, TP: MYR 8.30).

Strategy - Malaysia 10 October 2014

See important disclosures at the end of this report 2

Key Tax And Expenditure Measures

♦ As expected, the Federal Government announced that it will cut its budget deficit further to 3.0% of GDP or MYR35.7bn in 2015, from a deficit of 3.5% of GDP estimated for 2014. This will likely be achieved via an introduction of the GST to broaden its tax base as well as cutting its operating expenditure via further rationalisation of fuel subsidies. The consequence will likely be a jump in inflation and a slowdown in the economy during the year. As a whole, we expect GDP to slow down to 5.3% in 2015, from +5.8% estimated for 2014.

♦ Rising inflation and higher costs of doing business will likely dampen consumer and business sentiment, leading to lower spending. This will likely be made worse by the curbs on the property market in late 2013 and an interest rate hike in July 2014, and we believe the effects will likely be felt more significant in 2015. To what extent businesses and consumers will react to the double-whammy effect of higher fuel prices and the GST introduction remains to be seen. Any over reaction by consumers and businesses could pose downside risk to our GDP growth forecast.

♦ Net development expenditure of the Federal Government is projected to increase by 15.0% in 2015, a sharp increase from +1.4% estimated for 2014. This will likely help to support growth for the Malaysian economy under a relatively challenging external economic environment. The operating expenditure will be contained during the year, mainly by rationalising fuel subsidies, to improve the fiscal position of the Federal Government.

First strategy: Strengthening economic growth

♦ The services sector is targeted to contribute 60% to GDP by 2020 (2013: 55.2%). As such, the Government has proposed several initiatives to boost the sector, including: i) the implementation of the Services Sector Blueprint, ii) the setting up of the MYR5bn Services Sector Guarantee Scheme, and iii) the re-introduction of the Services Export Fund (SEF) totalling MYR300m.

♦ The Government is also looking to further strengthen Malaysia’s Islamic financial market. As such, a new shariah-compliant investment product in 2015 known as the Investment Account Platform (IAP) will be introduced. Initially, the IAP will be implemented with a startup fund of MYR150m. The Government is proposing that individual investors be given income tax exemption on profits earned from qualifying investment under the IAP for three consecutive years.

♦ The deduction for expenses incurred in the issuance of sukuk based on ijarah and wakalah principles will be extended until year of assessment 2018.

♦ To promote the domestic shipping industry, the Government will establish a Malaysia Protection and Indemnity Club under Exim Bank to assist owners of cargo ships with gross tonnage not exceeding 300 tonnes. The Club will offer third-party liability protection at reasonable premiums.

♦ An incentive of a 5-year 100% income tax exemption will be made available to encourage the private sector to manage, maintain and upgrade industrial estates in less developed areas. An incentive of a 5-year 70% income tax exemption will also be made available to the private sector to manage industrial estates in other areas.

♦ To increase automation in labour-intensive industries, incentives in the form of capital allowance will be provided on automation expenditure, based on these following categories:

♦ The Federal Government aims to furtherreduce the budget deficit to 3.0% of GDP orMYR35.7bn in 2015, from a deficit of 3.5%of GDP estimated for 2014



Figure 1: Capital allowances in labour-Intensive industries

1. High labour-intensive industries (such as rubber products, plastics, wood, furniture and

textiles): an automation capital allowance of 200% will be provided on the first MYR4m

expenditure incurred between 2015 and 2017.

2. For other industries: an automation capital allowance of 200% will be provided on the first

MYR2m expenditure incurred between 2015 and 2020

Source: Budget 2015 Speech

♦ In promoting high-quality and focused investment, a more specialised incentive package will be offered for investment projects based on technology, innovation and knowledge, involving highly-qualified and knowledgeable employees with high salaries.

♦ Infrastructure projects to be implemented in 2015 include:

Figure 2: Infrastructure projects to be implemented

1. The construction of the MYR5.3bn 59km Sungai Besi – Ulu Klang Expressway (SUKE)

2. The construction of the MYR5.0bn 276km West Coast Expressway from Taiping to Banting

3. The construction of the MYR4.2bn 47km Damansara – Shah Alam Highway (DASH)

4. The construction of the MYR1.6bn 36km Eastern Klang Valley Expressway (EKVE)

5. Upgrading of the East Coast railway line along Gemas – Mentakab, Jerantut – Sungai Yu and

Gua Musang – Tumpat (MYR150m)

6. The construction of the MYR23bn 56km Second MRT Line from Selayang to Putrajaya

7. The construction of the MYR9bn LRT 3 project, linking Bandar Utama to Shah Alam and Klang


♦ Additionally, to develop the electric vehicle manufacturing industry in Malaysia, a

Sustainable Mobility Fund of MYR70m will be established under SME Bank. Initially, 50 electric buses will be introduced.

♦ To spur growth in the creative industry, a Digital Content Industry Fund will be set up under the Communications and Multimedia Commission with an allocation of MYR100m.

♦ The High-Speed Broadband will continue to be implemented in areas of high economic impact. A sum of MYR2.7bn will be spent over the next three years to build 1,000 new telecommunication towers and to lay undersea cables.

♦ In conjunction with Malaysia – Year of Festivals 2015, the Government is allocating MYR316m for various programmes under the Ministry of Tourism and Culture.

♦ To accelerate the participation of SMEs in economic activity, the Government proposes the implementation of SME Investment Partner, which will give financing assistance in several forms. An initial fund totalling MYR375m will be provided for a period of five years. In addition, MYR10m will be allocated for the Business Accelerator Programme under SME Corp.

♦ To enhance the use of new technology, automation and innovation in the development of SMEs, MYR80m is allocated for a Soft Loan Scheme for Automation and Modernisation of SMEs under the Malaysian Industrial Development Finance Berhad.

♦ In 2015, TEKUN will provide additional funds of MYR500m which will be distributed to various entrepreneur groups. The Government will also provide Chinese SME entrepreneurs with soft loans totalling MYR50m, and MYR30m for hawkers and petty traders.

♦ Allocation of MYR1.3bn to the Ministry of Science, Technology and Innovation to implement several research and development (R&D) related programmes. These include: i) providing research funds amounting to MYR290m to implement various high-impact R&D programmes, ii) introduction of a new initiative known as Public Private Research Network with total fund allocation of MYR50m, and iii) additional allocation of MYR50m to further strengthen the Technology Commercialisation Platform Programme.



Second strategy: Enhancing fiscal governance

♦ Government widens the scope on basic food items and services that will not be subjected to the goods and services tax (GST) relative to Budget 2014.

♦ The Government is committed to providing various forms of assistance to the rakyat for year of assessment 2015. Among the initiatives announced are:

♦ In addition, some incentives and assistance is provided to businesses to achieve a level of readiness in the face of the GST.

♦ Government will implement subsidy rationalisation, particularly for petroleum. A new mechanism for providing petroleum subsidy will be announced soon.

♦ In relation to the National Blue Ocean Strategy and its projects and programmes, MYR356m will be provided in 2015 for the establishment of Urban Transformation Centre (UTCs) and upskilling acceleration.

Third strategy: Developing human capital and entreprenuership

♦ Allocating MYR56bn to the Ministry of Education for various teaching and learning programmes.

♦ Allocating MYR250m to schools which require guidance and special assistance under the School Improvement Specialist Coaches and School Improvement Partners programmes.

♦ Allocating MYR10m to expand 20 more Trust Schools in Johor, Sarawak, Selangor, Perak, Negeri Sembilan and Kuala Lumpur.

♦ Building 12 new schools which will consist of seven primary schools, three secondary schools and two boarding schools nationwide.

♦ Allocating MYR1.2bn to increase the student intake in vocational and community colleges and upgrade colleges.

Figure 3: GST exemption list widened

1) Basic food items such as fruits, bread and noodles

2) Various medication, reading materials for learning and newspapers

3) First 300 units of electricity per month for domestic consumers

4) Retail sale of RON95 petrol, diesel and LPG to consumers and targeted groups are

exempted from GST


Figure 4: Assistance to be given to the rakyat

1) For individuals and households for year of assessment 2015

- Individual income tax rates will be reduced by 1-3ppts

- Tax payers with family and income of MYR4,000 per month will not have tax liability.

- Individual income tax restructured: i) chargeable income subjected to the maximum

rate will be increased from MYR100,000 to MYR400,000, and ii) the current maximum

tax rate at 26% will be reduced to 24%, 24.5% and 25% based on three tax bracket

tiers

2) For assessment year 2015

- Cooperative income tax rate will also be reduced by 1-2ppts

- Secretarial fee and tax filing fee are allowed as deduction

3) For assessment year 2016

- Corporate income tax rate will be reduced from 25% to 24%

- Income tax rate for SMEs will also be reduced from 20% to 19%


Figure 5: Business GST readiness assistance

1) Training grant of MYR100m provided to businesses for their employees to attend GST

courses

2) Financial assistance amounting to RM150m provided to SMEs for the purchase of

accounting software

3) Accelerated Capital Allowance on purchase of ICT equipment and software

4) Expenses incurred for training in accounting and ICT relating to GST will be given

additional tax deduction




♦ Allocating MYR100m for 10,000 placements in technical and vocational private colleges. Further MYR50m to MARA to implement technical and vocational education and training (TVET) programmes.

♦ Enhancing existing tax incentives to encourage private companies operating in technical and vocational education.

♦ Allocating MYR800m to development and maintenance of education facilities.

Examples include national schools, national-type Chinese and Tamil schools, religious schools, fully residential schools and MARA Junior Science Colleges.

♦ Allocating MYR3bn for sponsoring education. The breakdown includes MYR1.9bn to Public Services Department, MYR759m to the Ministry of Education and MYR258m to the Ministry of Health.

♦ Allocating MYR112m to the expansion of MyBrain15 Programme. This programme which is currently for the private sector, is proposed to be extended to civil servants and employees of statutory bodies.

♦ To encourage repayments to Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN), the Government proposes various financial incentives to recoup the remaining 54% of MYR11.76bn.

♦ Talent Corp will provide MYR30m to develop curriculum for internship programmes and industrial training.

♦ Allocating MYR30m to provide technical training and education assistance to Indian youth, particularly those from low-income families.

♦ Extending tax incentives to companies conducting CSR efforts from year end 2016 to year end 2020.

♦ Allocating MYR300m through a new programme, namely Globally Recognised Industry and Professional Certification Programme (1MalaysiaGRIP) to intensify upskilling and reskilling 30,000 workers.

♦ Allocating MYR570m to increase skills training programmes in institutes under Department of Labour (JTK).

Fourth strategy: advancing bumiputera agenda

♦ MYR600m will be allocated to Ekuiti Nasional (Ekuinas) to increase bumiputera equity ownership in private companies and GLCs. To date, Ekuinas has cumulative investments of MYR2.3bn in various sectors.

