July 3, 2018
2H 2018 Outlook & Lookouts
Malaysia Resets
Analysts We expect world economic growth to be at +3.9% in 2018 (2017: +3.8%),
which implies slight moderation in 2H 2018 after the estimated growth of Suhaimi Ilias (Economics) +4.0% YoY in 1H 2018, with the deceleration to gain momentum in 2019 (+603) 2297 8682 as we forecast the global economy to expand at a slower pace of +3.6%. [email protected] This takes a cue from the latest reading in the global composite PMI, a
lead indicator on global real GDP growth, which showed that the PMI is Wong Chew Hann (Equity Strategy)
“plateauing”, signaling global economic growth has peaked or is peaking. (+603) 2297 8686
[email protected] Headwinds and risks to global growth are rising, mainly in the forms of rising interest rates globally and compounded by the beginning of the Malaysia Research & Economics Team end of major central banks’ QE policy. These in turn are causing volatility
STRATEGY (please refer to backpages for the full list) and corrections in the financial markets due to the re-pricing of growth and policy outlook. There are also signs of China’s economy slowing due to the impact of the “de-leveraging and de-risking” policy. The global economic outlook is further clouded by US trade tension with China that
Country Index vs MSCI has spread to other US key trading partners – EU, Canada and Mexico. 1,900 1,100
1,850 1,000 For Malaysia, the near-term growth outlook is fluid as domestic political
Malaysia event adds to the external developments. We trim 2018 real GDP growth 1,800 900
forecast to +5.1% from +5.3% as we adjust the growth forecasts of the 1,750 800 supply and demand components of GDP to factor in YTD data and the 1,700 700 impact of measures announced so far by the new Government. We see growth moderating further to +4.9% in 2019 given the outlook of slower 1,650 600
global economic growth that will affect Malaysia’s external trade growth 1,600 500 performance, as well as the implications of the new Government’s Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 policies on the dynamics of domestic demand growth. Kuala Lumpur Composite Index - (LHS) MSCI Asia ex JP - (RHS)
We also revise down our end-2018 KLCI target to 1,750 (from 1,840) as we re-peg valuation back to its LT mean of 15.6x 12M forward PER. We expect range-bound trading for the most of 2H 2018, and optimism from Budget 2019 (our base-case) to drive the KLCI higher in the last two months. Thematics will centre around regulatory risk, and growth. On balance, our observation is the new Government is strongly committed in strengthening its finances and stepping up on governance, accountability and transparency; we expect this to lift investors’ confidence over time.
THIS REPORT HAS BEEN PREPARED BY MAYBANK INVESTMENT BANK BERHAD PP16832/01/2013 (031128) SEE PAGE 98 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS 2H 2018 Outlook & Lookouts
Contents
Page
ECONOMICS: Reality Check 3-23
EQUITY: Malaysia Resets 24-53
RESEARCH UNIVERSE 54-57
SECTOR OUTLOOK
Automotive: Pedal to the metal 59-60
Aviation: Capacity discipline 61-62
Banks: Earnings momentum to be sustained 63-64
Building Material: A mixed view 65-66
Construction: Derailed 67-68
Consumer: Great but not cheap 69-70
Gaming: Doubling down on casinos 71-72
Glove Producers: Safe haven 73-74
Media: Awaiting a 2H kick-off 75-76
Oil & Gas: Recovering yet volatile 77-80
Petrochemical: All eyes on input cost volatility 81-82
Plantation: 2018 – Still muted 2H outlook 83-84
Property Developers: Certainly uncertain 85-86
REIT: Focus on defensive assets 87-88
Shipping and Ports: To stay lukewarm 89-90
Technology: Pick and Roll 91-92
Telecom: Awaiting regulatory clarity 93-94
Utility: Regulatory concerns taper 95-96
July 3, 2018 2
2H 2018 Outlook & Lookouts
ECONOMICS: Reality Check
Sustained global growth momentum in 1H 2018. We estimated that global economy grew by +4.0% in 1Q 2018, sustaining the +4.1% pace in 2H 2017. Growth in 2Q 2018 looked stable as well, based on global composite purchasing managers index (PMI) that measures global manufacturing and services activities and a lead indicator on quarterly global real GDP growth. It averaged 54.0 in Apr-May 2018, little changed from 54.2 in 1Q 2018 and 54.0 in 2H 2017, suggesting continued global growth of around +4.0% last quarter.
But global growth looks “toppish”. However, the above reading in global composite PMI showed it is “plateauing”, signaling global economic growth has peaked or is peaking. We expect world economic growth to be at +3.9% in 2018 (2017: +3.8%), which implies slight moderation in 2H 2018 after the estimated growth of +4.0% YoY in 1H 2018, with the deceleration to gain momentum in 2019 as we forecast the global economy to expand at a slower pace of +3.6%.
Amid build up in headwinds and risks to growth, mainly in the forms of rising interest rates globally spearheaded by the US Fed’s on-going interest rate hikes and compounded by the beginning of the end of the major central banks’ QE policy. These in turn are causing volatility and corrections in the financial markets due to the re-pricing of growth and policy outlook. There are also signs of China’s economy slowing due to the impact of “de-leveraging and de-risking” policy. The global economic outlook is also clouded by US trade tension with China that has spread to other US key trading partners, namely the EU, Canada and Mexico.
For Malaysia, fluid growth outlook as domestic political event adds to the above external developments i.e. unprecedented change in Government following the 14th General Election on 9 May 2018. We trim our 2018 real GDP growth forecast to +5.1% from +5.3% previously as we adjusted the growth forecasts of the supply and demand components of GDP to factor in year-to-date data and the impact of measures announced so far by the new Pakatan Harapan (PH) Government. We see growth moderating further to +4.9% in 2019 given the outlook of slower global economic growth that will affect Malaysia’s external trade growth performance, as well as the implications of the PH Government’s policies on the dynamics of domestic demand growth.
We expect a transitory boost to consumer spending growth (2017: +7.0%; 2018E: +7.3%; 2019E: +6.7%) from zero-rating Goods and Services Tax (GST) and fuel price stabilization until end-2018, before the impact dissipated with the re-instatement of Sales Tax and Service Tax to replace GST and as we anticipate a change in the current “blanket” fuel price subsidy to a “targeted” system next year. We see prudent Government spending growth (2017: +5.4%; 2018E: +1.0%; 2019E: +1.1%) to maintain fiscal discipline via sub-3% budget deficit to GDP ratio. Investment growth will be subdued (2017: +6.2%; 2018E: +1.5%; 2019E: +2.8%) mainly due to the impact of the reviews and cancellation of major infrastructure projects.
No change in OPR until end-2019. We expect BNM’s monetary policy bias to lean towards supporting growth as we see USDMYR stabilising over the next 18 months (end-2017: 4.05; end-2018E: 4.03; end-2019E: 3.90) and despite our expectation of faster inflation rate next year after the dis-inflation this year (2017: +3.7%; 2018E: +1.5% to +2.0%; 2019E: +2.0% to +3.0%) to a range that, in our view, is acceptable or tolerable to the central bank. Consequently, we see the Overnight Policy Rate (OPR) staying at 3.25% until end-2019.
July 3, 2018 3
2H 2018 Outlook & Lookouts
GLOBAL ECONOMY
“Toppish” global economic growth
Sustained global growth momentum in 1H 2018. Based on the 1Q 2018 real GDP growth figures of major economies, large emerging markets and regional countries which account for nearly 80% of the world’s GDP, we calculated that global economy grew by +4.0% in the first three months of the year, essentially sustaining the pace in 2H 2017 when the world economic expansion averaged +4.1%.
Fig 1: Global Real GDP % chg % Share of 1Q 2017 2Q 2017 3Q 2017 4Q 2017 1Q 2018 2017 2018E 2019E World GDP WORLD 3.5 3.8 4.1 4.1 4.0 3.8 3.9 3.6
Major Advanced Economies 60.3% 2.0 2.2 2.3 2.5 2.4 2.3 2.5 2.1 US 24.3% 2.0 2.2 2.3 2.6 2.8 2.3 2.8 2.5 Eurozone 15.8% 2.1 2.4 2.7 2.8 2.5 2.3 2.3 2.0 Japan 6.1% 1.4 1.5 1.9 1.8 0.9 1.7 1.2 1.0 UK 3.3% 2.1 1.9 1.8 1.4 1.2 1.8 1.4 1.4
BRIC 22.8% 5.5 5.6 5.7 5.8 5.8 5.7 5.8 5.7 Brazil 2.6% 0.0 0.4 1.4 2.1 1.2 1.0 2.1 2.6 Russia 1.9% 0.6 2.5 2.2 0.9 1.3 1.5 1.8 1.6 India 3.3% 6.1 5.6 6.3 7.0 7.7 6.7 7.4 7.5 China 15.0% 6.9 6.9 6.8 6.8 6.8 6.9 6.6 6.4
Asian NIEs 3.5% 3.0 2.8 3.8 3.1 3.3 3.2 3.0 2.8 South Korea 1.9% 2.9 2.8 3.8 2.8 2.8 3.1 3.0 2.9 Taiwan 0.7% 2.6 2.3 3.2 3.4 3.0 2.8 2.5 2.4 Hong Kong 0.4% 4.4 3.9 3.6 3.4 4.7 3.8 3.5 2.9 Singapore 0.4% 2.5 2.8 5.5 3.6 4.4 3.6 3.5 2.7
ASEAN-6 (incl. Singapore) 3.3% 4.7 4.9 5.6 5.2 5.4 5.1 5.2 5.0 ASEAN-5 2.9% 5.0 5.2 5.6 5.5 5.5 5.3 5.5 5.4 Indonesia 1.3% 5.0 5.0 5.1 5.2 5.1 5.1 5.3 5.5 Thailand 0.6% 3.4 3.9 4.3 4.0 4.8 3.9 4.5 3.8 Malaysia 0.4% 5.6 5.8 6.2 5.9 5.4 5.9 5.1 4.9 Philippines 0.4% 6.5 6.6 7.2 6.5 6.8 6.7 6.8 6.8 Vietnam 0.3% 5.2 6.3 7.5 7.7 7.4 6.8 6.8 6.5 Source: MKE Economics Research (World quarterly GDP growth; 2018-2019 annual GDP growth forecasts for World, China & ASEAN); IMF & Bloomberg (actual annual and quarterly 2017-2018 GDP growth); Consensus (2018-2019 annual GDP growth forecasts for others)
But purchasing managers index (PMI) suggests global growth has peaked or is peaking. The global composite PMI – which measures global manufacturing and services activities and a lead indicator on quarterly global real GDP growth (Fig 2) - looks “toppish”. It averaged 54.0 in Apr-May 2018, little changed from 54.2 in 1Q 2018 and 54.0 in 2H 2017, suggesting continued global growth of around +4.0% in 2Q 2018. However, the “plateauing” trend in global composite PMI after the preceding climb signals that global economic growth has peaked or is peaking.
July 3, 2018 4
2H 2018 Outlook & Lookouts
Fig 2: Global GDP Growth vs Global Composite PMI 55 4.3
54 4.1
54 3.9
53 3.7
53 3.5
52 3.3
52 3.1
51 2.9
2Q 2015 2Q 1Q 2015 1Q 2015 3Q 2015 4Q 2016 1Q 2016 2Q 2016 3Q 2016 4Q 2017 1Q 2017 2Q 2017 3Q 2017 4Q 2018 1Q
Global GDP (% YoY, RHS) Global Composite PMI Apr-May 2018 Apr-May
Source: Bloomberg, MKE Economics Research
Amid less synchronized growth among the major economies. The sustained global growth momentum in 1H 2018 is largely driven by the faster US growth thanks to the impact of fiscal stimulus from the tax cuts, plus steady growth in China, which in turn supported the expansions in Asian NIEs and ASEAN economies given that US and China are the largest export markets for the regional economies. This was amid slower growth in Eurozone and Japan, which previously have been picking up in tandem with the US.
Expect moderation in global economic growth in 2H 2018 and further deceleration in 2019. We expect world economic growth to be at +3.9% (2017: +3.8%), which implies slight moderation in 2H 2018 after the estimated growth of around +4.0% YoY in 1H 2018, with the deceleration gaining momentum in 2019 as we forecast the global economy to expand at a slower pace of +3.6%.
Build up in global growth headwinds
We are seeing build up in headwinds and risks to global growth, in the forms of rising interest rates globally compounded by the normalization of major central banks’ monetary policies, which in turn is causing financial markets’ volatility, corrections and re-pricing of outlook and risks. There are also signals of China’s economy slowing. The global economic outlook is also clouded by US trade tension with China that is also spreading to other US key trading partners, namely the EU, Canada and Mexico.
Rising global interest rates to impact growth by raising cost of funds (i.e. capital & credit) as well as the cost of debt servicing. Our measure of global weighted average benchmark interest rate (Fig 3) is inching up, mainly amid interest rate hikes in the Emerging Market – including Asian - economies to stabilize currencies and manage portfolio capital flows given the on-going US interest rate hikes as other major central banks, namely European Central Bank (ECB) and Bank of Japan (BoJ) are yet to join the interest rate hike bandwagon, with the ECB signaling it will keep its policy interest rate at current level through the summer of 2019. Further indicating the rising tide of “tightening bias” in central banks’ monetary policy is the rise in the monthly global benchmark interest rate diffusion index (Fig 4) which measures the difference between the numbers of central banks raising interest rates and the numbers of central banks cutting interest rates.
July 3, 2018 5
2H 2018 Outlook & Lookouts
Fig 3: Global Weighted Average Benchmark Interest Rate (% Fig 4: Global Benchmark Interest Rate Action Diffusion Index p.a.)
4.8 15 "Tightening" 4.5 Bias 4.3 10 4.0 5 3.8 3.5 0 3.3 3.0 (5) 2.8 (10) 2.5 "Easing" 2.3 (15) 2.0 Bias 1.8 (20) 1.5
1.3 (25)
Jul-10 Jul-17
Jul-10 Jul-17
Apr-12
Jan-14 Jan-07
Oct-08 Oct-15
Jun-13
Sep-11
Mar-08 Mar-15
Feb-11 Feb-18
Aug-07 Aug-14
Dec-09 Dec-16
Nov-12
Oct-08 Apr-12 Oct-15
May-09 May-16
Jan-07 Jun-13 Jan-14
Mar-08 Mar-15
Feb-11 Feb-18
Sep-11 Aug-07 Dec-09 Nov-12 Aug-14 Dec-16 May-16 May-09 Global Weighted Average Benchmark Interest Rate is based on the Global Benchmark Interest Rate Action Diffusion Index is the difference average of 34 countries monthly benchmark interest rates, weighted between the number of central banks raising interest rates and the by the respectively countries GDP number of central banks cutting interest rates from the sample used to construct the Global Weighted Average Benchmark Interest Rate Source: Bloomberg, CEIC, MKE Economics Research Source: Bloomberg, CEIC, MKE Economics Research
Fig 5: Benchmark Interest Rates Country Benchmark end 2Q18 end end end end end end Chg in 1H Chg in Chg in Interest Rate (% p.a.) 3Q18E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2018 2018E 2019E (% p.a.) (% p.a.) (% p.a.) (% p.a.) (% p.a.) (% p.a.) (ppt) (ppt) (ppt) US Fed Funds Target Rate 1.875 2.125 2.375 2.375- 2.625- 2.875- 3.125 0.50 1.00 0.75 2.625 2.875 3.125 Eurozone ECB Deposit Facility Rate (0.40) (0.40) (0.40) (0.40) (0.40) (0.30) (0.20) 0.00 0.00 0.20 Japan BOJ Policy Rate Balance (0.10) (0.10) (0.10) (0.10) (0.10) (0.10) (0.10) 0.00 0.00 0.00 UK BOE Bank Rate 0.50 0.75 0.75 0.75 1.00 1.00 1.25 0.00 0.25 0.50 China PBOC 7-Daye Repo Rate 2.60 2.60 2.65 2.70 2.75 2.80 2.80 0.05 0.15 0.15 India Repo Rate 6.00 6.00 6.25 6.25 6.25 6.25 6.25 0.25 0.50 0.00 S. Korea Target Overnight Rate 1.50 1.75 1.75 2.00 2.00 2.00 2.25 0.00 0.25 0.50 HK 3-Mth HIBOR 2.10 2.11 2.23 2.41 2.55 2.55 2.63 0.92 1.05 0.40 Taiwan Discount Rate 1.375 1.375 1.500 1.625 1.625 1.625 1.750 0.00 0.125 0.250 Singapore 3-Mth SIBOR 1.52 1.68 1.85 1.95 2.03 2.10 2.20 0.32 0.55 0.35 Indonesia 7-Day Reverse Repo 5.25 5.25 5.25 5.50 5.50 5.75 5.75 1.00 1.00 0.50 Malaysia Overnight Policy Rate 3.25 3.25 3.25 3.25 3.25 3.25 3.25 0.25 0.25 0.00 Thailand Repurchase Rate 1.50 1.50 1.75 1.75 1.75 2.00 2.00 0.00 0.25 0.25 Philippines Overnight Rate 3.50 3.75 3.75 3.75 3.75 3.75 3.75 0.50 0.75 0.00 Vietnam Refinancing Rate 6.25 6.25 6.25 6.25 6.25 6.25 6.25 0.00 0.00 0.00 Source: Bloomberg (actual as at end-2Q 2018); US Federal Reserve “dot plots” (forecasts for US); Maybank KE (forecasts for ASEAN), Consensus (forecasts for others)
Rising global interest rates and tightening bias in central banks’ monetary policy are compounded by the beginning of the end of major central banks’ quantitative easing (QE) policy as indicated by Fig 6 which showed the downtrend in net purchases of Government bonds by US Fed, ECB and BoJ, which is the main element of the major central banks’ QE. Fed has started its balance sheet reduction programme since Oct 2017, effectively ending its QE. ECB will further taper its QE by cutting the amount of its asset purchases to EUR15b per month starting Oct 2018 from current EUR30b per month (Jan–Sep 2018) which was reduced from EUR60b per month previously (Apr-Dec 2017) vs the starting amount of EUR85b per month, before pulling the plug on QE at end-2018. Although BoJ has not make any change to its existing QE policy, its actual net asset purchases is akin to QE Taper.
July 3, 2018 6
2H 2018 Outlook & Lookouts
Fig 6: Net Monthly Purchases of Government Bonds by Major Central Banks (USDb, 3-month moving average) 165 150 135 120 105 90 75 60 45 30 15 0
(15)
Jul-11 Jul-16
Apr-15 Apr-10
Jan-09 Jan-14
Oct-12 Oct-17
Jun-09 Jun-14
Sep-10 Sep-15
Mar-13 Mar-18
Feb-11 Feb-16
Aug-13
Dec-11 Dec-16
Nov-09 Nov-14
May-12 May-17 US Federal Reserve ECB BoJ Total
Source: OECD Economic Outlook, May 2018
Financial market volatility, correction and re-pricing. The above combination of rising global interest rates and shifting major central banks’ QE policy have contributed to financial markets’ increased volatility and corrections so far this year vs the declining/low volatility and market gains last year as equity and bond markets re-price macroeconomic and policy outlook and risks (Fig 7-8). In particular, as US Fed proceeds with its monetary policy normalization with the picked up pace of interest rate hikes and the “quantitative tightening” through its balance sheet reduction, one financial market impact is the flattening of US yield curve as the 2 Year- 10 Year US Treasury yield spread narrowed, which historically is a precursor to US economic slowdown / recession (Fig 9).
Fig 7: Volatility Index of Equity Market (VIX) and Bond Market (MOVE), Jan 2017 – June 2018
MOVE
VIX
Source: Bloomberg
July 3, 2018 7
2H 2018 Outlook & Lookouts
Fig 8: Global Equity and Bond Index, Jan 2017 – June 2018
Global Bond Index
Global Equity Index
Global Equity Index = MSCI World Index Global Bond Index = Bloomberg-Barclays Global Aggregate Bond Index (Total Return Index Value Unhedged USD) Source: Bloomberg
Fig 9: US – 2Y-10Y Treasury Yield Spread (bps) vs Real GDP Growth (% YoY)
US GDP Growth
2Y-10Y US Treasury Yield Spread
Source: Bloomberg
Signals of China economy slowing. China’s quarterly real GDP growth has been resilient, expanding within a tight range of between +6.7% YoY and +6.9% YoY since 3Q 2015 up to 1Q 2018. However, we maintain our expectations of China’s annual real GDP growth moderating to +6.6% this year (1H 2018: +6.8%; 2017: +6.9%) and +6.4% next year. This reflects the impact of “de-leveraging and de- risking” policies that are showing in terms of slowdown in domestic credit growth and house price increase (Fig 9). In addition, recent policy moves by the People’s Bank of China (PBoC) point to continued stance on “de-leveraging and de-risking” e.g. ban on property companies from raising USD-denominated debt offshore for financing of new projects (except for repayment of existing debt). At the same time, mindful of the downside risk of growth hard landing from the “de-leveraging and de-risking” policy that include higher policy and market interest rates, PBoC has been announcing a few rounds of targeted and conditional cuts in banks’ reserve requirement ratio (RRR) this year to soft land economic growth.
July 3, 2018 8
2H 2018 Outlook & Lookouts
Fig 10: China - Domestic Credit & House Price Index (% YoY) Fig 11: China – PBoC’s Reserve Requirement Ratio and Policy Interest Rate 35 16 17.5 2.60 30 17.0 25 14 16.5 2.50 20 16.0 12 15.5 15 2.40 15.0 10 10 14.5 5 14.0 2.30 0 8 13.5 (5) 13.0 2.20
(10) 6
Jul-17 Jul-18
Jan-17 Jan-18
Sep-17
Mar-17 Mar-18
Nov-17
May-17 May-18
Jan-17 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
Sep-11 Sep-07 Sep-09 Sep-13 Sep-15 Sep-17
May-08 May-10 May-12 May-14 May-16 May-18 Domestic Credit (% YoY) Smaller Banks' Reserve Requirement Ratio House Price Index (% YoY) Major Banks' Reserve Requirement Ratio Real GDP Growth (% YoY, RHS) PBoC 7-Day Reverse Repo Rate (RHS) Source: Bloomberg, CEIC Source: Bloomberg, CEIC
Further clouding the global economic outlook is the escalating US-China trade tension and the spreading of the trade conflict to include US other key trading partners i.e. EU, Canada and Mexico, amid “tit-for-tat” tariff measures and counter-measures. Thus far, we calculated that the value of US, China, EU, Canada and Mexico products already and potentially subjected to higher import tariffs to each other totaled at least USD619b (Fig 12), equivalent to 0.8% of world GDP.