♦ To increase the number of bumiputera entrepreneurs through the following initiatives: i) strengthening the role of the National Entrepreneurship Institute (INSKEN) as a centre of excellence for bumiputera entrepreneurship, ii) accelerating the Bumiputera Entrepreneurs Startup Scheme (SUPERB) through additional allocation of MYR30m. The programme will be extended to entrepreneurs in Sabah and Sarawak, iii) introducing a pre-export programme for high-performing bumiputera companies (TERAS) for enhanced branding, international certification and market surveys for bumiputera products. The programme targets 60 TERAS companies to increase their capacity and penetrate international markets, and iv) expanding the carve-out and compete programme through meritocracy for the Government and privatised projects including the MRT Phase II and the Pan-Borneo Highway.

♦ MYR200m will be allocated to Lembaga Tabung Haji for the establishment of the shariah-compliant restricted investment account (RIA) under Bank Islam to provide financing and credit between MYR50,000 and MYR1m from Jan 2015. Amanah Ikhtiar Malaysia (AIM) will use internal sources of MYR1.8bn for financing to benefit 346,000 Sahabat AIM.

♦ Develop bumiputera human capital through the following initiatives: i) allocate MYR2bn to MARA to sponsor the education of eligible bumiputera students, ii) allocate MYR72m to Yayasan Peneraju Pendidikan Bumiputera to implement three programmes in the form of scholarships, training and financial assistance to benefit 5,000 people, and iii) establish a professional accounting centre in

Figure 6: Enhanced tax incentives to private companies

1) Double deduction for scholarships awarded to students

2) Double deduction on expenses incurred by a company to implement a structured internship

programme

3) Further deduction on training expenses incurred by an employer for employees to obtain

certificate qualifications




Universiti Teknologi MARA in collaboration with the Malaysian Institute of Accountants.

♦ Kick off the construction of the 1,663-km Pan-Borneo Highway comprising 936 km in Sarawak and 727 km in Sabah to improve the welfare of the rakyat in Sabah and Sarawak.

♦ Through National Blue Ocean Strategy (NBOS), establish a mini urban transformation centre (UTC) and rural transformation centre (RTC) in Sabah and Sarawak to facilitate transactions for the communities in the interior and urban areas.

♦ Undertake the construction of Tenom Health Clinic, Sabah and Lubok Antu, Sarawak, upgrade facilities at Hospital Tawau and provide nuclear medical and radiotherapy services to treat cancer patients at Hospital Wanita dan Kanak-kanak Likas, Sabah.

♦ Introduce for the first time MYR70m worth of hill paddy subsidies to benefit paddy farmers in Sabah and Sarawak covering 76,000ha of crop area.

♦ In an effort to standardise the prices of essential goods between Peninsular Malaysia, Sabah and Sarawak, the Ministry of Domestic Trade, Co-operatives and Consumerism will: i) allocate MYR262m to finance the cost of transportation and enforce price controls on essential goods, especially in Sabah and Sarawak, and ii) set up two more KR1M in Sabah, bringing its total to 16, and three more in Sarawak to bring the state’s total to 19.

Fifth strategy: upholding the role of women

♦ Allocate MYR2.26bn to: i) strengthen the Women Directors Programme to achieve 30% participation of women in decision-making positions with the aim of training 125 potential women directors to fill positions as members of the board of Government-linked companies and the private sector, ii) improve opportunities for women to return to the job market through the 1Malaysia Support for Housewife programme, and iii) set up a women’s career comeback programme for professional women returning to the job market, based on professional qualifications established through Talent Corp.

♦ Purchase premises for special protection homes for women in the Eastern, Northern and Central zones and continue the Single Mother Skill Incubator Programme (I-KIT), Women Entrepreneurship Incubator Programme (IkUnita) and Women Core Development Programme for single mothers interested in entrepreneurship.

♦ Allocation of MYR30m through AIM to inculcate the spirit of entrepreneurship among Indian women.

♦ Improve child care leave eligibility for civil servants by revising the conditions so

that the eligibility is not tied to the duration of maternity leave, effective from 1 Jan 2015. The leave is limited to children until they reach one year of age and is extended to female personnel with stepchildren, legally adopted children, foster

children and children with disabilities.

Sixth Strategy: Developing National Youth Transformation Programme

♦ Allocation of MYR320m to launch the National Youth Transformation Programme.

♦ Establish 1Malaysia Youth City with an allocation of MYR100m to fund three pilot projects in Peninsular Malaysia, Sabah and Sarawak, which is aimed at providing a comprehensive ecosystem for youth to increase progress in work, business and entrepreneurship as well as enjoy housing, recreational and sports facilities

♦ Introduction of the Youth Housing Scheme, a smart partnership between the Government, Bank Simpanan Nasional, Employees Provident Fund and Cagamas to address youth’s home ownership issues.

♦ Allocate MYR103m to implement a Sporting Nation Blueprint to transform Malaysia into a sporting nation.



Seventh Strategy: Prioritising Well-being of the Rakyat

♦ Starting Jan 2015, a MYR100 each will be given to all primary and secondary school students with an allocation of MYR540m which will benefit 5.4m students.

♦ The Government will continue to implement the 1Malaysia Book Voucher Programme with the assistance of MYR250 per student. A sum of MYR325m will be allocated for this programme and is expected to benefit about 1.3m students.

♦ Allocating MYR6bn to Ministry of Agriculture and Agro-Based Industry to implement the following initiatives: i) establish 65 permanent farmers’ markets and 50 fish markets, ii) introduce a weekly auction programme for quality vegetables at reasonable prices at 85 FAMA trading operation centres, iii) intensify the Jom Bertani Programme; iv) providing MYR100m in matching grants to the Farmers’ Organisation Authority

♦ Accelerate the development of four new integrated agriculture development areas in Rompin, Batang Lupar, Kota Belud and Pekan involving paddy cultivation areas of 25,905 hectares.

♦ The Government is concerned with the development and welfare of the fishermen, and aims to improve it by: i) increasing the living allowance for fishermen in Zone A to MYR300 and Zone B and C to MYR250, ii) provide a monthly allowance of MYR200 for the first time for full-time coastal fishermen, iii) allocate MYR60m for fishermen who are affected especially during the monsoon season, iv) allocate MYR27m to install an automatic identification system on fishing boats to increase fish landing

♦ Allocate MYR300m for a special housing fund for fishermen to build and refurbish houses for fishermen and an additional of MYR250m for housing projects.

♦ Implement a price uniformity scheme, transport subsidy and establishing more Kedai Rakyat 1Malaysia (KR1M).

♦ The Ministry of Domestic Trade, Co-operatives and Consumerism will implement the following initiatives: i) establish another 20 KR1M in Peninsular Malaysia; ii) set up price watch teams comprising consumer associations, iii) strengthen the GST Enforcement Unit.

♦ To improve the public transport system, the Government will introduce the following programmes: i) provide intercity bus services to those residing outside Kuala Lumpur (KL) but work in KL with a discounted monthly fare of 30%, ii) provide an electric train service (ETS) for the Ipoh-Butterworth route starting April 2015, iii) upgrade stage bus services in phases in Kuching, Ipoh, Seremban, Kuala Terengganu and Kangar

♦ The Malaysian Rubber Board (MRB) will allocate MYR100m to implement a regulatory price mechanism at the farm level.

♦ MRB also provide soft loans of MYR6.4m as working capital to 64 smallholder cooperatives to purchase rubber directly from 442,000 rubber smallholders nationwide

♦ The Government will allocate MYR41m for oil palm smallholders for new planting and replanting.

♦ Export duty exemption for crude palm oil (CPO) will be extended until Dec 2014. ♦ Allocate MYR23.3bn for health services and facilities to implement the following

initiatives: i) build two hospitals, 20 Health Clinics and four dental clinics, ii) establish an additional 30 1Malaysia clinic, iii) replace 635 units of haemodialysis machines in Government hospitals and clinics with an allocation of MYR30m, iv) allocate MYR45.4m for patients undergoing chronic and acute haemodialysis treatment

♦ The Government proposes the existing tax relief be increased to MYR6,000 per year to reduce the burden of medical expenses and treatment of serious diseases.

♦ Allocate MYR30m to contain the dengue fever epidemic from spreading. ♦ Allocate MYR2.2bn to the Ministry of Women, Family and Community

Development



♦ Allocate MYR711m to the Ministry of Education, Tabika Kemas, PERMATA and

Tabika Perpaduan. ♦ 50% stamp duty exemption on instruments of transfer and loan agreements and

increase the purchase limit to MYR500,000 from MYR400,000 for first home buyers. The exemption will be given until 31 Dec 2016.

♦ MYR40m will be allocated under the Public Housing Maintenance Programme. Meanwhile, MYR100m will also be allocated under the 1Malaysia Maintenance Fund for maintenance of private low-cost housing.

♦ MYR4.5bn will be allocated, particularly in Sabah and Sarawak for the implementing of the following programmes: i) MYR943m for construction of 635km of rural roads in Sabah and Sarawak, ii) MYR1.1bn for electricity connection for 15,000 house, iii) MYR394m to supply clean water supply for 7,500 houses, iv) MYR200m to build and rehabilitate 9,500 dilapidated houses, v) MYR160m to increase rural air services in Sabah and Sarawak, vi) MYR352m to implement economic development programmes for the Orang Asli community, vii) MYR26m to install an additional 10 lamp posts in every village nationwide.

♦ Expedite the construction of Air Langat 2 Water Treatment Plant. Costing MYR3bn, the plant will increase the supply of treated water to 1,130 million litres daily.

♦ MYR112m for setting up leakage control zones as well as detecting and repairing leaking pipes.

♦ MYR17.7bn to the Malaysian armed forces (ATM) while MYR9.1bn to the PDRM to increase the level of safety and public order. MYR804m is also allocated to Maritime Enforcement Agency Malaysia to strengthen maritime enforcement.

♦ Government will increase the intake of policemen by 11,757 personnel, build 14 Police Headquarters (IPK) and police stations including a new block for IPK Perlis as well as strengthen the police patrol units of the Royal Malaysian Police through the purchase of 1,000 units of motorcycles. The Government will also allocate MYR121m for PDRM to implement various programmes under NKRA.

♦ Allocate MYR7bn to ATM to increase the readiness of ATM’s personnel and assets.

♦ Allocate MYR393m to APMM to improve maritime safety. ♦ Allocate MYR117m to strengthen the role of RELA. ♦ One-off grant of MYR50m to creditable NGOs involved in community

development programmes, unity, social welfare, consumerism, health and security.

♦ Increase in the minimum eligibility for civil servant housing loans to MYR120,000 from MYR80,000 and the maximum eligibility limit to MYR600,000 from MYR450,000.

♦ To enable more civil servants to buy PPA1M houses, the Government has agreed to build an additional 5,380 units including 1,600 units in Putrajaya, Bukit Jalil (1,530 units), Papar, Sabah (1,290 units) and Bukit Pinang, Kedah (960 units).