Fig 12: Trade Tension Timeline
22 Jan 2018 US imposed “safeguard” import tariffs of 20%-50% on large residential washing machines, 15%-30% on solar panels & components.
8 Mar 2018 US imposed import tariffs of 25% on steel & 10% on aluminum w.e.f. 23 Mar 2018. Canada & Mexico exempted amid NAFTA review talks.
22 Mar 2018 US proposed 25% tariff on USD50b imports from China dominated by high-technology industrial products aimed at ”recouping losses” caused by China’s alleged abuse of intellectual property (IP). EU, South Korea, Australia, Brazil & Argentina exempted from steel & aluminum import tariffs
23 Mar 2018 China responded with import tariffs of 15%-25% on 128 products worth USD3b from US effective 2 Apr 2018, mainly agriculture/food products, steel and aluminum products.
3 Apr 2018 US released list of 1,333 products from China – mainly medical, industrial tools & materials, technology, defence, transport, consumer/home products - to be charged with 25% import tariff (re: 22 Mar 2018).
4 Apr 2018 China reciprocated with 25% import tariff on 106 US products worth USD50b e.g. cars, soybeans, aircrafts, chemicals, wheat, tobacco
5 Apr 2018 US President Trump instructed his administration to consider import tariff on additional USD100b China products.
23 May 2018 US President Trump ordered Commerce Department to investigate whether auto and auto parts imports pose a threat to national security by eroding domestic auto industry.
1 June 2018 US officially imposed 10%-25% import duties on European, Canadian and Mexican steel and aluminum after the expiry of temporary exemptions. Canada announced ”dollar-for-dollar” retaliatory import tariffs on CAD16.6b (USD12.8b) worth of US products effective 1 July 2018 in response to US import tariffs on Canadian steel & aluminum.
5 June 2018 Mexico imposed 20%-25% import tariff on US steel, food & beverage products following the imposition of US import tariffs on Mexican steel & aluminum.
18 June 2018 US threatened to impose 10% tariffs on additional USD200b worth of imports from China, and if China retaliates, US will pursue tariffs on another USD200b worth of imports from China.
22 June 2018 EU applied import tariffs of up to 10%-25% on EUR2.8b (USD3.2b) worth of US products (e.g. steel and aluminum products, farm produce such as sweetcorn and peanuts, bourbon, jeans and motor-bikes) in retaliation to US move to impose import duties on European steel & aluminum. US threatened to retaliate with 20% tariff on all imports of EU-assembled cars.
Source: MKE Economics Research, Media Reports
July 3, 2018 9
2H 2018 Outlook & Lookouts
US, China, EU, Canada and Mexico account for 64.4% of global GDP and 55.7% of global trade values, highlighting the significant risk to global growth from trade war between these economies. The trade tension between US and its major trading partners reflects the fact that three-quarters of US total trade deficit value is derived from its trade deficits with China (almost half of US trade deficit value), Canada, Mexico and EU countries like Germany, Ireland and Italy (Fig 15). However, when the US trade deficit is broken down on value-added basis instead to better reflect the global supply chain – the shares of the economies that are engaged in trade tensions with the US is reduced to less than half (Fig 16). This however also shows the risk of significant knock on effect on other economies in the event of full-blown or all-out trade war between US, China, EU, Canada and Mexico. At this point, we are taking the view that eventually all parties concerned will negotiate to de-escalate and resolve the current trade tensions.
Fig 13: Share of World GDP Fig 14: Share of World Trade
HK: 0.4% Taiwan: 0.6% RoW: 13.9% Mexico: 1.5% RoW: 21.4% Russia: 1.7% US: 22.8% EU: 27.8% S. Korea: Brazil: 1.0% 1.8% Canada: 2.0% Russia: 1.5% Brazil: 2.5% Taiwan: 1.6% India: 1.9% ASEAN: 3.9% Mexico: 2.4% EU: 20.3% US: 11.5% Canada: 2.5% India: 5.3% S. Korea: 2.8% HK: 3.3% China: Japan: 5.3% 11.5% China: 17.8% Japan: 3.9% ASEAN: 6.9% Source: IMF Source: ITC, UN COMTRADE
Fig 15: Decomposition of US Goods Trade Deficit on Value Fig 16: Decomposition of US Goods Trade Deficit on Value Basis (2017) Added Basis (2015)
Thailand: Canada: Taiwan: 2.1% 2.6% 2.2% RoW: -2.0% South Korea: RoW: 18.7% China: 16.4% 2.9% India: 2.9% Malaysia: 3.1% Italy: 4.0% Italy: 4.0% Japan: 12.7% Ireland: 4.2% Ireland: 4.8% China: 47.1% Malaysia: Vietnam: 4.4% 4.8% Vietnam: Germany: Germany: 4.6% 10.9% 8.1% Taiwan: 6.6% Japan: 8.6% Mexico: 8.1% South Korea: Mexico: 8.9% 9.4%
“RoW: -2.0%” refers to US trade surplus with other countries not stated Source: ASEAN Macroeconomic Research Office’s (AMRO) ASEAN + 3 Regional Economic Outlook Source: US Census Bureau
July 3, 2018 10
2H 2018 Outlook & Lookouts
MALAYSIAN ECONOMY
GDP growth forecast a “moving target”
Fluid 2018 growth outlook post-GE14. In our 1Q 2018 GDP note dated 18 May 2018, we maintained our 2018 real GDP growth forecast of +5.3%, but adjusted the projections for the supply-side and demand-side components of GDP to factor in the +5.4% YoY economic growth in 1Q 2018 and the expected economic policies of the newly-formed Pakatan Harapan (PH) Government following the coalition’s victory at the 14th General Election (GE14) on 9 May 2018. We also cautioned back then that there would be revisions to our growth forecast as we obtained more information and clarity on PH Government economic policies.
Our 2018 real GDP growth forecast is now trimmed to +5.1% from +5.3% previously as we adjusted the growth figures for some of the supply-side and demand-side components of GDP to factor in year-to-date data on key indicators, as well as the impact of measures and policies announced by the PH Government so far.
We see growth moderating further to +4.9% in 2019, given our above- mentioned outlook of slower global economic growth that will affect Malaysia’s external trade growth performance, as well as the implications of the new PH Government’s policies and measures on the dynamics of domestic demand growth in terms of consumer spending, Government spending and investment.
Fig 17: Malaysia - Real GDP & Other Key Economic Indicators % chg % Share of GDP ACTUAL MAYBANK OFFICIAL (Based on 4Q 2017 1Q 2018 2017 2018E 2019E 2018E 2017 GDP) Real GDP 100.0 5.9 5.4 5.9 5.1 4.9 5.5-6.0
Manufacturing 23.3 5.4 5.3 6.0 5.1 4.8 5.9 Services 55.2 6.2 6.5 6.2 6.3 6.0 6.1 Agriculture 8.3 10.7 2.8 7.2 2.3 1.5 3.6 Mining 8.5 (0.3) 0.1 1.0 1.3 1.5 1.8 Construction 4.6 5.9 4.9 6.7 4.0 3.8 7.3
Domestic Demand 92.2 6.2 4.1 6.5 4.8 4.9 5.7 Private Consumption 53.8 7.0 6.9 7.0 7.3 6.7 7.2 Public Consumption 13.0 6.8 0.4 5.4 1.0 1.1 0.6 Gross Fixed Capital Formation 25.4 4.3 0.1 6.2 1.5 2.8 5.2 Private Investment 17.4 9.2 0.5 9.3 2.0 3.8 9.1 Public Investment 8.0 (1.4) (1.0) 0.1 0.5 0.8 (3.2) Net External Demand 7.8 2.3 62.4 (1.9) 27.3 11.5 5.5 Exports of Goods & Services 72.9 6.7 3.7 9.4 4.5 4.3 8.8 Imports of Goods & Services 65.1 7.3 (2.0) 10.9 1.8 3.3 9.1
Inflation Rate - 3.5 1.8 3.7 1.5 – 2.0 2.0 – 3.0 2.0 – 3.0 Overnight Policy Rate (% p.a.) - 3.00 3.25 3.00 3.25 3.25 - MYR per USD (end of period) - 4.05 3.86 4.05 4.03 3.90 - MYR per USD (period average) - 4.16 3.92 4.30 4.00 3.97 3.90 Current Account Balance (% of GDP) - 3.9 4.4 3.0 3.7 3.8 2.6 Fiscal Balance (% of GDP) - (2.0) (3.3) (3.0) (2.8) (2.8) (2.8) Source: Dept. of Statistics, BNM Annual Report 2017, MoF Economic Report 2017/2018, Bloomberg, MKE Economics Research
July 3, 2018 11
2H 2018 Outlook & Lookouts
Consumer spending key driver of 2018-2019 growth
We maintain our May 2018 upgrade in this year’s consumer spending growth forecast to +7.3% vs the pre-GE14 forecast of +6.5% (2017: +7.0%), reflecting additional boost to disposable income and purchasing power from the implementation of consumer-friendly measures by the PH Government i.e. cut in the Goods & Services Tax (GST) rate to 0% from 6% effective 1 June 2018 and the fuel price subsidy that maintains until end-2018 the prices of RON95 petrol and diesel which have been unchanged at MYR2.20/litre and MYR2.18/litre respectively since 22 Mar 2018. These are part of the new Government’s 10 promises in first 100-day pledges.
Fig 18: Pakatan Harapan’s 10 Promises in First 100 Days
1. Abolish Goods & Services Tax (GST), reinstate Sales Tax & Services Tax (SST)
2. Stabilise fuel prices; introduced targeted fuel subsidies
3. Review mega projects awarded to foreign countries
4. Equalise and raise minimum wage i.e. equalise minimum wage between Peninsula Malaysia (MYR1,000/mth now) and East Malaysia (Sarawak, Sabah, Labuan – MYR920/mth now) and increase to MYR1,500/mth over the next five years
5. Defer repayments of student loans (PTPTN) for those earnings 6. EPF Contribution Scheme for housewives via additional 2% EPF contribution on working husband plus MYR50/mth from PH Govt 7. MYR500 p.a. assistance scheme to B40 households/income groups for primary healthcare care at registered private clinics 8. Address FELDA issues i.e. abolish 50% settlers’ debt with FELDA (arising from things like replanting costs; house repairs & renovation; cost of living and income advances); MYR2,000/mth cost of living allowance during replanting; payments to settlers within 45 days after CPO fresh fruit bunch (FFB) collection 9. Set up Royal Commissions to investigate 1MDB, FELDA, MARA, Tabung Haji 10. Set up Special Cabinet Committee on Malaysia Agreement 1963 Source: PH GE14 Manifesto Fig 19: Global Crude Oil Price (Brent, USD/bbl) vs Domestic Fuel Price (MYR/litre) 80 2.90 2.70 70 2.50 60 2.30 50 2.10 1.90 40 1.70 30 1.50 20 1.30 1-Jul-18 1-Jul-15 1-Jul-16 1-Jul-17 1-Jan-15 1-Jan-16 1-Jan-17 1-Jan-18 1-Sep-15 1-Sep-16 1-Sep-17 1-Mar-18 1-Mar-15 1-Mar-16 1-Mar-17 1-Nov-15 1-Nov-16 1-Nov-17 1-May-18 1-May-15 1-May-16 1-May-17 Brent Crude (LHS) RON 97 RON 95 Diesel Source: Bloomberg July 3, 2018 12 2H 2018 Outlook & Lookouts These add to the existing Budget 2018 measures to stimulate consumer spending, namely BR1M which has been renamed to Bantuan Sara Hidup Rakyat (BSHR) or Cost of Living Aid (COLA); bonus for civil servants and pensioners; and the 2ppts cut in personal income tax rate. These measures, summarized in Fig 20 essentially sustain the policy of stimulating consumer spending since 2016. And offset the expiry and reversal of a couple of previous stimulus to consumer spending i.e. normalisation of workers’ EPF contribution; BNM interest rate hike. Workers’ monthly contribution rate to the Employees Provident Fund (EPF) reverted back to 11% this year after the option for lower contribution of 8% between Mar 2016 and Dec 2017. Bank Negara Malaysia (BNM) raised the Overnight Policy Rate (OPR) by +25bps to 3.25% at the 24-25 Jan 2018 Monetary Policy Committee (MPC) meeting, reversing the -25bps cut to 3.00% in July 2016. Fig 20: Budget and non-budget measures to address cost of living issues, raise disposable income and stimulate consumer spending, 2016-2018 Key Measures 2016 * 2017 * 2018 pre-GE14 * 2018 post-GE14 ** BR1M MYR5.4b MYR6.3b MYR6.1b Maintained but renamed 1st payment made in to Bantuan Sara Hidup Feb–Mar; 2nd and 3rd Rakyat (BSHR) or Cost payments scheduled in of Living Aid (COLA). June and August 2nd payment made respectively starting 6 June totaling MYR1.6b for 4.1m people. Civil service salary & pension adjustments MYR1.4b - - - Bonus/Special payments to civil servants & MYR1.0b i.e. MYR500 for MYR1.0b i.e. MYR500 for MYR3.0b i.e. MYR1,500 MYR0.7b i.e. MYR400 Government pensioners Civil Servants, MYR250 Civil Servants, MYR250 for Civil Servants, for civil servants (Grade for Government for Government MYR750 for Government 41 and below) and Pensioners Pensioners Pensioners. Two-thirds MYR200 for Government of the amount was paid pensioners on 6 June in Jan; remaining one- third to be paid in June Tax Measures Increase tax reliefs for Introduce tax reliefs for 2ppts cut in tax rates Cut Goods & Services spouse, children, childcare centre / equal to MYR1.5b; Tax (GST) rate to 0% education fees. kindergarten fees & extend tax relief for from 6% effective 1 Introduce tax relief for “lifestyle” education savings June; repeal GST and parental care (SSP1N) until 2020 re-instate Sales & Services Taxes (SST) on 1 Sep Employees’ Monthly EPF Contribution Rate Option for 8% rate instead of 11% rate Back to 11% rate - (Mar 2016 – Dec 2017) Minimum Wage (MW) 11%-15% increase w.e.f. “Full-year effect” of Under Review Announcement 1 July 2016’s hike expected in August. (Propose to equalise MW between Peninsula Malaysia (MYR1,000/mth now) and East Malaysia (Sarawak, Sabah, Labuan – MYR920/mth now), and increase MW to MYR1,500 over five years) Others BNM Overnight Policy BNM OPR unchanged at BNM OPR raised by MYR3.0b subsidy to Rate (OPR) cut by 25bps 3.00% 25bps to 3.25% in stabilise RON95 petrol & to 3.00% in July January diesel prices until end- 2018 * BN Government’s annual budgets ** PH Government Announcements & GE14 Manifesto Source: Budgets 2016-2018, MKE Economics Research July 3, 2018 13 2H 2018 Outlook & Lookouts Expect consumer spending growth to moderate in 2019 to +6.7% (2018E: +7.3%). Factors that will support consumer spending growth next year include our view that BNM will maintain the Overnight Policy Rate (OPR) at current 3.25% level until end-2019, and the positive income effect from the announcement of minimum wage review that is expected by Aug 2018 thus having a full-year impact in 2019. However, the pace of consumer spending growth is projected to moderate next year given that the consumption tax holiday effect from the zero- rating of GST in June-Aug 2018 and its subsequent abolition will dissipate with the re-instatement of the Sales Tax and Services Tax (SST) scheduled on 1 Sep 2018. Furthermore, the Government is likely to be prudent in terms of civil service pay and pension as well as bonus next year in view of the need to manage its spending to maintain fiscal discipline. We also believe there will be change in the current “blanket” fuel price subsidy to a more “targeted” system sometime next year to manage the fuel subsidy cost. This is also in line with PH GE14 election manifesto that talked about monthly fuel subsidies on motor vehicles with low engine capacity (i.e. cars < 1,300cc; motorcycles < 125cc) for qualified persons/households. “Austere” Government spending growth Maintain our revised public consumption growth of +1.0%, which was cut from the original forecast of +5.8% (2017: +5.4%), reflecting the impact of a MYR6.3b net reduction in Government spending to achieve this year’s budget deficit target of -2.8% of GDP. Therefore, this year’s total Government spending (operating expenditure + development expenditure) will be MYR273.4b, which is -2.3% lower than the Budget 2018’s allocation of MYR279.7b, in turn resulting in a slower +4.8% increase from last year’s MYR260.7b actual spending vs the +7.3% increase as per Budget 2018 allocations. Fig 21 overleaf showed details on the revenue and spending impact and offsets provided by the Ministry of Finance (MoF) amid concerns over risk to budget deficit following the zerorisation and abolition of GST and the return of fuel price subsidy. The GST revenue loss will be offset by proceeds from SST re-instatement plus better-than-expected corporate income tax and GLC dividends that is largely due to the positive impact on oil-related revenues from the higher crude oil price, which so far this year averaged USD71/bbl vs Budget 2018’s assumption of USD52/bbl. While the Government incurred additional expenses due to the fuel price subsidy and the special payments to civil servants and Government pensioners, there is also the expected savings from expenditure rationalization exercise, of which several measures have already been announced and implemented e.g. “leaner” Cabinet; 10% cut in Ministers’ salaries; terminate the employment contracts of 17,000 “political appointees”; and closed, rationalized and re-designated Government departments and agencies created under the previous Government. The overall impact is a marginal increase in budget deficit amount to –MYR40.1b from the original Budget 2018’s projection of –MYR39.8b to maintain this year’s target of -2.8% to GDP ratio (Fig 22). July 3, 2018 14 2H 2018 Outlook & Lookouts Fig 21: Government revenues and expenditure impact and offsets following PH Government’s tax and spending measures announced so far Revenue Impact of… MYRb Zero-rating Goods & Services Tax (GST) starting 1 June 2018 (21.0) Increase in Corporate Income Tax due to Higher Crude Oil Price 5.4 Higher dividends from GLCs 5.0 Proceeds from Sales & Services Taxes (SST) to be re-instated on 1 Sep 2018 4.0 Net revenue Impact (6.6) Expenditure Impact of… MYRb Special assistance to civil servants and pensioners 0.7 Fuel price stabilization programme i.e. cost of fuel price subsidy to maintain 3.0 current RON95 petrol and diesel prices until end-2018 Expenditure rationalisation exercise (10.0) Net expenditure impact (6.3) Net impact on Budget 2018 (0.3) Source: Ministry of Finance Fig 22: Federal Government Revenues, Expenditures & Budget Deficit 2017 Actual Budget 2018 1Q 2018 Actual Revised Budget 2018 (Oct 2017) (Based on information in Fig 21) Total Revenue, MYRb 220.4 239.9 54.3 233.3 % YoY 3.8 8.8 16.5 5.8 Total Expenditure, MYRb 260.7 279.7 65.8 273.4 % YoY 3.9 7.3 (1.6) 4.8 Budget Deficit, MYRb (40.3) (39.8) (11.5) (40.1) % of GDP (3.0) (2.8) (3.3) (2.8) Source: Ministry of Finance Economic Report 2017/2018, Budget 2018, BNM, MKE Economics Research We expect continued prudent Government spending in 2019, hence our forecast of a continued subdued +1.1% growth in public consumption next year. Pending the tabling of Budget 2019 on 2 Nov 2018, we assume the Government remains committed to fiscal discipline by keeping next year’s budget deficit to GDP ratio at least stable at -2.8% as per the commitment for this year. With this in mind, we foresee the Government to focus on the “low hanging fruits” of rationalisation in Government spending to reduce excesses, wastages and leakages of the past, including in Government procurements, grants and transfers. Looking at Government’s annual operating expenditure (OE) based on 2018 Budget Figs (Fig 23), 57.5% of OE are “fixed costs”, namely “Emoluments” (33.8% of total OE), “Retirement Charges” (10.5% of total OE) and “Debt Service Charges” (13.2% of total OE). “Supplies and Services” (14.4% of total OE - mainly Government procurements), “Grants and Transfers to State Governments and Statutory Bodies” (9.0% of total OE) and “Others” (7.8% of total OE - consisting of grants to statutory funds, public corporations and international organizations as well as insurance claims and gratuities) are where cost savings and spending optimization can be done e.g. open tenders for Government procurements; reviewing grants and transfers. July 3, 2018 15 2H 2018 Outlook & Lookouts Fig 23: Breakdown of Government Operating Expenditure (% Share) Others Grants & (7.8%) Transfers (9.0%) Subsidies & Social Emoluments Services (33.8%) (11.3%) Supplies & Services Retirement (14.4%) Debt Service Charges Charges (13.2%) (10.5%) Source: Budget 2018 There is also the prospective review in “Subsidies & Social Assistance” - which includes BSHR/COLA and fuel price stabilization/subsidy and account for 11.3% of OE. As mentioned earlier, we expect the Government to adjust current “blanket” fuel subsidy to “targeted” system sometime next year. Tun Daim Zainuddin – former Finance Minister who is Chairman of the Council of Eminent Persons set up by the PH Government to study, review and advice on policies – said MYR37b was spent last year on BR1M, subsidies and various kinds of aids. The Government may consider overhauling the country’s social safety nets by setting up “basic income fund” that invest the social welfare allocations from the Government for returns that are distributed as monthly basic income to qualified recipients. The need for the Government to exercise restraints in its spending is also due to the situation on the Government’s total liabilities and the “Debt Service Charge” component of OE. According to the Ministry of Finance’s (MoF) official statement on 26 May 2018, the Government’s total liabilities was almost MYR1.1 trillion at end-2017. This takes into account of not just Government debt, but contingent liabilities arising from Government-guaranteed debts as well as commitments and obligations to lease payments for Public-Private Partnership (PPP) projects (Fig 24). Fig 24: Government Total Liabilities as at end-2017 Items MYRb % of GDP Government Debt 686.8 50.8 Government-Guaranteed Debt * 191.1 14.6 PPP Project Lease Payments (i.e. rental, maintenance, other charges) for the construction of schools, hostels, roads, police 201.4 14.9 stations, hospitals etc TOTAL 1,087.3 80.3 * Include Danainfra (MYR42.2b), 1MBD (MYR38b), Prasarana Malaysia Bhd (MYR26.6b), Malaysia Rail Link Sdn Bhd (MYR14.5b), Govco Holdings Sdn Bhd (MYR8.8b). Exclude entities that are able to service their debts such as Khazanah, TNB & MIDF (including these, Government Guaranteed debt totaled RM238b or 17.6% of GDP) Source: Ministry of Finance (Official Statement on 26 May 2018) July 3, 2018 16 2H 2018 Outlook & Lookouts At the same time, the “Debt Service Charge” is rising (Fig 25) and as % of OE it is approaching the 15% threshold under the administrative fiscal rule (Fig 26). The main risk to “Debt Service Charge” now is the Government taking 1MDB debts into its balance sheet, which in our view is a “fait accompli” after the entire outstanding 1MDB debt being counted as part of the Government’s contingent liability and MOF’s revelation that the Government has made MYR6.98b payments for 1MDB since Apr 2017. These are on top of the Government’s pledge to honour all its commitments. Our Fixed Income Research estimated that the coupon and principal repayments of 1MDB debt is moderate in 2019-2021 at MYR1.7b-MYR2.7b p.a., but will jump to MYR15.4b in 2022 and MYR13.1b in 2023 (Fig 27). Fig 25: Government Debt Service Charges (MYRb) xxx xxx Fig 26: Government Debt Service Charges (% of Operating xxx xxx Expenditure) 35,000 35 30,000 30 25 25,000 20 20,000 15 15,000 10 10,000 5 5,000 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018E 0 % of Operating Expenditure Threshold for Debt Service Charge as % of Operating 1986 1976 1978 1980 1982 1984 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018E Expenditure Source: BNM, Ministry of Finance Source: BNM, Ministry of Finance Fig 27: Estimate of Debt Service Obligations for 1MDB Bonds, 2019-2039 (MYRb) 18.0 Coupon Principal 16.0 14.0 12.0 10.0 8.0 14.0 12.5 6.0 4.0 5.0 2.0 1.0 1.7 1.7 1.7 1.4 1.0 0.0 0.6 0.3 0.3 2019 2020 2021 2022 2023 2024 2039 Source: Estimates by MKE Fixed Income Research July 3, 2018 17 2H 2018 Outlook & Lookouts Investment outlook clouded by review of major infrastructure projects We cut again our growth projection for gross fixed capital formation to +1.5% (+3.1% previously vs +6.6% originally; 1Q 2018: +0.1% YoY; 2017: +6.2%), reflecting our expectation of weak growth in private investment of +2.0% (+4.3% previously vs +9.0% originally; 1Q 2018: +0.5% YoY; 2017: +9.3%) as we maintained the May 2018 revised forecast for public investment growth of +0.5% (vs +1.5% originally; 1Q 2018: -1.0% YoY; 2017: +0.1%). To note, even before GE14, imports of capital goods – a proxy for gross fixed capital formation growth – dropped by -9.3% YoY in Jan-Apr 2018 compared with the +15.3% jump in 2017. Investment outlook is clouded by review, renegotiation, audit and cancellation of major infrastructure projects by the PH Government (Fig 28). At the time of writing, the Government is reviewing the Klang Valley Mass Rapid Transit 2 (KVMRT2) and re-negotiating on the East Coast Rail Link (ECRL) to reduce their projects costs, while the Klang Valley Mass Rapid Transit 3 (KVMRT3) has been cancelled. It is not clear whether Klang Valley Light Rail Transit 3 (KVLRT3) and Gemas-Johor Bahru Double Tracking Rail are under review as well but we do not discount the possibility given the issue of project costs and foreign contractors. The status of the KL – Singapore High Speed Rail (KL-SG HSR) project is “fluid” despite the retraction of the Project Development Partner (PDP) award to Gamuda-MRCB given the subsequent comments made by Prime Minister and Finance Minister. Meanwhile, the audit on contractors of the Pan Borneo Highway-Sarawak may extend to Pan Borneo Highway-Sabah, and there are talks of reviewing the PDP status/fees. Previously, investment growth forecast has been premised on the implementation of these “mega” projects. Fig 28: Status of Major Infrastructure Projects Projects Cost Status Klang Valley Mass Rapid Transit 2 (KVMRT2) MYR32b Majority of packages (MYR31b) awarded – viaducts, stations, system works. 22% of the elevated works and 31% of the underground works have been completed as of Apr 2018. First two tunnel drives have commenced in Mar 2018 and May 2018 respectively. To be completed & operational in 2Q 2022. Total construction cost of the project is under review. Klang Valley Mass Rapid Transit 3 (KVMRT3) MYR40b Cancelled Klang Valley Mass Light Rail Transit 3 (KVLRT3) MYR9.6b MYR9.6b awarded since Apr 2017 including 6 main viaduct packages, 1 underground package, 2 depot work packages and rolling stocks. Completion by Feb 2021. East Coast Rail Link (ECRL) MYR66b EPCC contract awarded to China Communications Construction Company (CCCC) (MYR55 project cost in Nov 2016, ground-breaking 9 Aug 2017, construction started Jan 2018 and + MYR11b for expected to be commercially operational in July 2024. 30% of contract value is fortification works) supposed to be apportioned to local contractors. MYR19.7b of the project cost has been paid with 14% of works completed as at mid-May 2018. The Government is re-negotiating to reduce the project cost KL – Singapore High Speed Rail (KL-SG HSR) MYR70b Joint Development Partner contract awarded to WSP Engineering Malaysia – Mott Macdonald Malaysia – Ernst & Young Advisory Services consortium. Project Development Partner (PDP) for the Malaysian civil infrastructure awarded to Gamuda-MCRB on 5 Apr 2018 but retracted on 31 May 2018. Based on media reports quoting statements by PM Tun Dr Mahathir and Finance Minister Lim Guan Eng between late-May 2018 and late-June 2018, the project status has shifted from “cancelled” to “postponed” to “under review”. Gemas – Johor Bahru Double-Tracking Rail MYR9.4b China Railway Construction Corp Ltd (CRCC) - China Railway Engineering Corp (CREC) - China Communications Construction Co (CCCC) consortium appointed as main contractor (Oct 2016) with 40%-30%-30% shares. Pan Borneo Highway – Sarawak MYR16.1b Project Development Partner (PDP) awarded in 2015. 11 civil work packages have been awarded (MYR12.1b). Project implementation is expected to continue. Contractors are currently being audited. Pan Borneo Highway – Sabah MYR12.8b Project Development Partner (PDP) awarded in Apr 2016. Of the total 35 work packages, 7 packages have been awarded (MYR3.2b) to Sabahan contractors and works have started on 5 of these packages. Of the remaining 28 packages, 10 were submitted for MoF approval and 18 were at tender stage at end-1Q 2018. Source: MKE Equity Research; Media Reports July 3, 2018 18 2H 2018 Outlook & Lookouts Underscoring the effect of these reviews, re-negotiation and cancellation of major infrastructure projects, our Fixed Income Research expects a sharp drop in the issuance of Government-guaranteed infrastructure bonds next year (Fig 29). Fig 29: Issuance of Government-Guaranteed Infrastructure Bond (MYRb) 40 34.0 35 30 25 21.8 20.0 20 18.1 15.5 14.7 15 12.1 10 7.8 5 0 2012 2013 2014 2015 2016 2017 2018E 2019E Source: BPAM, MKE Fixed Income Research Meanwhile, PETRONAS’ plan to raise its capex may be hampered by legal issue and policy overhangs despite higher crude oil price. Following the recovery in global crude oil prices, PETRONAS plans to raise its total capex this year after two years of declines (Fig 30). To note, the national oil company’s annual domestic capex is equivalent to almost one-third of public investment, 12.5% of gross fixed capital formation, and 3% of the country’s GDP. Fig 30: PETRONAS Capex (MYRb) 70 64 65 60 56 55 50 25 50 45 30 45 10 10 38 39 24 40 8 33 14 31 29 11 30 24 18 11 22 13 18 14 45 20 39 40 15 35 37 14 10 31 32 4 8 28 10 20 22 15 18 11 10 10 12 0 2003 2005 2007 2009 2011 2013 2015 2017 Domestic Overseas TOTAL Source: PETRONAS July 3, 2018 19 2H 2018 Outlook & Lookouts The changed political landscape post-GE14 elevated the issue on the rights to upstream oil & gas (O&G) activities in the country, following the set up of Sarawak’s state oil company Petros as the regulator of O&G activities in the state under Sarawak’s Oil Mining Ordinance (OMO) 1958. In contrast, the Petroleum Development Act (PDA) 1974 gives PETRONAS the exclusive authority on all upstream O&G activities in Malaysia. On 22 June 2018, Federal Court rejected the national oil company’s application to commence proceeding to declare PDA overrules or supersedes Sarawak’s OMO. Although this was on “technical ground” in that PETRONAS’ application should be made to – and the case should be decided by - the High Court instead, the legal case is a material risk event. In addition, PH Government’s election manifesto also contains several pledges that could affect PETRONAS’ financials over the medium term i.e. higher petroleum royalty to oil-producing states of 20% from 5% currently; review of PDA 1974; and