♦ MYR500m allocated for repair and maintenance that will be implemented in stages for military, police, teachers’ and medical staff’s quarters nationwide.

♦ BR1M increased to MYR950 from MYR650 for households with monthly income of MYR3,000 and below.

♦ BR1M increased to MYR750 from MYR450 for households with monthly income of between MYR3,000 and MYR4,000.

♦ BR1M increased to MYR350 from MYR300 for single individuals aged 21 and above and with a monthly income not exceeding MYR2,000.

Figure 7: Programmes implemented by Ministry of Women, Family and Community Development

1) MYR1.2bn in assistance of poor families, children, senior citizens and disabled.

2) Increase tax relief for each disabled child to MYR6,000 from MYR5,000.

3) Increase tax relief for purchase of basic supporting equipment to MYR6,000 from

MYR5,000

4) Increase daily food allowance to MYR16 from MYR8 for 8,700 residents in 63 institutions

under the social welfare department

5) Increase annual grant for the National Council for Persons with Disabilities to MYR1m from

MYR500,000

6) Establish additional five Senior Citizens Activity Centres, bringing the total to 50.




♦ Group takaful insurance or i-BR1M with a family bereavement scheme revised with the new scheme entitling the next of kin of BR1M recipients to receive RM1,000 effective for a year.

♦ Half-month bonus with minimum payment of MYR500 to be paid to civil servants.

Impact On The Economy: Pro-growth and ensuring fiscal sustainability Revenue and expenditure proposals Federal Government: Fiscal position to strengthen with introduction of GST One of the major steps forward in the Budget 2015 is the introduction of the GST, which is expected to enhance government revenue to allow it to sustain a growth of 4.5% in 2015. At the same time, the operating expenditure will be contained at a marginal rise of 1.1% in 2015, from an increase of 4.7% estimated for 2014, mainly by rationalising fuel subsidies and it reflects the Government’s commitment towards fiscal consolidation. While operating expenditure will still take up 95.0% of government revenue in 2015, it is a reduction from 98.2% estimated for 2014. This is a step in the right direction even though it is still at an uncomfortably high level. This will likely be reflected in a bigger decline in subsidies of 7.1% in 2015, after falling by 6.4% estimated for 2014, in line with the Government’s intention to gradually shift away from blanket subsidies to targeted subsidy scheme. As a whole, the Federal Government’s budget deficit is projected to narrow further to 3.0% of GDP or MYR35.7bn in 2015, from a deficit of 3.5% of GDP or MYR37.3bn estimated for 2014 (see Table 8).

The setback from the introduction of the GST, together with a fuel price hike in October 2014, will likely result in a significant jump in inflation to 4-5% projected for 2015, up from +3.3% estimated for 2014 and a low of +1.6% in 2012. This will be the third consecutive year of acceleration in inflation, suggesting that inflationary expectation will likely build up despite a cost-push factor, which in turn, will likely dampen consumer and business sentiment, leading to a slowdown in spending. This will likely be made worse by the curbs on the property market in late 2013 and an interest rate hike in July 2014, and we believe the effects will likely be felt more significant in 2015. To what extent businesses and consumers will react to the double-whammy effect of higher fuel prices and the GST introduction remains to be

♦ The budget deficit is projected to narrow further to 3.0% of GDP or MYR35.7bn in2015, from a deficit of 3.5% of GDPestimated for 2014

Table 8: Federal Government’s financial position

20141 20152

MYRbn % change MYRbn % change

Revenue 225.1 5.5 235.2 4.5

Total Expenditure 263.3 3.9 271.9 3.3

Operating Expenditure 221.1 4.7 223.4 1.1

Gross Development Expenditure 42.2 0.03 48.5 14.9

Loan Recoveries 0.9 1.0

Net development expenditure 41.3 1.4 47.5 15.0

Overall balance (37.3) (35.7)

% of GDP (3.5) (3.0)

Sources of financing:

Net domestic borrowing 37.6 -

Net external borrowing (0.4) -

Change in assets 0.2 - 1: Revised estimates by MOF 2: Budget forecasts, excluding 2015 tax measures

Note: Total may not add up due to rounding

Source: Economic Report 2014/2015, Ministry of Finance

♦ Inflationary expectation will likely build up,dampening consumer and businesssentiment and leading to a slowdown inspending



seen. Any over-reaction by consumers and businesses could pose downside risk to our GDP growth forecast. We are projecting real GDP growth to slow down to 5.3% in 2015, from +5.8% estimated for 2014. Any over-reaction by consumers and businesses could pose as a downside risk to our GDP growth forecast. We project annual real GDP growth to slow down to 5.3% in 2015, from the +5.8% estimated for 2014. On a more positive note, what is heartening is the increase in allocation for net development expenditure in Budget 2015, which has a larger multiplier impact on the economy. Net development expenditure will increase by 15.0% in 2015, a sharp increase from +1.4% estimated for 2014. This is on the back of higher allocations for housing, education, trade & industry as well as transportation. This would help to support growth – under a relatively challenging external economic environment. In addition, private investment will likely be supported by increasing domestic activities, the ongoing implementation of Economic Transformation Programme (ETP) projects and higher growth in construction-related sectors. Several infrastructure projects announced in the 2015 budget such as the construction of new highways and upgrading of existing highways (which have a combined cost of MYR16.3bn), the construction of MRT Line-2 (MYR23bn) and extension of LRT linking Bandar Utama to Shah Alam and Klang (MYR9bn) will likely drive private investment in the coming years. The implementation of high-speed broadband (HSBB) (MYR2.7bn) over the next three years and the Government’s intention to build the Pan-Borneo Highway at a cost of MYR27bn would also provide impetus for the construction-related sectors. While a slowdown in consumer spending is inevitable in 2015, given the high level of household debt and rising inflation, we still expect consumer spending to remain resilient. Consumer spending, however, will likely be supported by a higher amount of cash transfers via the 1Malaysia People's Aid (BR1M) for the low-income group. In addition, the individual tax burden will be reduced by 1-3ppts. Meanwhile, the greater number of tax reliefs for a few categories, as well as higher tax threshold for individual tax payers could help to mitigate the moderation in the growth of consumer spending. A half-month bonus for the civil servants and special financial assistance of MYR250 for Government pensioners in 2015 would also boost consumer spending. Also, Malaysia’s Year of Festival 2015 is likely to support consumer spending next year. Apart from taking a major step towards fiscal sustainability by implementing the GST and containing the increase in operating expenditure, what is significant in Budget 2015 is the strategy put forth to ensure a smooth transition to the 11th Malaysia Plan (11MP), which will cover the final crucial leg in the country’s transformation into a high-income nation by 2020. A number of strategies and measures have been formulated in the 2015 budget for the country to advance up the value chain. These include developing human capital and entrepreneurship, encouraging research & innovation, nurturing the growth of small and medium size enterprises (SMEs) and promoting the growth of the services sector. Indeed, a new approach known as the Malaysian National Development Strategy (MyNDS) is being formulated and will form a key basis to planning and preparing programmes and projects under the 11MP. The emphasis on using limited resources optimally, with a focus on high-impact projects and programmes at a low cost, as well as efficient and rapid implementation, is crucial for the nation’s progress to a high-income advanced economy by 2020. Meanwhile, rising inflation amid slowing growth will likely put the Central Bank in a dilemma in its near-term monetary policy stance. We believe the strength of economic growth will likely be a more important consideration – relative to inflation –for monetary decisions for the rest of the year, given the challenging global economic environment. Consequently, we continue to expect the overnight policy rate (OPR) to be kept at 3.25% for the rest of the year. Further out, we believe the Central Bank could still raise the OPR by another 25bps in 1Q15, if the economic performance of the country remains favourable.

♦ Private investment to be supported by several infrastructure projects announced in Budget 2015

♦ Consumer spending to remain resilient, supported by a higher amount of cash transfers and a reduction in the individual tax rate

♦ A Malaysian National Development Strategy for the planning and preparation of programmes under the 11MP

♦ The strength of economic growth will likely be a more important consideration relative to inflation in the Central Bank’s monetary policy stance



Market Impact: No Re-Rating Catalysts 2015 Budget contained few new initiatives The 2015 Budget comprehensively addressed areas of concerns surrounding the fiscal health of the nation. This includes bringing down the fiscal deficit to 3% of GDP in 2015, implementing GST as scheduled and rationalising fuel subsidies.

Other than the first official mention of a start date for MRT Line 2 and the extension of existing schemes like the 1Malaysia People’s Aid (BR1M) and 1Malaysia People’s Housing Scheme (PR1MA), there were few other new initiatives in the budget to lift the market.

While the scope of items not subjected to GST has been widened to include many daily consumables, medicines, books, newspapers, the first 300 units of electricity (from 200 units previously), diesel and RON95 petrol, we would have preferred to see more clarity on specific GST details like a comprehensive list of products that will be either exempt or zero-rated. We now expect this information to emerge in the coming months. Details on the widely expected petroleum subsidy mechanism – to be implemented in stages – to ensure a more targeted subsidy, and reduce leakages and smuggling also did not materialise. The proposed reduction in income tax by 1-3% from year of assessment (YA) 2015 and corporation income tax by 1% from YA2016 was already announced in the 2014 Budget. Combined with the hike in BR1M handouts by MYR300 and the absence of additional duties on the brewery and tobacco industries, the consumer sector can breathe a sigh of relief. There were no additional gaming duties too while the property sector also escaped unscathed after the punitive curbs imposed last year.

The slew of large scale infrastructure projects promoted in the 2015 Budget announcement could offer a mild fillip to the construction sector in the short-term. It also reaffirms our expectation that the upcycle of activity in the construction sector will continue to be sustained.



Market Outlook: Selloff Presents An Opportunity To Accumulate From the macroeconomic perspective, the inability of the developed countries to transition from a recovery to an economic boom since the Great Recession of 2008-2009 suggests that there is no risk of significant policy tightening anytime soon. While there is continued concern given the end of QE3 this month together with expectations of a normalization of US interest rates, we note that ending the extraordinary low interest rates is a positive reflection that the US economic recovery has reached a self-sustaining stage. This will imply improving global growth outlook, which will eventually translate to stronger corporate earnings growth and equity market performance.

Figure 9: MSCI Asia ex-Japan index corrected both after end of QE1 and QE2

Source: Bloomberg

The direction of global equities and the Malaysian equity market in 4Q and into 1H 2015 is likely to be dictated by the strength of the global economy and on the local front, corporate earnings growth and potential changes in expectations of the timing and speed of the US rate hike cycle, in our view. The good news is that policies in the major world countries will remain very accommodative and supportive of equities. We believe the earnings outlook will gradually improve as economic and business activities pick up. Based on our projection, the normalised net EPS of the FBM KLCI stocks under our coverage remains on track to improve to 7.6% in 2015, and could continue to trend higher given the impending 1ppt reduction in the corporate income tax rate effective year of assessment 2016. The significant improvement in earnings growth projected for 2015 is fairly broad-based and underpinned by the banking, construction, telecommunications, gaming, health care and shipping sectors. The prospects will likely brighten gradually as investors shift their attention to focus on the improving outlook in FY2015-2016. While liquidity in the banking system is gradually tightening on account of the gradual reversal of short-term capital and a slower deposit versus loan growth, it remains ample.