PETRONAS to contribute a fixed percentage of its profits - subject to a minimum MYR10b p.a. - to boost the sovereign wealth fund Kumpulan Wang Amanah Negara (KWAN). Corporate earnings growth will provide some support for investment activities given the correlation between earnings growth and real private investment growth (Fig 31). Maybank KE’s research universe core earnings is expected to grow further by +5.6% this year and pick up to +10.7% next year following the +6.7% rebound last year after “no growth” years of 2014-2016 which dragged private investment growth back then. Fig 31: Corporate Earnings Growth vs Real Private Investment Growth 14 12 10 8 6 4 2 0 (2) 2013 2014 2015 2016 2017 2018E 2019E MKE Research Universe Core Earnings (% chg) Real Private Investment (% chg) Source: MKE Equity Research, Department of Statistics Overall, we expect businesses to be on “wait-and-see” mode for the time being pending more details and clarity on PH Government policies, leading to a modest pick up in investment growth next year. The “overhangs” are not just about the status of major infrastructure projects, but also on other key policy decisions and events that can affect investment decisions, such as the announcement on Minimum Wage review that is expected by Aug 2018 as well as the tabling of Budget 2019 on 2 Nov 2018. Consequently, we expect gross fixed capital formation growth to pick up marginally to +2.8% next year (2018E: +1.5%) on slightly better pace of growth in both private investment (2019E: +3.8%; 2018E: +2.0%) and public investment (2019E: +0.8%; 2018E: +0.5%) as these “overhangs” are progressively cleared. July 3, 2018 20 2H 2018 Outlook & Lookouts Moderate external trade growth in 2018-2019 after 2017 surge We adjusted 2018 growth forecasts for exports and imports of goods and services to +4.5% (+4.3% previously vs +4.9% originally; 1Q 2018: +3.7% YoY; 2017: +9.4%) and to +1.8% (+2.5% previously from +5.7% originally; 1Q 2018: -2.0% YoY; 2017: +10.9%) respectively, as we factor in actual Jan-Apr 2018 gross exports and gross imports growth of +7.8% YoY and +1.6% YoY respectively. For the whole of 2018, we expect gross exports and gross imports growth of +6.3% and +4.8% respectively. This will be followed by +4.8% and +4.0% growth respectively in 2019, which contributes to +4.3% and +3.3% increases in next year’s exports and imports of goods and services. Our forecasts of continued but slowing external trade growth in 2018-2019 reflect a combination of factors summarized in Fig 32, including the high base effect after the external trade growth surge in 2017; firmer average MYR vs USD; continued rise in average crude oil price; volatile average CPO price; and moderating global semiconductor market growth. Fig 32: External Trade Forecasts and Key Assumptions 2017 2018YTD 2018E 2019E Gross Exports (% chg) 18.9 7.8 (Jan-Apr) 6.3 4.8 Gross Imports (% chg) 19.9 1.6 (Jan-Apr) 3.0 4.0 Trade Balance (MYRb) 97.2 46.4 (Jan-Apr) 131.0 144.2 Current Account Balance (MYRb) 40.3 15.0 (1Q) 54.2 59.7 Current Account Balance (% of GDP) 3.0 4.4 (1Q) 3.7 3.8 Global Real GDP (% chg) 3.8 4.0 (1Q) 3.9 3.6 Average USDMYR 4.30 3.94 (1H) 4.00 3.97 Average Crude Oil Price (Brent, USD/bbl) 54 71 (1H) 70 75 Average Crude Palm Oil (MYR/tonne) 2,792 2,422 (1H) 2,450 2,550 Global Semiconductor Chip Sales (% chg) 21.6 20.7 (Jan-Apr) 12.4 4.4 Source: MKE Economics & FX Research, World Semiconductor Trade Statistics (WSTS) As exports outpace imports in 2018 and 2019, we expect sustained and wider trade and current account surpluses. Trade surplus is expected to broaden to +MYR131b in 2018 (2017: +MYR97.2b) and sustained at +MYR144.2b in 2019, which contributes to the larger current account surplus of +MYR54.2b or +3.7% of GDP in 2018 (2017: +MYR40.3b or +3.0% of GDP) and sustained at +MYR59.7b or +3.8% of GDP in 2019. Slower domestic demand, positive net external demand Domestic demand, which makes up slightly over 90% of GDP, is revised downward further to +4.8% (+5.2% previously vs +6.4% originally; 1Q 2018: +4.1% YoY; 2017: +6.5%) as a result of the slower growth in public consumption and gross fixed capital formation which offset the firmer consumer spending growth. In contrast, there is another round of upward revision in net external demand growth to +27.3% (+19.5% previously vs -2.2% originally; 1Q 2018: +62.4% YoY; 2017: -1.9%) in view of the sustained and wider year-to-date trade surplus (Jan-Apr 2018: +68.7% YoY to +MYR46.4b; Jan-Apr 2017: -16.4% YoY to +MYR27.5b) and current account surplus (1Q 2018: +212.9% YoY to +MYR15.0b or +4.4% of GDP; 1Q 2017: -24.2% to +MYR4.9b or +1.5% of GDP). We also expect net external demand growth to be sustained next year at +11.5% in view of the continued growth outperformance of exports relative to imports, which will sustain the trend of wider trade and current account surpluses as noted above. July 3, 2018 21 2H 2018 Outlook & Lookouts Impact on growth in key economic sectors On the supply side, we again tweaked the growth forecasts for services, agriculture and construction, but maintained the May 2018 growth forecasts for manufacturing and mining. Services sector’s 2018 growth forecast is lowered slightly to +6.3% from the previous upgrade to +6.6% in May 2018 vs the original forecast of +5.9% (1Q 2018: +6.9% YoY; 2017: +6.2%). Measures announced by the PH Government thus far to boost consumer disposable income and spending – namely the reduction in GST rate to 0% from 6% starting 1 June 2018 and fuel price subsidy to stabilize the RON95 petrol and diesel prices until end-2018 - will be positive for the growth of consumer-related services such as retail trade and household finance. However, PH Government’s reviews of major infrastructure and investment projects is causing uncertainties over investment outlook, which together with the slower pace of external trade growth so far this year after the surge last year, are expected to dampen growth of the construction-and- property-related services as well as business finance, particularly those relating to project-financing and trade-financing. The expected moderation in consumer spending and net external demand growth next year are the key factors behind our forecast of a slower +6.0% services sector growth in 2019. We trimmed further this year’s growth forecast for construction sector to +4.0% (from +4.5% previously vs +7.0% originally; 1Q 2018: +4.9% YoY; 2017: +6.7%) on the impact of the above-mentioned reviews of major infrastructure projects and repercussions to property sector, especially the “transit-oriented real estate developments”. This is on top of the general slowdown in property building activities due to the oversupply situation in both residential and non- residential segments. The “overhangs” in infrastructure construction and property market will result in continued moderate construction sector growth of +3.8% in 2019. 2018 agriculture sector growth forecast is adjusted down to +2.3% (from +3.0% previously vs +3.8% originally; 1Q 2018: +2.8% YoY; 2017: +7.2%). Crude palm oil (CPO) output, which make up 47% of agriculture sector’s GDP and is highly correlated with the agriculture sector’s GDP (correlation coefficient: +0.97), saw its growth decelerated to +5.3% in Jan-May 2018 (2017: +15.0%). We expect agriculture sector growth to ease further to +1.5% in 2019 on further normalization in CPO output after the El Nino-related surge in 2017 and higher re-planting activities. Maintained our mid-May 2018’s outlook of slower manufacturing sector growth (+5.1% vs +5.8% originally; 1Q 2018: +5.3% YoY; 2017: +6.0%) and pick up in mining sector growth (unchanged original forecast of +1.3%; 1Q 2018: +0.1% YoY; 2017: +1.0%). These are in tandem with year-to-date data showing slower growth in manufacturing production index (Jan-Apr 2018: +5.3% YoY; 2017: +6.1%) and rebound in mining production index (Jan-Apr 2018: +0.5% YoY; 2017: -0.1%). Furthermore, Malaysia’s manufacturing PMI has been on a downtrend so far this year – falling for the fourth consecutive month to an 11- month low of 47.6 in May 2018 - signaling the outlook of slower manufacturing output growth. Meanwhile, crude oil output rebounded by +1.0% YoY in Jan-Apr 2018 after the -2.8% decline last year despite Malaysia being a party to the output cut agreement between OPEC and non-OPEC producers in place since last year. The announcement on 23 June 2018 following meetings involving OPEC and non-OPEC oil producers to allow more flexibility in output starting July 2018 should sustain this year’s rebound in Malaysia’s crude oil output. For 2019, we expect manufacturing sector growth to moderate further to +4.8% while mining sector growth to pick up further to +1.5%. July 3, 2018 22 2H 2018 Outlook & Lookouts Stable OPR amid “volatile” inflation and MYR MYR to stabilize after current volatility. The downward bias in MYR vs USD last quarter is expected to persist this quarter amid the expected continuation of volatility in global financial market and capital flows particularly amid concerns over global trade war risk which feeds into strong USD – weak CNY bias in the regional currency market. Consequently, our FX Research Team expects USDMYR at 4.08 at end-3Q 2018 (end-2Q 2018: 4.04). Major and Regional Currencies vs USD End-2Q 2018 End-3Q 2018E End-4Q 2018E End-1Q 2019E End-2Q 2019E End-3Q 2019E End-4Q 2019E DXY (Dollar Index) 94 94 92 91 90 89 89 Japanese Yen 111 109 108 107 107 106 106 Euro 1.17 1.17 1.20 1.22 1.23 1.25 1.25 Pounds Sterling 1.32 1.34 1.38 1.40 1.42 1.44 1.45 Australian Dollar 0.74 0.74 0.75 0.78 0.80 0.80 0.80 Renminbi 6.62 6.68 6.65 6.58 6.55 6.50 6.45 Indian Rupee 68.47 70.00 69.00 68.50 68.20 68.00 68.00 HK Dollar 7.85 7.85 7.85 7.80 7.80 7.80 7.80 Taiwan Dollar 30.48 30.80 30.60 30.50 30.40 30.20 30.00 Korean Won 1,115 1,130 1,110 1,100 1,090 1,070 1,080 Singapore Dollar 1.362 1.375 1.365 1.36 1.36 1.35 1.33 Malaysian Ringgit 4.04 4.08 4.03 3.98 3.98 3.95 3.90 Indonesian Rupiah 14,330 14,100 14,000 13,900 13,800 13,750 13,700 Thai Baht 33.04 33.20 33.50 33.50 33.00 33.00 32.50 Philippines Peso 53.37 53.00 52.80 53.00 53.30 53.30 53.00 Vietnamese Dong 22,938 23,100 23,000 22,900 22,800 22,800 22,700 Sources: Bloomberg (end-2Q 2018), Maybank FX Research Positively, S&P re-affirmed Malaysia’s “A-” sovereign credit rating and “Stable” rating outlook in a report released on 29 June 2019. The decision is based on Malaysia’s core credit strengths such as above-average growth, robust external position underpinned by the sustained current account surplus, credible monetary policy, well-established track record of the policymaking institutions amid the evolving fiscal policy settings following the change in