Figure 10: Large amount of excess liquidity continued to be mopped out by the Central Bank

Source: Bank Negara Malaysia, RHB estimates

QE 3

QE1

QE2



Figure 11: Low interest rate environment

Source: Dept. of Statistics, Bank Negara Malaysia

There are no changes to our earnings forecasts arising from the Budget announcement. We believe the market pullback is an opportunity to accumulate growth stocks at more palatable valuations. We continue to project a recovery in in corporate earnings with net EPS growth for FBMKLCI component stocks rising to 7.6% in 2015 from just 2.8% in 2014 in line with expectations of a better growth outlook in developed economies. We maintain our end-2014 and 2015 FBMKLCI targets at 1,940pts and 2,100pts respectively. Preferred sectors include construction, basic materials, technology and property. Some of our top picks include Gamuda, SapuraKencana, Malaysia Airports, Unisem and Press Metal.

Figure 12: KLCI vs SCI vs Fledging Index

Source: Bloomberg

Figure 13: FBM KLCI’s performance relative to regional markets

Source: Bloomberg



Figure 14: Earnings Outlook And Valuations FBM KLCI RHB BASKET

COMPOSITE INDEX @ 10-Oct-14

1,808.88 2012A 2013A 2014F 2015F 2012A 2013A 2014F 2015F

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

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

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

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

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

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

Prospective PER (x)* 18.3 17.8 17.2 15.8 18.3 17.7 16.9 15.1

Price/EBITDA (x) 10.2 10.0 9.4 8.7 10.2 9.9 9.2 8.5

Price/Bk (x) 2.6 2.4 2.2 2.0 2.4 2.2 2.0 1.9

Price/NTA (x) 3.2 2.9 2.7 2.4 2.9 2.6 2.4 2.1

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

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

EV/EBITDA (x) 7.4 7.5 7.0 6.5 8.4 8.5 8.0 7.4 Div Yld (%) 2.7 3.1 3.2 3.3 2.9 3.0 3.1 3.3 ROE (%) 14.1 13.3 12.8 12.9 13.3 12.3 11.9 12.3

* Excludes MAS earnings in 2012-15. FBM KLCI stocks not under our coverage: HLFG, PPB, Pet Dagangan, RHB Cap and YTL. Source: Bloomberg, RHB estimates

Figure 15: Top Picks

FYE Price Target Price

Mkt Cap Shariah EPS Growth

(%)

P/E

(x)

P/BV

(x)

P/CF

(x)

NDY (%)

(MYR/s) (MYR/s) (MYRm) Compliant FY14 FY15 FY14 FY15 FY15 FY15 FY15

10-Oct-14

SapuraKencana^ Jan 3.65 5.33 21,871 Yes 24.3 20.1 15.8 13.1 1.7 46.4 0.0

AMMB^ Mar 6.70 8.00 20,195 No 7.9 7.0 10.5 9.8 1.3 n.a. 4.2

Gamuda Jul 4.80 5.61 11,068 Yes 1.3 (5.8) 15.5 16.5 1.9 29.6 2.5

Westports Dec 2.98 3.29 10,162 Yes 15.5 1.6 20.2 19.9 5.3 13.8 3.8

MAHB Dec 7.03 8.51 9,262 No (74.8) 86.2 +>100 55.9 1.7 8.4 2.2

IOIPG Jun 2.61 3.38 8,454 Yes (38.7) 17.0 19.9 17.0 0.7 11.7 3.1

CMS Dec 4.05 5.00 4,168 Yes 15.0 26.3 20.2 16.0 2.1 13.4 1.9

Press Metal Dec 5.39 8.30 2,852 No +>100 37.7 10.9 7.9 1.4 3.9 2.2

Dayang Dec 3.06 4.80 2,525 Yes 76.2 18.7 11.9 10.0 2.7 11.4 5.0

Coastal Contracts Dec 4.19 5.90 2,480 Yes 32.2 14.7 12.9 11.2 1.9 6.5 2.2

Inari Amerton Jun 2.87 3.82 1,481 Yes +>100 2.6 14.7 14.3 5.1 10.1 2.8

Karex Jun 2.83 3.41 1,146 No 56.3 31.8 25.3 19.2 4.4 35.3 1.3

Unisem Dec 1.46 2.16 984 Yes n.a. 41.4 15.1 10.7 0.9 3.8 1.4

Tambun Indah Dec 2.19 3.00 892 Yes 46.2 16.1 9.1 7.8 2.0 11.1 4.7

Pintaras Jaya Jun 4.34 4.92 695 Yes 19.7 9.5 13.1 12.0 2.0 11.8 3.5

SKP Resources^ Mar 0.64 0.85 576 No 59.3 56.6 12.0 7.7 2.0 1.1 6.5

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




Figure 16: Sector weightings & valuations

Covered Stocks MKT CAP Weight EPS Growth (%) P/E (x) Recommendation

MYRbn % FY13 FY14 FY15 FY13 FY14 FY15

Utilities 127.6 9.8 (8.8) 14.7 4.6 18.9 16.4 15.4 Overweight

Property 51.8 4.0 7.6 (6.1) 13.0 13.5 13.6 11.8 Overweight

Rubber Products 44.2 3.4 6.9 4.9 19.1 19.2 18.1 15.2 Overweight

Construction 27.1 2.1 3.5 15.7 17.6 16.7 13.4 11.0 Overweight

Non-Bank Financials 23.5 1.8 19.9 1.4 8.0 14.7 12.5 11.6 Overweight

Basic Materials 19.3 1.5 19.1 24.9 27.3 21.5 17.1 13.3 Overweight

Logistics 3.1 0.2 1.6 7.0 5.2 9.0 8.4 8.0 Overweight

Banking 275.9 21.3 5.6 0.3 7.2 13.6 12.9 11.7 Neutral

Telecommunications 182.4 14.1 4.9 (0.9) 8.1 23.4 23.6 21.8 Neutral

Plantation 139.4 10.7 (20.7) (7.1) (2.6) 17.8 19.2 19.6 Neutral

Oil & Gas 104.5 8.1 7.7 17.3 12.6 17.9 15.2 13.4 Neutral

Gaming 68.2 5.3 (11.5) (3.3) 11.7 15.8 16.3 14.6 Neutral

Shipping 31.4 2.4 62.7 8.5 28.9 18.9 17.5 13.5 Neutral

Property-MREITs 30.3 2.3 16.0 1.8 6.0 19.2 18.6 17.2 Neutral

Auto 25.5 2.0 (8.1) 13.9 18.3 15.7 13.8 11.7 Neutral

Aviation 22.1 1.7 (43.4) (90.8) >100 22.9 +>100 25.7 Neutral

Media 20.4 1.6 1.8 5.50 14.24 25.5 24.1 21.0 Neutral

Healthcare 13.8 1.1 21.8 21.3 44.6 51.9 41.2 27.9 Neutral

Ports 12.7 1.0 13.9 11.2 4.9 21.2 19.0 18.1 Neutral

Technology 6.2 0.5 19.2 74.2 15.4 36.5 16.0 12.1 Neutral

Timber 3.9 0.3 (52.8) 56.4 26.0 27.9 17.8 14.1 Neutral

Consumer 63.4 4.9 (1.1) 2.0 7.2 20.9 20.4 19.0 Underweight

1296.7 100.0 (0.7) 2.7 10.1 17.7 16.9 15.1 * Excludes MAS earnings in 2013-15 Source: RHB estimates

Figure 17: High Dividend Yield Stocks

Price NDY (%)

EPS Growth (%)

P/E (x)

P/BV (x)

ROE (x)

(MYR/s) FY14 FY15 FY14 FY15 FY14 FY15 FY15 FY15 10-Oct-14

Quill Capita 1.17 7.3 7.3 9.3 8.6 12.1 11.1 0.8 7.3

Parkson 2.55 7.2 3.7 (40.6) 43.2 19.6 13.7 1.0 7.5

Hektar REIT 1.51 7.0 7.1 (0.5) 5.5 13.2 12.5 1.0 7.8

MCIL^ 0.87 6.9 7.1 (7.1) 4.1 10.3 9.9 2.1 21.9

CapitaMalls 1.40 6.6 6.9 3.4 5.6 16.2 15.3 1.1 7.3

Protasco 1.56 6.4 6.4 39.9 33.3 9.1 6.8 1.2 19.0

Magnum Bhd 2.94 6.4 6.5 2.7 1.3 12.5 12.3 1.6 13.2

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

Maxis 6.48 6.2 4.9 0.2 5.2 23.2 22.1 10.3 45.8

Paramount 1.49 6.0 6.0 7.4 (2.2) 8.8 9.0 0.7 8.2

B-Toto 3.57 5.8 6.0 5.5 2.1 14.5 14.2 6.7 48.8

Axis REIT 3.63 5.8 5.5 1.3 9.0 18.8 17.3 1.4 8.3

Glomac^ 1.11 5.7 5.7 1.9 2.4 7.3 7.2 0.8 11.3

Hua Yang 2.16 5.7 6.3 (2.0) 11.6 6.2 5.5 1.1 21.5

Padini 1.77 5.6 6.1 6.5 8.1 13.2 12.2 2.9 24.5

Media Prima 2.12 5.6 6.3 (10.4) 13.3 11.9 10.5 1.3 17.2

IGB REIT 1.28 5.5 5.7 4.7 3.4 20.1 19.4 1.2 6.3

Pavilion REIT 1.45 5.4 5.6 4.0 4.6 19.6 18.7 1.2 6.6

Maybank 9.70 5.3 5.8 (1.0) 7.9 12.8 11.9 1.6 13.9

Sunway REIT 1.51 5.2 5.5 (4.7) 10.2 19.8 18.0 1.2 6.7

Carlsberg 11.44 5.1 5.3 (1.9) 3.8 19.5 18.8 12.9 68.6

VS Industry 2.35 5.0 5.6 +>100 12.0 8.2 7.3 0.8 11.5 ^ FY14 & FY15 valuations refer to those of FY15 & FY16



Figure 18: Laggard Stocks On RHB Buy List

Price Target Price % Chg in price

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

10-Oct-14

Thong Guan 2.13 2.60 (25.5) (10.6) 3.8 41.3

Press Metal 5.39 8.30 (23.2) 29.4 123.4 155.9

Rev Asia 1.08 1.68 (20.1) 4.7 29.1 96.5

OCK 1.35 1.65 (17.6) (6.8) (2.3) 80.4

Unisem 1.46 2.16 (16.4) (14.0) 18.4 71.1

Coastal Contract 4.19 5.90 (15.8) (15.3) (13.1) 48.1

Naim 3.16 5.06 (15.4) (23.8) (12.2) (10.5)

Datasonic 1.61 2.50 (14.8) (20.4) (20.2) 221.6

E&O^ 2.52 3.60 (13.7) (16.8) 11.0 26.6

Sapura Kencana^ 3.65 5.33 (11.6) (13.4) (14.4) 1.0

Tropicana 1.26 2.15 (11.4) (14.5) (19.5) (19.0)

TASCO 3.05 3.90 (10.9) 19.2 23.0 52.0

MAHB 7.03 8.51 (10.7) (16.6) (13.0) (9.6)

Wah Seong 1.68 2.40 (10.6) (9.1) (9.1) 0.1

Matrix 2.97 3.93 (9.7) 2.6 8.6 59.5

Protasco 1.56 2.43 (9.6) (16.7) (18.8) 19.4

OldTown^ 1.76 2.30 (9.5) (17.1) (10.0) (12.8)

Ahmad Zaki 0.70 0.96 (8.9) 0.7 5.9 (7.3)

Kimlun 1.39 1.68 (8.5) (14.1) (16.2) (18.2)

Dayang 3.06 4.80 (8.3) (14.4) (14.4) (1.5)

Favelle Favco 3.12 3.62 (8.2) (11.1) (17.9) 12.2

Maybulk 1.53 2.00 (8.2) (16.5) (27.0) (12.8)

Tune Insurance 2.13 3.00 (7.3) (4.4) 0.5 10.7

Hua Yang^ 2.16 2.74 (7.2) (0.5) 19.8 (4.4)

MRCB 1.56 2.05 (7.1) (9.7) (2.5) 6.8

Tambun Indah 2.19 3.00 (6.9) (3.0) 16.9 58.3

Perdana Petroleum 1.64 2.20 (6.7) (14.4) (12.6) 23.6

Bumi Armada 1.64 2.24 (6.6) (13.5) (29.2) (28.0)

SOP 5.70 6.60 (6.5) (19.7) (16.5) (5.2)

IOI Prop 2.61 3.38 (6.0) (12.9) (0.3) 13.5

M'sia Steel 0.99 1.31 (5.7) 1.5 (1.0) 2.6

Dialog 1.59 2.25 (5.1) (13.1) (8.8) 23.9

Paramount 1.49 1.88 (4.5) 0.0 (8.0) 6.1

Skyt Takaful 12.30 15.00 (4.3) (4.3) (0.5) 35.4

CMS 4.05 5.00 (4.1) 9.0 30.9 143.8

Pos Malaysia^ 4.71 5.70 (3.9) (13.6) 0.2 (13.7)

Inari Amerton 2.87 3.82 (3.8) (9.6) 9.3 153.5

MBSB 2.63 2.80 (3.7) 1.3 4.4 (4.5)

Genting Bhd 9.28 10.96 (3.5) (5.0) (4.9) (6.1)

Hiap Teck 0.71 1.00 (3.3) (7.0) (5.2) 18.5

Lafarge 9.91 11.27 (2.9) (4.6) 11.6 3.1

AMMB^ 6.70 8.00 (2.7) (5.0) (4.6) (7.5)

DRB-Hicom^ 2.14 3.20 (2.7) 1.4 (11.4) (13.5)

Genting Plantation 9.80 11.15 (2.4) (14.7) (10.7) 1.0

Maybank 9.70 11.00 (2.3) (1.4) 1.3 0.0

Suria Capital 2.50 3.50 (2.3) (10.7) (1.1) 46.3

Pintaras 4.34 4.92 (2.0) 1.1 31.3 45.8

SP Setia 3.29 4.08 (1.8) (1.5) 12.8 4.0

Bursa Malaysia 7.91 9.10 (1.6) 3.0 7.5 6.1

IJM Land^ 3.20 4.15 (1.5) (3.9) 7.3 17.5



Technical Review

Figure 19 : FBM KLCI’s weekly chart

Source: RHB, Bloomberg

Violates critical 50-week MAV line

In our recent analysis, we highlighted the significance of the 50-week MAV line to the FBM KLCI. This MAV line has provided meaningful support for the index for seven times since the bull market started in 2009. However, as highlighted in the above chart, it was violated once in 2011. Just last week, the index broke below the MAV line for the second time and it seems that the violation could be a decisive one as the index lost slightly more than 30pts last week.

Previously, we mentioned that the FBM KLCI seemed to be struggling to hold up the 50-week MAV line since August, as it has not been able to create a higher high since then. Since it finally dipped below this critical line last week, there is a possibility that the market may experience the kind of strong selling pressure that was last seen in 2011, unless it can quickly bounce back above this line this week – thereby proving that the violation was a fake breakdown.

Judging by the fact that the FBM KLCI has not had a lengthier downward consolidation phase since 2011, there is a possibility that the immediate strong 1,800-1,802pt support area may not be able to hold up the index. If this support area is violated, we can regard the 1,769-pt level as the next downside target – where the next strong support can be found. The 1,769-pt level is also its lowest point recorded this year.

As the essential 50-week MAV line has been violated, we now view the MAV line as a strong resistance for the market to challenge. The line is now situated at the 1,845-pt level. An additional resistance can be found at the 1,860-pt level.

♦ 50-week MAV line violated for the second time since 2009

♦ Potential further strong selling pressure in the coming weeks

♦ Next strong supports at the 1,800-1,802pt range and 1,769-pt level

♦ 50-week MAV line is now a strong resistance

50-week MAV line



Aviation Neutral

Waiting for the new policy In conjunction with the Malaysia Year of Festivals 2015 tourism campaign, the Government is targeting for 29.4m foreign tourist arrivals next year, vis-à-vis 2014’s target of 28m, with an expected income of MYR89bn. For this, MYR316m will be allocated for various programmes under the auspices of the Tourism and Culture Ministry. This is positive for the aviation sector, but we believe that the impact will be fairly neutral. Note that this allocation was lower than the MYR1.2bn allocated this year for the Visit Malaysia 2014 campaign.

There was no announcement made on the direction of the upcoming national aviation policy in Prime Minister Datuk Seri Najib Razak’s 2015 Budget speech. We anticipate for this to be revealed at a later date. The proposed aviation policy was mooted with the emphasis on providing some pre-emptive measures to protect the domestic market ahead of the Asean Open Skies policy, which is slated for implementation in 2015. The policy is also expected to outline the measures needed to strengthen the aviation industry’s ecosystem and services network. This is all part of the Government’s initiative to make Malaysia a leading regional aviation hub.

♦ Still awaiting the national aviation policy

Figure 20: Valuations of aviation stocks

Price Target

Price

Mkt

Cap

P/E

(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec

(MYR/s) (MYR/s) (MYRm) FY14 FY15 FY14 FY15 FY14 FY14 FY14 FY14

MAHB 7.03 8.51 9,262 +>100 55.9 (74.8) 86.2 1.7 8.7 1.7 1.9 B

AirAsia 2.48 2.73 6,896 56.9 12.7 (73.4) +>100 1.4 5.5 2.4 1.6 B

MAS* 0.25 0.27 4,178 n.m. n.m. (21.1) 9.1 1.5 n.m n.m 0.0 N

AirAsia X 0.73 0.68 1,719 n.m. n.m. ->100 91.6 1.6 9.6 n.m 0.0 S

Sector Avg n.m. 25.7 n.m +>100

* Excludes MAS earnings



Banks Neutral

Lukewarm On New Business Avenue for Islamic Banks The Government will introduce a new shariah-compliant investment product in 2015 called the Investment Account Platform (IAP). IAP will provide investors with opportunities to finance entrepreneurial activities and develop viable small medium enterprises (SMEs). At the same time, IAP will be a platform to attract institutional and individual investors, including high net worth individuals, to invest in the Islamic financial market. Initially, IAP will be implemented with a startup fund of MYR150m. To promote investment in IAP, the Government proposes individual investors be given income tax exemption on profits earned from qualifying investment for three consecutive years.

The IAP will be an innovative product – it is linked to the banks’ financing portfolio like project and entrepreneurial financing, which provides Islamic banks’ customers the opportunity to earn investment returns and enjoy tax incentives. Recall that IA (a liabilities item on the banks’ balance sheet) will also benefit the Islamic banks with zero capital charges on assets tagged to IA, as the risk is borne by investors, and hence it is excluded from statutory reserve requirement (SRR). Additionally, there will be further tax deduction for expenses incurred for the issuance of sukuk.

However, we are NEUTRAL on its impact on BIMB Holdings (BIMB MK, NEUTRAL, TP: MYR4.70), despite the fact that it could spur its fee income stream. We remain concerned about the uncertainties on the implementation of the new product and the customers’ reception. Furthermore, the industry has yet to provide an update on the possibilities of off-balance sheet accounting. Given that IA is not a form of deposit, it may affect the Islamic bank’s ability to retain depositors (and hence its financing-to-deposit ratio), who may switch to IA for potential higher returns, though we believe not every customer will be qualified for IA. Ultimately, we expect the industry to face near-term hike in operational costs to adapt to the new platform and to incentivise customers to partake in the product. While this could propel wealth management avenues for Islamic finance, it is yet to be known if the platform could spur innovative solutions for takaful and financing products.

♦ While the IAP could create new fee incomeavenues for Islamic banks, we remainNEUTRAL on this new business avenue, given the uncertainties in implementation,which could generate costs

Figure 21: Valuations of banking stocks

Price Target

Price

Mkt

Cap

P/E

(x)

EPS Growth

(%)

P/BV

(x)

NDY

(%)

ROE

(%)

Rec

(MYR/s) (MYR/s) (MYR/s) FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15

Maybank 9.70 11.00 86,596 12.8 11.9 (1.0) 7.9 1.7 1.6 5.3 5.8 13.9 13.9 B

AMMB^ 6.70 8.00 20,195 10.5 9.8 7.9 7.0 1.4 1.3 3.9 4.2 14.0 13.8 B

Public Bank 18.28 19.85 67,220 15.4 15.0 2.5 2.4 2.4 2.3 3.0 3.3 18.2 16.2 N

CIMB 6.66 7.55 55,384 12.5 11.4 (11.5) 10.4 1.4 1.3 3.2 3.6 12.8 12.2 N

HLB 14.20 15.10 25,009 11.9 11.2 12.8 6.4 1.7 1.5 2.7 2.8 15.3 14.5 N

BIMB 4.25 4.70 8,161 15.1 13.8 94.0 9.7 1.7 1.6 3.3 3.6 14.0 11.9 N

AFG^ 4.84 4.95 7,493 12.6 11.6 5.7 8.0 1.8 1.7 4.8 5.1 14.2 14.7 N

Affin 3.29 3.50 5,803 9.4 8.8 (12.5) 7.9 0.7 0.8 3.3 3.9 8.5 8.9 N

RHB Cap 8.88 NR 22,475 11.2 10.4 12.9 7.6 1.2 1.1 2.6 2.8 11.2 10.8 NR

Sector Avg 12.9 11.7 0.3 7.2 1.7 1.5

* Not under our coverage. I/B/E/S estimates forecasts are used for companies not covered by RHB Research Institute.