the Government after GE14 and the tax and spending measures announced so far. S&P also expects the PH Government to pursue meaningful expenditure rationalisation, manage the debt position - especially the contingent liabilities arising from the Government-guaranteed debts, and honoured all the sovereign commitments. This should ease the risk of sovereign credit rating downgrade. Together with our views of continued fiscal discipline under the new Government, sustained current account surplus and firm crude oil price next year, USDMYR is expected to stabilize at 4.03 by end-2018 and further to 3.90 by end-2019. Inflation to pick up in 2019 after slowing in 2018. Inflation rate averaged +1.7% YoY in Jan-May 2018 compared with +4.1% YoY in the same period a year ago. We expect inflation rate of 1.5%-2.0% this year (2017: +3.7%) reflecting mainly the dis-inflationary effect of stable fuel prices and zero-rating of GST. However, with the end of consumption tax holiday as SST replaces GST, the impending Minimum Wage review, and our expectation of the shift to a “targeted” fuel subsidy sometime next year, we forecast inflation rate to edge higher to 2.0%-3.0% in 2019. No change in OPR until end-2019. We expect BNM’s monetary policy to be “biased” towards supporting growth as we see USDMYR to stabilize over the next 18 months and despite our expectation of faster inflation rate next year to a range that in our view is acceptable or tolerable as far as the central bank is concerned. Furthermore, BNM has been well ahead of the curve in normalizing its monetary policy after raising the OPR from the record low of 2.00% since Mar 2010 to current level that is just 25bps below the pre-GFC peak of 3.50%. Consequently, we see the Overnight Policy Rate (OPR) staying at 3.25% until end- 2019. July 3, 2018 23 2H 2018 Outlook & Lookouts EQUITY July 3, 2018 24 2H 2018 Outlook & Lookouts EQUITY: Malaysia Resets Precarious external environment. We expect the external markets to remain Current KLCI: 1,691.5 (30 Jun) volatile in 2H 2018 on multiple risk factors and pressure points. A full-blown global trade war is not fully priced-in; it is however not our base-case either. YE KLCI target: 1,750 (from 1,840) That said, rhetorics will continue (as tactic for negotiation) inviting counter- retaliation; these noises will continue to destabilise markets. Beyond the concern of a trade war is the probability of a slower global growth in 2019 due to monetary policy normalisation by the major central banks. M’sia equities growth & valuation For Malaysia, we expect investors to remain in a holding position, pending 2017A 2018E 2019E clarity on longer term government’s policy direction and re-assurance on the KLCI @ 1,691.5 PE (x) 17.6 16.5 15.5 government’s fiscal position especially beyond 2018. We expect more clarity in Earnings Growth (%) 6.3% 1.0% 6.4% Budget 2019 on 2 Nov 2018. Over the near term, we expect foreign net sell of Malaysian equities to continue, but at a tapered pace. This implies that there is still downside risk for Malaysian equities, but small, barring a major external Research PE (x) 17.8 16.8 15.2 event that could trigger a massive fund outflow from this region and EMs. Universe Earnings Growth (%) 6.7% 5.6% 10.7% Confidence to return. On balance, our observation is that the new government has shown strong commitment in strengthening the finances it inherited and in stepping up on governance, accountability and transparency; we expect this to lift investors’ confidence over time. We would not be surprised on foreign flows turning positive again, after Budget 2019 realistically reassures on the country’s macro growth and addresses the government’s fiscal target. Thereafter, prudent Top BUY picks economic management should see long-term investors returning. Stock Name BB Ticker Shr Px @ TP 30 Jun Market direction – the way we see it. Having considered the external risk Axiata AXIATA 3.80 4.80 factors and the domestic factors, we are of the view that our end-2018 KLCI Genting GENT 8.41 12.35 target of 1,840 is no longer realistic. We revise down our target to 1,750 as we AMMB AMM 3.75 4.20 re-peg valuation back to its long-term mean of 15.6x 12M forward PER (previously Inari INARI 2.26 2.80 16.0x). This is also the lower end of the KLCI’s past 5-years valuation range. We expect range-bound trading for the most of 2H 2018, and optimism from Budget Alliance Bank ABMB 4.04 5.00 2019 (our base-case) to drive the KLCI higher in the last two months. Yinson YNS 4.58 4.60 Malakoff MLK 0.83 1.15 Equity strategy, thematics. With volatility to remain dominant, we recommend AEON Co. AEON 2.27 2.50 a trading strategy for most of 2H 2018, with bottom-up stock picking (on dips) as long-term investment strategy. Thematic will centre around regulatory risk, Bermaz Auto BAUTO 2.20 3.00 which have been substantially priced-in for many of the sectors/stocks affected, Allianz ALLZ 12.70 15.50 but their share prices may have further downside tendency as the details are Source: Maybank KE announced, thus offering better buying opportunity then. Another thematic is sectors/stocks with strong earnings growth potential as funds repositioned out from sectors temporarily impacted by the new government’s GE14 manifesto. Sector weights. From a top-down (fundamental) perspective, we stay POSITIVE on Oil & Gas and Automotive. Elsewhere, while there are headwinds, we remain POSITIVE on Technology due to developed markets’ transition into 5G cellular and dollar-content growth, and Gaming (Casino) due to added capacity and more visitors expectations. From a bottom-up (valuation) perspective, we are POSITIVE on Aviation as the market has overpriced the fears of rising fuel prices and policy uncertainty. Elsewhere, we remain selective on Banks as we continue to see values in the smaller banks, and Property whose valuations have fallen much. Top BUYs. We refresh our top BUY list for the market – Axiata, GENT, AMMB, Inari, Alliance Bank, Yinson, Malakoff, AEON Co., Bermaz Auto and Allianz. Many of these stocks are for the longer term, based on price points as at 30 Jun 2018. July 3, 2018 25 2H 2018 Outlook & Lookouts 1H 2018 REVIEW Unexpected turn, unprecedented change 1H 2018 saw an unexpected turn for Malaysia with an unprecedented outcome of the 14th general election (GE14) on 9 May. This, alongside external headwinds, roiled the domestic capital market as Malaysian equities were not spared from foreign net sell, experienced in the other regional markets as well. The KLCI had started the year on a positive note as it climbed to an all-time high of 1,895.2 pts on 19 Apr (+5.5% YTD) on heavy volume trades and foreign net buy ahead of GE14, but eased in the following two weeks to 8 May (-2.6%). Domestic buying immediately post GE14 absorbed sizeable foreign net sell triggered by the change in government – this supported the KLCI until 21 May, as concerns over government’s finances took over - exacerbated by the external headwinds – trade tension (US-China), geopolitics (Trump-Kim summit) and political turmoil (Italy, Spain). The turbulence continued into June with re-affirmation of monetary policy normalisation by US Fed and ECB, and an open US-China trade conflict. As of end-Jun 2018, the KLCI has retraced -5.9% from 2017’s close (-8.4% post- GE14). FBM70 was down -9.1% (-4.4% post-GE14), FBMSC a sharper -17.8% (-3.7% post-GE14). Within the region however, the KLCI’s loss in 1H 2018 trailed Philippines’ (PSEi) -15.9%, Thailand’s (SET) -9.0% and Indonesia’s (JCI) -8.8%. In USD term, the KLCI’s loss was a relatively smaller -5.5% after the MYR’s +0.36% gain against the USD, to 4.039 USDMYR as of end-Jun 2018. KLCI’s 12 months’ journey, major events 12/6: 1,900 19/4: 1,895.2, Trump-Kim 11/7: 7/9: BNM 13/12: US all-time high summit UMWH- leaves OPR Fed ups FF UMWOG unchanged by 25bps to 13/6: US 9/11: BNM completes 1.25%- Fed ups FF leaves OPR 1,850 demerger 12/9: Ex- 1.50% by 25bps to unchanged, PM Najib range 1.75%- signals 11/7: LCT meets with 2.00% review lists on President 26/12: Govt range ahead Bursa Trump at says no 27/10: 7/3: BNM 1,800 White change in 14/6: ECB National 17/11: M'sia leaves OPR House electricity says to end Budget 3Q17 GDP 5/2: Ex-PM unchanged 2/4: tariff for 9/5: QE bond 2018 up 6.2% Najib USDMYR RP2 (2018- Malaysia purchases YoY announces 21/3: US at a year 20) 25/1: BNM GE14 - in Dec 2018 new cap Fed ups FF low of 1,750 14/9: Ex- raises OPR Change in mkt by 25bps to 3.862 13/7: BNM PM Najib 25bps to Govt 22/6: Nor 18/8: M'sia measures 1.50%- leaves OPR meets with 3.25% Shamsiah 2Q17 GDP 1.75% 7/4: M'sian unchanged PM 10/5: BNM Mohd up 5.8% 30/11: 14/2: M'sia range Parliament Theresa leaves OPR Yunus to be YoY Listing of 4Q17 GDP dissolves 1,700 May at unchanged new BNM SDPL, +5.9% YoY 28/3: BNM Downing 31/12: Governor 22/8: RHB- SDPR Annual Street USDMYR 17/5: M'sia from 1 Jul AMMB calls Report closed at 1Q18 GDP off merger 2017 24/9: year low of +5.4% YoY 29/6: S&P talks 1,650 German 4.047 reaffirms elections 28/6: 1,665.7, Malaysia's 2018 low rating, outlook stable 1,600 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Note: KLCI at 1,796.8 (29 Dec 2017), 1,641.7 (30 Dec 2016); Source: Maybank KE (compilation) July 3, 2018 26 2H 2018 Outlook & Lookouts Malaysian equities key indices, 2018 YTD (30 Jun) KLCI vs. MSCI, 2014-2018 YTD (30 Jun) 1,900 800 (7.2%) FBMEMAS 1,850 750 (7.6%) 1,800 700 (3.7%) FBMSC 1,750 650 1,700 600 (17.8%) (4.4%) 1,650 550 FBM70 (9.1%) 1,600 500 KLCI (pts, LHS) Post-GE14 1,550 450 (8.4%) MSCI Asia ex-Jap (pts, RHS) KLCI 2018 YTD (5.9%) 1,500 400 Jul-15 Jul-16 Jul-17 (20%) (15%) (10%) (5%) 0% 5% Jul-14 Jan-16 Jan-14 Jan-15 Jan-17 Jan-18 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Sep-14 Nov-14 Sep-15 Nov-15 Sep-16 Nov-16 Sep-17 Nov-17 May-15 May-16 May-17 May-18 May-14 Source: Bloomberg, Maybank KE (chart) Source: Bloomberg, Maybank KE (chart) KLCI vs. MYRUSD, 2014-2018 YTD (30 Jun) KLCI vs. Brent, 2014-2018 YTD (30 Jun) 1,900 0.33 1,900 120 1,850 0.32 1,850 105 1,800 0.30 1,800 90 1,750 0.29 1,750 75 1,700 0.27 1,700 60 1,650 0.26 1,650 45 1,600 KLCI (pts, LHS) 0.24 1,600 KLCI (pts, LHS) 30 1,550 MYRUSD (RHS) 0.23 1,550 Brent (USD/bbl, RHS) 15 1,500 0.21 1,500 0 Jul-14 Jul-15 Jul-16 Jul-17 Jul-14 Jul-15 Jul-16 Jul-17 Jan-16 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-14 Jan-15 Jan-17 Jan-18 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Sep-14 Nov-14 Sep-15 Nov-15 Sep-14 Nov-14 Sep-15 Nov-15 Sep-16 Nov-16 Sep-17 Nov-17 Sep-16 Nov-16 Sep-17 Nov-17 May-18 May-15 May-16 May-17 May-14 May-15 May-16 May-17 May-18 May-14 Source: Bloomberg, Maybank KE (chart) Source: Bloomberg, Maybank KE (chart) KLCI vs. region, 2018 YTD (30 