Basic Materials Overweight

Infrastructure spending, affordable houses to propel demand As expected, Budget 2015 was a demonstration of the Government’s commitment to following through with various infrastructure projects and building more affordable homes (please refer to the construction and property sectors for more details). Therefore, we reiterate our expectation of moderate demand growth for basic materials like cement and steel in the medium term.

Prefer cement over steel boys That said, we continue to like the cement sector as there is only one producer each in Sabah and Sarawak, while the West Malaysia market is dominated by an oligopoly. We have witnessed the pricing power of cement players according to their capability in increasing selling prices in the past. However, the outlook for the steel players – which is still largely dependent on macroeconomic factors like global over-capacity and the fragmented industry – continue to dent the companies’ profitability. With that, we continue to be less upbeat on most of the pure steel players. However, we like companies like Lafarge Malayan Cement (LMC MK, BUY, TP: MYR11.27) and Cahya Mata Sarawak (CMS MK, BUY, TP: MYR5.00) which are involved in cement manufacturing. These two companies, together with some other niche players, lead us to continue to be OVERWEIGHT on the basic materials sector.

Figure 22: Valuations of basic materials stocks

Price Target

Price

Mkt Cap P/E

(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


LMC 9.91 11.27 8,420 19.6 19.0 10.3 2.9 2.6 14.9 13.2 4.6 B

CMS 4.05 5.00 4,168 20.2 16.0 15.0 26.3 2.3 18.0 11.9 1.5 B

Press Metal 5.39 8.30 2,852 10.9 7.9 +>100 37.7 1.5 5.7 16.7 1.8 B

Pantech^ 1.06 1.25 609 10.2 9.2 7.1 10.0 1.3 9.6 13.6 3.8 B

Hiap Teck 0.71 1.00 503 11.0 10.7 88.2 2.7 0.5 3.3 4.9 0.9 B

MSC 3.12 4.20 314 5.7 5.2 n.a. 9.6 1.2 5.2 22.6 4.4 B

MSW 0.99 1.31 223 7.4 5.8 2.6 27.4 0.4 12.5 5.3 1.5 B

KKB 2.20 2.78 567 14.4 11.1 19.2 29.8 1.9 22.5 15.3 2.8 TB

Southern Steel 1.40 1.49 582 54.1 16.3 (74.8) +>100 0.7 2.6 1.2 2.9 N

Ann Joo Resources 1.19 1.07 622 24.6 14.4 8.9 70.5 0.6 1.3 2.4 0.0 S

Lion Industries 0.61 0.53 434 n.m. 17.4 n.a. n.a. 0.2 10.0 n.m 0.0 S

Sector Avg 17.1 13.3 24.9 27.3


♦ We expect demand for basic materials togrow, supported by projects with a highmultiplier impact and affordable housingschemes

♦ Cement companies have better pricing power over fragmented steel players



Construction Overweight Gross development expenditure up 15%

The 2015 Budget projected the gross development expenditure for 2015 at MYR48.5bn, up 15% from the MYR42.2bn estimated for this year. This is positive for the construction sector. While the budget specifically mentioned several major expressway and rail projects, they are not recipients of the allocation. The expressways (other than the Pan-Borneo Highway) will be carried out on a build-operate-transfer (BOT) basis while funding for mass rapid transit (MRT) Line 2 and light rail transit (LRT) Line 3 will come from special purpose vehicles (SPVs). The biggest recipients of the allocations are rural infrastructure, water projects (including the MYR3bn Langat 2 water treatment plant), affordable housing and property/facility maintenance (see Figure 23).

Figure 23: Key projects slated for implementation Project Value

(MYRm) Potential beneficiaries

Highways ♦ Pan-Borneo Highway 27,000 Contractors based in East Malaysia. ♦ Sg Besi – Ulu Klang Expressway (SUKE) 5,300 Permodalan Nasional (concessionaire) and mid-sized contractors. ♦ West Coast Expressway (WCE) 5,000 IJM/Kumpulan Europlus (concessionaire and contractor) and mid-

sized contractors. ♦ Damansara – Shah Alam Highway (DASH) 4,200 Permodalan Nasional (concessionaire) and mid-sized contractors. ♦ Eastern Klang Valley Expressway (EKVE) 1,600 Ahmad Zaki (concessionaire and contractor) Rail projects ♦ MRT Line 2 (Selayang – Putrajaya) 23,000 Gamuda/MMC (project delivery partner and tunnelling contractor)

and the entire construction sector ♦ LRT 3 (Bandar Utama – Shah Alam – Klang) 9,000 Mid-sized contractors. ♦ Upgrading of the East Coast railway line (Gemas – Mentakab, Jerantut –

Sungai Yu and Gua Musang – Tumpat) 150 Mid-sized contractors.

Water ♦ Langat 2 water treatment plant 3,000 Ahmad Zaki, Salcon and MMC ♦ Water pipe replacement 112 Water pipe manufacturers Rural infrastructure 4,500 ♦ Electricity connection(15,000 houses) 1,100 Specialist contractors ♦ Rural roads (including former logging roads) (635km) 943 Small and mid-sized contractors. ♦ Water supply (7,500 houses) 394 Water pipe manufacturers ♦ Infrastructure & facilities for Orang Asli 352 Small contractors ♦ Refurbishment of dilapidated houses (9,500 units) 200 Small contractors ♦ Street lighting in villages 56 Small contractors Affordable housing ♦ Under 1Malaysia People Housing Programme (PR1MA) (80,000 units) 1,300 Mid-sized contractors ♦ Under Program Perumahan Rakyat (26,000 units) 644 Small and mid-sized contractors ♦ Under Syarikat Perumahan Negara (37,000 units) n.a. Small and mid-sized contractors ♦ Under 1Malaysia Civil Servants’ Housing (PPA1M) (5,380 units) n.a. Mid-sized contractors Property/facility maintenance ♦ Education facilities 800 Small contractors ♦ Quarters for military, police, teachers and staff 500 Small contractors ♦ Houses in fishing villages 250 Small contractors ♦ Public/private low-cost houses 140 Small contractors ♦ Government quarters 105 Small contractors

Al-Quran printing centre in Putrajaya 30 Mid-sized contractors

Source: Budget 2015, RHB

Generally GST-neutral The impact of the goods and services tax (GST) on construction services, which are standard-rated, is neutral. A provider of construction services is entitled to recover the GST paid on inputs used as input tax credits. This is because all inputs used (including the value of all works, materials and other moveable goods charged to customers) can be attributable to the making of taxable supplies.

On the other hand, toll roads are an exempt supply and, as such, are not subject to GST. This also means a toll road concessionaire is not entitled to recover the GST paid on inputs used (including road maintenance, utilities and professional fees) as input tax credits. However, these GST-taxable inputs typically make up only about 30% of total costs and, as such, the non-recoverability of the GST paid on them will not likely put a significant dent on earnings. The other key cost components of a toll road concessionaire are depreciation and amortisation (50%) and staff costs (20%). In short, while the GST is negative to toll road concessionaires, the impact to their bottomlines is negligible.



Our Top Picks: Gamuda, Pintaras and Protasco Maintain OVERWEIGHT. We believe the current strong momentum of activities in the construction industry will be sustained, potentially driving medium-term sector earnings growth. We are unconcerned by the construction resources to be disengaged from Line 1 of the Klang Valley MRT project upon completion in mid-2015. We believe these resources will find their homes in Line 2 of the project, which is scheduled to start work in mid-2016, or at a host of other mega projects that have already hit the ground. In particular, this includes the MYR89bn refinery and petrochemical integrated development (RAPID) project in Pengerang, Johor, the MYR5bn West Coast Expressway (WCE) and various public housing projects, particularly, the 1Malaysia People Housing Programme (PR1MA) that is backed by a MYR1.3bn facilitation fund under the 2015 Budget. Our three top themes and their corresponding proxies are: i) the Klang Valley MRT project – Gamuda (GAM MK, BUY, TP: MYR5.61), ii) piling – Pintaras Jaya (PINT MK, BUY, TP: MYR4.92), and iii) public housing – Protasco (PRTA MK, BUY, TP: MYR2.43).

Figure 24: Valuations of construction stocks

Price Target

Price

Mkt Cap P/E

(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


Gamuda 4.80 5.61 11,068 15.5 16.5 1.3 (5.8) 2.0 48.3 13.9 2.5 B

IJM^ 6.43 7.90 9,412 12.7 9.9 31.1 28.2 1.0 8.4 9.2 2.0 B

Naim 3.16 5.06 790 7.2 6.2 +>100 14.9 0.7 77.5 9.9 2.5 B

Pintaras 4.34 4.92 695 13.1 12.0 19.7 9.5 2.3 12.7 18.8 3.5 B

Protasco 1.56 2.43 530 9.1 6.8 39.9 33.3 1.3 6.1 14.7 6.4 B

Kimlun 1.39 1.68 376 7.6 6.5 23.7 15.7 0.9 5.6 16.9 2.2 B

Ahmad Zaki 0.70 0.96 338 20.5 11.3 66.0 82.3 1.1 9.4 6.2 1.4 B

WCT 2.08 2.31 2,259 15.1 12.7 8.8 19.0 1.0 16.8 6.7 3.6 N

HSL 1.77 2.06 984 10.3 10.3 12.0 (0.0) 1.5 9.3 16.2 1.7 N

Eversendai 0.88 1.06 681 17.4 8.3 (25.1) +>100 0.8 8.5 4.6 2.6 N

Sector Avg 13.4 11.0 15.7 17.6




Consumer Underweight No Surprises We believe Budget 2015 will have a minimal impact on the overall consumer sector. Similar to the preceding year, the implementation of the mentioned proposals would increase the disposable income of middle-to lower-income households. However, our concern lies in the effectiveness of the said incentives as we believe they may be insufficient to offset the impact of the: i) rising costs of living, ii) rationalisation of government subsidies, and iii) upcoming implementation of the goods and services tax (GST).

Key points from the Budget 2015 are:

1) Increased cash assistance (Bantuan Rakyat 1Malaysia or BR1M) of MYR950 for households earning MYR3,000 and below a month, and MYR750 for households earning between MYR3,000 and MYR4,000 a month. Both handouts will be disbursed in three installments in January, May and September 2015. Meanwhile, unmarried individuals earning less than MYR2,000 a month will receive MYR350, which will be disbursed one shot in early 2015.

2) Group Takaful Rakyat 1Malaysia (i-BR1M) will be replaced by a Family Bereavement Scheme, entitling the next of kin of BR1M recipients to receive MYR1,000 for a year.

3) Individual income tax reduction of 1-3% for all taxpayers for year of assessment 2015. The chargeable income subject to the maximum rate will be increased to >MYR400,000 from >MYR100,000. The current maximum tax rate of 26% will be reduced to 24%, 24.5%, and 25% based on three tax bracket tiers.

4) Taxpayers with family and income of MYR4,000 per month will not have tax liability.

5) A half-month bonus for civil servants and special financial assistance of MYR250 for government pensioners.

More on GST. The Government has widened the scope of items that will not be subject to the GST as follows:

1) All types of fruits (local and import)

2) White and wholemeal bread

3) Coffee and cocoa powder, tea dust

4) Yellow mee, kuey tiow, laksa, and meehoon

5) Essential medicines

6) Reading materials eg reference books, text books etc

7) Newspapers

8) First 300 units of electricity consumption

9) RON95 petrol, diesel, and liquefied petroleum gas (LPG)

GST implementation favourable to F&B players. Food and beverage (F&B) operator and instant coffee/tea manufacturer OldTown Bhd (OTB MK, BUY, TP: MYR2.30) may see a favourable impact from the GST implementation, together with F&B staple players like Nestle (NESZ MK, NEUTRAL, TP: MYR67.00) and QL Resources (QLG MK, NEUTRAL, TP: MYR3.60), as most of their products are now zero-rated, allowing them to claim the GST charged on their input costs.

Retailers may take a hit from consumers’ cautious spending. We reiterate our view that the impact of the GST implementation on retailers like AEON Co (M) (AEON MK, NEUTRAL, TP: MYR3.90), Padini Holdings (PAD MK, NEUTRAL, TP: MYR2.03) and Parkson Holdings (PKS MK, SELL, TP: MYR2.31) will be relatively insignificant as the GST imposed will be passed on to consumers. Prices of most of their goods are expected to be higher due to the GST as most of these goods are currently not taxed. Hence, we believe retailers may see lower sales volume as

♦ We believe that the incentives proposed inBudget 2015 may be insufficient to offsetthe inflationary pressure from the: i) risingcosts of living, ii) rationalisation ofgovernment subsidies, and iii) upcomingimplementation of the GST.



consumers remain cautious on discretionary spending amid rising inflationary pressure.

Cheers for plastic packaging players. For high labour-intensive industries (such as rubber products, plastics, wood, furniture and textiles), the Government has proposed an automation capital allowance of 200% on the first MYR4m expenditure incurred within the 2015-2017 period. We believe this may have a positive impact on plastic packaging players. We expect Scientex Bhd’s (SCI MK, BUY, TP: MYR8.64) FY15 earnings to improve by less than 5% given its large earnings base. As for other plastic packaging players of smaller earnings base like Thong Guan Industries (TGI MK, BUY, TP: MYR2.60), VS Industry (VSI MK, BUY, MYR2.92), SKP Resources (SKP MK, BUY, TP: MYR0.85) and Daibochi Plastic & Packaging Industry (DPP MK, NEUTRAL, TP: MYR4.10), we expect their bottomlines to improve in the range of 9-20% in the next financial year.

Maintain UNDERWEIGHT. While we expect the implementation of the proposals mentioned to lessen the burden of middle- to lower-income households, we stick to our view that they may be insufficient to offset the inflationary pressure arising from the: i) rising costs of living, ii) rationalisation of government subsidies, and iii) upcoming implementation of the GST. We remain UNDERWEIGHT on the sector due to: i) lofty valuations with limited earnings growth, ii) compressed dividend yields, and iii) earnings risk from a reduction in spending. At this juncture, we prefer consumer packaging companies such as Scientex, SKP Resources and Thong Guan Industries. We like their earnings visibility on the back of their expanding production capacity and strong orders from international customers.

Tobacco & Brewery Brewers and tobacco players spared from excise duty hike. The brewers were spared from an excise duty hike for the ninth consecutive year (since 2006). This is expected as we understand that the Royal Malaysian Customs Department had changed the basis for the excise duty valuation from 1 Nov 2013 onwards, resulting in higher effective duty payments. On 19 Sept 2014, Selangor State Director of Royal Malaysia Customs imposed two bills on Carlsberg Brewery Malaysia (CAB MK, NEUTRAL, TP: MYR11.55), namely: i) excise duty amounting to MYR35.7m, and ii) sales tax of MYR13.8m and penalty of MYR6.9m, both for the period between 1 Jul 2011 and 14 Jan 2014. For 2014-2016, we expect beer volume to decline in view of the upcoming GST implementation, subdued consumer sentiment and intensifying competition from contraband beers. We are NEUTRAL on Guinness Anchor (GUIN MK, TP: MYR13.10) and Carlsberg given the stocks’ rich valuations relative to their miniscule earnings growth and waning yield appeal.

On the other hand, the tobacco players were unexpectedly spared from an excise duty hike this time round. The last excise duty hike occurred in 28 Sept 2013 when the Government raised the excise duty by 3 sen/stick to 25 sen/stick, which prompted cigarette manufacturers to increase retail prices by a higher quantum of 7.5 sen/stick to mitigate the decline in sales volume. Recently, British American Tobacco (ROTH MK, SELL, TP: MYR56.00) took us by surprise when it reverted to its old pricing just two weeks after announcing a price hike of MYR1 per pack for all its cigarette brands. Management cited the reversal is necessary to remain competitive. As the local tobacco industry is oligopolistic by nature, we believe Philip Morris (M) SB’s decision to keep prices of its cigarette brands unchanged has prompted the back-pedaling. Despite the absence of an excise duty hike this time round, we maintain our SELL recommendation on British American Tobacco as its rich valuations are unwarranted given its limited growth opportunities. Also, the industry’s legal sales volume has been on a continued downtrend over the years, while illicit cigarettes sales volume remains high.

All in all, we remain UNDERWEIGHT on the brewery and tobacco sectors as we do not foresee any re-rating catalysts for both industries in the near term.



Table 25: Valuations of consumer stocks

Price Target Mkt Cap P/E EPS Growth P/BV P/CF ROE NDY Rec

Price (x) (%) (x) (x) (%) (%)

(MYR/s) (MYR/s) (MYR/m) FY14 FY15 FY14 FY15 FY14 FY14 FY14 FY14

Scientex 7.39 8.64 1,615 11.1 9.2 17.4 20.8 2.3 10.5 21.2 2.8 B

OldTown^ 1.76 2.30 794 16.3 16.1 1.1 21.7 2.3 10.0 15.4 3.1 B

SKP Resources^ 0.64 0.85 576 12.0 7.7 59.3 56.6 2.4 0.8 20.6 4.2 B

VS Industry 2.35 2.92 438 8.2 7.3 +>100 12.0 0.8 10.2 10.7 5.0 B

Thong Guan 2.13 2.60 224 6.6 5.5 21.0 18.5 2.1 5.0 11.3 4.3 B

Nestle 67.10 67.00 15,735 26.6 24.3 5.5 9.3 19.1 23.6 72.3 3.7 N

AEON 3.66 3.90 5,139 20.3 18.9 9.5 7.4 2.9 0.7 14.7 1.9 N

QL Resources^ 3.27 3.60 4,081 20.8 18.4 22.9 12.9 2.9 1.1 14.5 1.3 N

GAB 12.66 13.10 3,825 19.3 19.7 (9.2) (2.3) 10.7 16.0 54.9 3.9 N

Carlsberg 11.44 11.55 3,524 19.5 18.8 (1.9) 3.8 12.9 17.1 66.0 5.1 N

MSM 4.90 5.23 3,445 13.8 14.1 (0.5) (1.7) 1.8 8.9 13.1 4.1 N

Padini 1.77 2.03 1,196 13.2 12.2 6.5 8.1 3.1 1.6 23.9 5.6 N

Daibochi 4.18 4.10 415 16.5 13.6 5.0 21.6 2.7 13.7 17.2 3.6 N

BAT 66.12 56.00 18,879 22.1 22.4 3.9 (1.3) 35.7 18.8 167.0 4.4 S

Parkson 2.55 2.31 2,710 19.6 13.7 (40.6) 43.2 1.0 8.9 5.1 7.2 S

NTPM^ 0.70 0.70 786 17.5 14.7 (16.6) 19.5 2.2 0.7 12.8 3.1 S

Sector Avg 20.4 19.0 2.0 7.2




Healthcare Neutral

Investing In Medical Tourism 5.4% increase in public healthcare expenditure. The Government’s budget allocation to improve public healthcare services is in line with our expectations. For 2015, the Government will allocate MYR23.3bn vs MYR22.1bn in 2014 (+5.4% y-o-y) to build two new government hospitals, 20 health clinics and four dental clinics nationwide. It will also establish 30 more 1Malaysia clinics and replace 635 haemodialysis machines in government hospitals. We believe the increase in public healthcare expenditure points to an evidently growing need for and importance of healthcare services in the country, and expect this to continue growing in the coming years.

A “sweetener” for private healthcare players. On another note, the Government also introduced a tax incentive for private healthcare service providers to promote medical tourism. We view the introduction of the tax incentive as a positive measure to promote Malaysia as a medical tourism hub. The incentive basically provides an exemption on income equivalent to an investment tax allowance of 100% for a period of five years to private healthcare service providers that offer services to medical tourists. The tax is eligible to companies that are: i) licensed by the Ministry of Health, and ii) registered with the Malaysian Healthcare Travel Council (MHTC). Meanwhile, a qualified medical tourist has to be one of the following: i) a participant of the Malaysia My Second Home programme or his/her dependent, ii) an expatriate holding a work permit or his/her dependent, and iii) a non-Malaysian citizen who visits and receives treatment from private healthcare facilities in Malaysia. However, at least 5% of the facilities’ total patients have to be medical tourists in order for the providers to be able to claim the tax incentive.

With regards to medical tourism, we note that the healthcare service providers under our coverage, ie IHH Healthcare (IHH MK, NEUTRAL, TP: MYR4.61) and KPJ Healthcare (KPJ MK, NEUTRAL, TP: MYR3.67) are currently trying to tap into the lucrative sub-section of the healthcare industry. Both currently have less than 10% of revenue coming from medical tourism but we expect the tax incentive to motivate both companies to invest in means to attract medical travelers to their hospitals going forward.

Maintain NEUTRAL. Though we are positive on the announcement, we do not expect the increase in the number of medical travelers to happen overnight for the private healthcare players – as the international traveler’s awareness of Malaysia as a medical hub is still on the low side, at the moment. Additionally, each hospital needs to be certified by MHTC to be eligible to receive medical travelers – which means the healthcare providers require time in order to comply with MHTC’s requirements. Since we expect the players to book bigger contributions from medical tourism in the next 2-3 years, we make no changes to our earnings forecasts and TPs for both IHH and KPJ at this juncture. As such, we also maintain our NEUTRAL call on the sector.

♦ Introduction of tax incentive on medicaltravellers for private healthcare serviceproviders to propel medical tourism

Figure 26: Valuations of healthcare stocks

Price Target

Price

Mkt

Cap

P/E

(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec

(RM/s) (RM/s) (RMm) FY14 FY15 FY14 FY15 FY14 FY14 FY14 FY14

IHH Healthcare 4.76 4.61 38,334 47.8 32.5 23.7 46.8 2.1 27.5 4.4 0.5 N

KPJ Health 3.80 3.67 3,731 28.5 26.5 10.7 7.8 3.2 16.6 11.7 1.9 N

Faber 3.05 3.20 1,794 20.0 11.7 (5.0) 71.0 2.5 20.0 14.2 1.8 N

CARiNG^ 1.70 1.95 370 13.0 11.7 31.0 11.1 2.9 4.3 23.5 0.0 N

Hovid 0.37 0.39 282 16.0 13.0 (10.7) 22.7 1.8 16.7 11.2 0.0 N

Esthetics^ 1.20 1.35 222 13.7 12.4 4.8 10.5 1.6 22.2 12.4 3.3 N

Sector Avg 41.2 27.9 21.3 44.6




Property Overweight A Small Beneficiary

Key incentives: 1. To encourage first-time home ownership and reduce the cost of buying a

house, the Government has extended the 50% stamp duty exemption on instruments of transfer and loan agreements, and increased the purchase limit to MYR500,000 from MYR400,000. The stamp duty exemption is only eligible for Malaysians who have never owned a residential property, and will be given until 31 Dec 2016.

2. The Youth Housing Scheme, which is a partnership between the Government, Bank Simpanan Nasional, Employees Provident Fund (EPF) and Cagamas, offers a funding limit for a first home priced below MYR500,000. This is for married youth aged 25-40 years with household income of not more than MYR10,000. The maximum loan period is 35 years. The Government will also provide a 10% loan guarantee to enable borrowers to obtain full financing. Borrowers can also withdraw from EPF Account 2 to top up their monthly installment and other related costs.

3. Under the purview of Cagamas, the Government has also improved Skim Rumah Pertamaku by raising the ceiling price to MYR500,000, and the age of borrowers to qualify for the scheme to 40 years from 35.

Favourable to affordable housing players

The incentives given under Budget 2015 mainly benefit the affordable housing players. The higher ceiling price of MYR500,000 is now more realistic, given that house prices have appreciated over the last 2-3 years, and hence more first-time home buyers can enjoy the 50% stamp duty exemption. Under our coverage, Tambun Indah (TILB MK, BUY, TP: MYR3.00), Matrix Concepts (MCH MK, BUY, TP: MYR3.93) and Hua Yang (HYB MK, BUY, TP: MYR2.74) are the key beneficiaries, as almost all of their residential products (2-storey linked houses for Tambun Indah and Matrix Concepts, and apartments for Hua Yang) are priced below the MYR500,000 mark. Based on our calculations, buyers for MYR500,000 worth of properties will be able to save about MYR5,750 or 1.15% of the purchase price, which could be a meaningful amount for middle-income earners.

Figure 27: Savings for first-time home buyers for residential property, assuming at a purchase price of MYR500,000

Source: RHB

Maintain OVERWEIGHT The 2015 budget announcement on the property sector is largely within our expectation, as we already mentioned that we expect neither more drastic measures to be imposed nor the relaxation of policies. We think this is good news for the sector, especially given the cautious sentiment over the sector prior to the budget announcement, further dampened by the recent broad equity market sell-down. The sector should see a relief rally post budget, and we continue to expect property demand to be driven by last-minute frontloading just before the implementation of the goods and services tax (GST) in 1Q15. Property sales should also continue to recover from 2Q14. Our Top Picks remain IOIPG (IOIPG MK, BUY, TP: MYR3.38) for big caps, and Tambun Indah and Matrix Concepts for small/mid caps.

♦ Affordable housing players will likely be the key winners

♦ Maintain OVERWEIGHT

Stamp duty Rate Amount (MYR)

First MYR100,000 1% 1,000

MYR100,001 to 500,000 2% 8,000

Total 9,000 50% discount 4,500

Loan agreement fee 0.5% 2,500 50% discount 1,250

Total savings 5,750 % of purchase price 1.15%



Figure 28: Valuations of property stocks

Price Target

Price

Mkt Cap P/E

(x) EPS Growth

(%) P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


IOI Prop 2.61 3.38 8,454 19.9 17.0 (38.7) 17.0 0.8 16.2 8.5 3.1 B

SP Setia 3.29 4.08 8,089 22.3 17.3 (22.3) 28.5 1.4 33.7 6.5 2.7 B

Sunway 3.31 3.90 5,705 10.9 10.0 (5.4) 9.4 3.3 10.5 9.5 3.0 B

IJM Land^ 3.20 4.15 4,988 13.0 11.1 (7.8) 17.4 1.4 59.8 11.1 1.4 B

E&O^ 2.52 3.60 2,868 22.3 16.6 53.9 34.6 1.8 20.7 8.5 1.3 B

UOA Dev 2.10 2.45 2,814 8.8 8.5 (14.4) 4.0 1.1 5.1 12.7 6.2 B

MRCB 1.56 2.05 2,543 53.6 22.8 n.a. +>100 1.4 (70.4) 10.3 1.3 B

Tropicana 1.26 2.15 1,448 7.8 7.4 (19.0) 6.4 0.5 10.2 7.3 3.0 B

Matrix 2.97 3.93 1,357 8.2 7.4 (28.7) 10.7 2.1 10.9 27.4 4.9 B

Tambun Indah 2.19 3.00 892 9.1 7.8 46.2 16.1 2.3 14.4 28.4 4.0 B

Hua Yang^ 2.16 2.74 570 6.2 5.5 (2.0) 11.6 1.3 4.7 22.2 5.7 B

Paramount 1.49 1.88 519 8.8 9.0 7.4 (2.2) 0.7 4.7 7.9 6.0 B

UEM Sunrise 1.70 2.52 7,333 13.3 13.3 (7.5) 0.2 1.1 15.7 8.8 2.4 TB

Mah Sing 2.37 2.71 3,378 10.1 8.7 16.1 16.5 1.6 13.9 16.2 4.1 N

Glomac^ 1.11 1.28 808 7.3 7.2 1.9 2.4 0.8 12.6 11.9 5.7 N

Sector Avg 13.6 11.8 (6.1) 13.0





Rubber Products Overweight Incentive for a labour intensive sector In the 2015 Budget, the Government will provide an incentive in the form of capital allowance on automation expenditure. This is to encourage automation in the manufacturing sector. An automation allowance of 200% will be provided on the first MYR4m expenditure incurred within the 2015 to 2017 period. The positive impact for large gloves manufacturers will be around a 2-6% improvement in earnings, as their earnings base are relatively larger. As for Karex (KAREX MK, BUY, TP: MYR3.41), assuming it is able to claim the capital allowance of MYR8m, given that we expect the capex on automation to be greater than MYR4m, the improvement to its bottomline is quite signicant, ie in the range of 10-13%. This is because its earnings base is relatively smaller. We maintain our OVERWEIGHT call on the sector with BUY calls on Kossan Rubber Industries (Kossan) (KRI MK, TP: MYR5.12) and Hartalega (HART MK, TP: MYR7.70). Meanwhile, we have NEUTRAL calls on Top Glove Corp (TOPG MK, TP: MYR5.06) and Supermax Corp (SUCB MK, TP: MYR2.31). Kossan is our sector Top Pick.

Figure 29: Valuations of rubber glove stocks

Price Target

Price

Mkt Cap P/E

(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec

(MYR/s) (MYR/s) (MYR/m) FY14 FY15 FY14 FY15 FY14 FY14 FY14 FY14

Hartalega^ 6.90 7.70 5,333 22.6 17.9 (2.5) 26.8 4.4 15.7 21.9 2.0 B

Kossan 4.35 5.12 2,782 16.6 14.4 17.8 15.0 3.4 14.8 21.9 2.0 B

Karex 2.83 3.41 1,146 25.3 19.2 56.3 31.8 5.1 25.2 27.3 0.0 B

Top Glove 4.83 5.06 2,996 16.4 15.5 (1.6) 5.7 2.1 10.8 13.3 3.1 N

Supermax 2.30 2.31 1,525 11.8 10.3 0.4 14.8 1.5 6.7 13.7 2.6 N

Sector Avg 18.1 15.2 4.9 19.1




Telecommunications Neutral HSBB expansion remains a key thrust The Government will continue its previous initiatives to expand the addressable market for fixed broadband. This should benefit Telekom Malaysia (TM) (T MK, NEUTRAL, TP: MYR6.10), which was tasked to take on the second phase of the high speed broadband (HSBB) project involving an investment of MYR1.8bn. We expect the incumbent to also capitalise on the recently completed acquisition of unlisted Packet One Networks (M) SB (P1) to offer converged mobile broadband services in a bid to take some wallet share away from the mobile operators.

TM’s Unifi service has seen its take up expand to 674,000 customers as at 1H14, or 45% of the 1.5m premises passed. There are now more than 1m customers on HSBB, including those on upgraded 4Mbps/8Mbps copper networks.

1,000 new towers and undersea cable investments We believe the allocation of MYR2.7bn for the construction of new telecommunication towers and undersea cables over the next three years encompasses the MYR1.5bn universal service provisioning (USP) Timeline-3 (T3) grant extended under the 2014 Budget for the building of 1,000 new towers in East Malaysia and, potentially, additional phases. The award of the T3 contract involving the first phase of 400 towers, we understand, is just round the corner and will benefit telecommunication tower contractors such as OCK Group (OCK MK, BUY, TP: MYR1.65), Instacom (INST MK, NR) and Weida Malaysia (WEI MK, NR).

We suspect the undersea cable investment forms part of the MYR850m budget announced last year for the same purpose with the primary beneficiaries being TM and Time dotcom (TDC MK, NEUTRAL, TP: MYR5.20).

♦ TM is likely to up the ante with a strong converged broadband offering under P1

♦ TM and Time dotcom are major players in the wholesaling of fiber capacity

Figure 30: Valuations of telecommunication stocks

Price Target

Price

Mkt Cap P/E

(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


Digi 5.87 6.50 45,639 22.9 21.7 11.0 5.6 90.4 14.3 341.3 4.4 B

OCK Group 1.35 1.65 385 18.4 15.2 45.3 21.5 3.6 32.7 22.6 0.0 B

Axiata 7.07 7.30 60,494 22.8 20.1 (4.0) 13.4 2.9 7.9 13.0 3.5 N

Maxis 6.48 6.00 48,600 23.2 22.1 0.2 5.2 9.9 13.7 38.4 6.2 N

TM 6.85 6.10 24,505 28.4 26.7 (16.9) 6.2 3.7 7.7 12.6 3.2 N

Time dotCom 4.83 5.20 2,768 22.8 21.2 9.4 7.9 0.9 12.2 4.9 0.8 N

Sector Avg 23.6 21.8 (0.9) 8.1

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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 Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. 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