Jun) in local currencies KLCI vs. region, 2018 YTD (30 Jun) in USD term Taiwan 2018 YTD % gain/(loss) 1.8 Japan (0.3) 2018 YTD % gain/(loss) India in local currencies 1.7 Taiwan (0.9) in USD terms Japan (2.0) Vietnam (3.4) Vietnam (2.4) Hong Kong (3.6) Hong Kong (3.2) India (5.3) Singapore (3.9) Malaysia (5.5) Korea (5.7) Singapore (5.8) MSCI Asia ex Jap (5.8) Malaysia (5.9) Korea (9.8) Indonesia (8.8) Thailand (10.5) Thailand (9.0) Indonesia (13.2) China (13.9) China (15.4) Philippines (15.9) Philippines (21.6) (18) (15) (12) (9) (6) (3) 0 3 (24) (21) (18) (15) (12) (9) (6) (3) 0 Source: Bloomberg, Maybank KE (chart) Source: Bloomberg, Maybank KE (chart) July 3, 2018 27 2H 2018 Outlook & Lookouts Sectors’ performances were mixed In the first four months of this year, (i) the technology sector underperformed on concerns over faltering global demand and the impact of a stronger MYRUSD on earnings; (ii) media stocks suffered double-digit losses in share prices as continuing adex fall (due to weak consumer sentiment) dented earnings outlook; (iii) REITs were weaker due to market expectations of more than a 25bps hike in the OPR in 2018, impacting their yield outlook; (iv) selected property and oil & gas stocks also registered double-digit losses in share prices. Fortunes however reversed (for some) post GE14 as the technology and REITs rebounded; glove stocks (except Hartalega) also gained. In addition, the new government’s people centric GE14 manifesto drove gains in many consumer stocks, but withdrawal/review/renegotiation of major infrastructure projects (i.e. KVMRT 3, KL-SG HSR and ECRL) and pending toll concession reviews prompted sizeable losses in the construction (cum infrastructure) stocks. Two telco stocks also suffered heavy losses on earnings uncertainty from impending lower broadband charges (TM) and poor 1Q18 results (Axiata). Consumer stocks’ performances post GE14 (% gain) Construction, telcos’ performances post GE14 (% loss) ROTH MK CMS MK PAD MK T MK EQUITY QLG MK WCTHG MK AEON MK GAM MK HEIM MK KICB MK IJM MK MNHB MK AXIATA MK EQUITY NESZ MK LTK MK CAB MK SCGB MK ALN MK DIGI MK EQUITY SEM MK TDC MK EQUITY MSM MK HSL MK BFD MK Maxis MK EQUITY (10%) 0% 10% 20% 30% 40% 50% 60% (50%) (40%) (30%) (20%) (10%) 0% Source: Maybank KE Source: Maybank KE Sectors’ performances, 1H 2018 (% gains/(losses), based Sectors’ performances, 1H 2018 (% gains/(losses), based on combined share price gains/(losses) for stocks under on combined market cap gains/(losses) for stocks under our coverage, within their respective sectors) our coverage, within their respective sectors) Consumer Glove Producers Glove Producers Consumer Petrochemicals Autos Autos Petrochemicals Oil & Gas Oil & Gas Healthcare Non-Banking Finance Banking Healthcare Non-Banking Finance Banking Utilities Utilities Gaming Property - REITS Property - REITS Plantation Transport Gaming Plantation Technology Technology Transport Property - Developer Property - Developer Telecommunications Telecommunications Construction / Infra Construction / Infra Media Media Building Materials Building Materials (50%) (40%) (30%) (20%) (10%) 0% 10% 20% 30% (50%) (40%) (30%) (20%) (10%) 0% 10% 20% 30% Source: Maybank KE Source: Maybank KE July 3, 2018 28 2H 2018 Outlook & Lookouts Stock gains, 2018 YTD (30 Jun) Stock losses, 2018 YTD (30 Jun) (60%) (50%) (40%) (30%) (20%) (10%) 0% 52% Top Glove (55%) Barakah Offshore (51%) Telekom 43% Nestle (50%) Lafarge (50%) WCT QL Resources 38% (48%) Ann Joo Resources (44%) Pecca Group 29% AEON Co (43%) Icon Offshore 28% Tan Chong Motor (43%) TH Plantations (41%) IJM Corp 26% Carlsberg Brewery (40%) Astro Malaysia (40%) Cahya Mata Sarawak 23% Dialog (39%) Century Logistics (38%) Kimlun 20% Magnum (37%) Media Prima (36%) VS Industry 17% Eversendai (34%) CMMT (34%) Gamuda 16% Guinness (34%) Star Media (33%) Sime Darby Property 15% UMW Hldgs (32%) UEM Sunrise (31%) Axiata 14% Wah Seong (30%) TSH Resources (28%) Ta Ann 13% Yinson (28%) Sunway Construction (26%) Mah Sing 13% Padini (25%) MCIL (25%) MMS Ventures 12% Public Bank (24%) Litrak (23%) SP Setia 12% Hartalega (22%) Alam Maritim (22%) Globetronics Mynews Holdings 11% (20%) MISC (20%) YTL Power 11% Sime Darby (20%) Tambun Indah 11% Pavilion REIT (20%) KNM Group (20%) MMHE 9% Berjaya Sports Toto (20%) Glomac (19%) Sarawak Oil Palms 9% Petronas Chemicals (19%) DiGi.Com (17%) Berjaya Food 9% RHB Bank (17%) Al-Salam REIT (17%) CIMB 9% Bursa Malaysia (16%) TIME dotCom (16%) Tomypak Holdings 8% MBM Resources (16%) Malakoff (16%) CSC Steel 7% HL Bank (15%) AMMB (13%) Genting Malaysia 6% Boustead Plantations (13%) BAT (M) (13%) BIMB 5% Lotte Chemical Titan (11%) MSM Malaysia (11%) Harbour-Link 5% KPJ Healthcare (11%) Sime Darby Plantation (11%) Ecoworld 5% MPHB Capital (11%) AirAsia (11%) Ecoworld International 5% Atlan (11%) Felda Global Ventures (10%) Vitrox Corp 4% IHH (10%) Genting Plantations (10%) Sapura Energy 4% Kossan Rubber (9%) Maxis MRCB-Quill REIT 3% AirAsia X (9%) (9%) YTL Hospitality REIT 1% RCE Capital (9%) Genting Berhad (8%) Westports 1% HLFG (8%) UMW O&G (8%) Maybank 0% MAHB (7%) KLCC Prop (7%) Sunway REIT 0% IOI Corp (7%) Asia File Corporation (6%) Allianz Malaysia 0% Bermaz Auto (6%) Bumi Armada (5%) Sunway Berhad 0% 10% 20% 30% 40% 50% 60% (5%) White Horse Source: Maybank KE Note: Stocks with <5% losses are not shown July 3, 2018 29 2H 2018 Outlook & Lookouts Foreign inflows reversed, sizeable outflows in May-June Foreign investors were upbeat on Malaysian equities in early-2018 with a net buy of MYR3.3b in January – the highest monthly net buy since Mar 2017. After a total MYR3.5b of net buy in Jan-Apr 2018, foreign investors turned cautious as GE14 polling day drew closer; they net sold MYR1.2b between 2-8 May. Their net sell accelerated post GE14 (polling on 9 May), totalling MYR4.4b between 14-31 May. This brought net sell for the month of May to MYR5.6b – such high monthly net sell level has not been seen since Aug 2013 when foreign funds exited MYR6.8b in the month. Foreign investors’ exit from Malaysian equities continued into June, at MYR4.9b. Consequently, foreign funds’ position for 1H 2018 was a net sell of MYR7.0b (vs. a net buy of MYR10.6b in 2017). In USD term, this was about USD1.8b. Foreign holdings in Malaysian equities was 24.4% end-May 2018 (end- 2017: 23.2%); it should have retraced as of end-Jun 2018. Malaysia has not been alone in experiencing sizeable foreign fund outflows. From Bloomberg’s data, we note that foreign funds have been selling on Thailand equities since Oct 2017 (and into 1H 2018) and they have also been net selling in Indonesia since May 2017 (except Jan 2018 with a small net buy). Consequently, the heaviest foreign fund outflows from equities in 1H 2018 in this region was from Thailand (e.USD5.6b), followed by Indonesia (e.USD3.6b), while Philippines also recorded a foreign net sell of e.USD1.2b. This puts Malaysia (e.USD1.8b) as the third highest in terms of foreign net sell in this region in 1H 2018. Malaysian equities: Daily and cumulative foreign net buy/ Malaysian equities: Monthly foreign net buy/(sell) in 2017 & (sell) in 2018 YTD (MYR m) 2018 YTD (MYR b) Daily foreign net buy/(sell) (MYR m, LHS) 6.0 Cumulative foreign net buy/(sell) (MYR m, RHS) 4.3 600 4000 4.0 2.7 3.3 400 2500 2.1 1.5 200 1000 2.0 0.9 0.9 0.5 0.3 0.4 0 (500) 0.0 (200) (2000) (0.1) (0.3()0.8 )( 0.3) (0.1) (400) (3500) (2.0) (1.2) (600) (5000) (4.0) (800) (6500) (5.6) (4.9) (1000) (8000) (6.0) MYR b Jul-17 9-Apr 1-Jan 4-Jun Apr-17 Oct-17 Apr-18 Jan-17 Jun-17 Jan-18 Jun-18 Feb-17 Mar-17 Feb-18 Mar-18 Nov-17 Dec-17 Aug-17 Sep-17 7-May May-17 May-18 23-Apr 15-Jan 29-Jan 18-Jun 12-Mar 26-Mar 26-Feb 12-Feb 21-May Source: Bursa Malaysia, Maybank KE (chart) Source: Bursa Malaysia, Maybank KE (chart) Malaysian equities: Cumulative monthly foreign net buy Malaysian equities: Yearly and cumulative foreign net buy/ since early-2010 (MYR b) (sell) since early-2010 (MYR b) 40 50 33.8 High was MYR49.4b 31.4 end-May 2013, just 30 26.9 40 after GE13 (5 May) 15.9 20 15.9 17.7 30 13.7 14.7 10.6 MYR7.7b end- 7.2 7.7 Jun 2018 10 4.1 20 1.8 2.4 0 10 (3.1) (10) (6.9) (7.0) 0 Yearly Cumm (19.7) (20) Jul-17 Jul-12 2010 2011 2012 2013 2014 2015 2016 2017 2018 Apr-11 Oct-13 Apr-16 Jan-10 Jun-10 Jan-15 Jun-15 Feb-12 Mar-14 Feb-17 Nov-10 Dec-12 Nov-15 Dec-17 Sep-11 Aug-14 Sep-16 May-18 (10) May-13 MYR b YTD Source: Bursa Malaysia, Maybank KE (chart) Source: Bursa Malaysia, Maybank KE (chart) July 3, 2018 30 2H 2018 Outlook & Lookouts Malaysian equities: Foreign net buy/(sell) as % of market Malaysian equities: Market foreign shareholding (by market capitalisation (rolling 12M) capitalisation) (%) 2.0% 29 High was 1.7% end- 24.4% @ 31 May 2018 1.5% (Dec 2017: 23.2%; Dec 2016: 22.3%, Dec 2015: 22.8%, May 2013, just after 27 GE13 (5 May) Dec 2014: 24.3%, Dec 2013: 24.0%, 1.0% Dec 2012: 24.4%; Dec 2011: 23.1%) 0.5% average = 0.1% 25 0.0% 23 (0.5%) 21 (1.0%) -0.4% end- High of 25.2% end-May 2013, Jun 2018 just after GE13 (5 May) (1.5%) 19 (2.0%) 17 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-12 Jan-11 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Apr 18 Apr Apr 07 Apr 07 Oct 08 Apr 08 Oct 09 Apr 09 Oct 10 Apr 10 Oct 11 Apr 11 Oct 12 Apr 12 Oct 13 Apr 13 Oct 14 Apr 14 Oct 15 Apr 15 Oct 16 Apr 16 Oct 17 Apr 17 Oct 04 Dec Source: Bursa Malaysia, Maybank KE (chart) Source: Bursa Malaysia, Maybank KE (chart) Malaysian equities: Cumulative foreign vs. domestic Regional equities: Foreign net buy/(sell) in 2018 YTD institutions vs. retail net buy/(sell) in 2018 YTD (MYR m) (USDm) Cumulative foreign net buy/(sell) Cumulative DI net buy/(sell) Cumulative retail net buy/(sell) Malaysia 2018 YTD (1,752) 6000 4000 Vietnam 1,564 2000 0 Thailand (2000) (5,642) (4000) Philippines (1,219) (6000) (8000) Indonesia (3,570) 9-Apr 1-Jan 4-Jun 7-May 23-Apr 29-Jan 18-Jun (MYR m) 15-Jan 12-Mar 26-Mar 26-Feb 12-Feb (USD m) (6,000) (5,000) (4,000) (3,000) (2,000) (1,000) 0 1,000 2,000 21-May Source: Bursa Malaysia, Maybank KE (chart) Source: Bloomberg, Bursa Malaysia, Maybank KE (chart) Market earnings growth continues, but slower 4Q17 core earnings of our research universe (which makes up 75% of total market capitalisation on Bursa Malaysia) registered a positive +8.4% YoY growth. Consequently, we estimate that 2017 core earnings of our universe grew +6.7% YoY - the first year of growth after three years of stagnating. Growth however slowed in 1Q18, with aggregate core net profit of our research universe (those with quarters ended Feb/Mar/Apr 2018) up just +2.1% YoY. Positively, the banks, utility, gaming, consumer, glove, auto and aviation sectors delivered double-digit stronger YoY core earnings. But, this was offset by double-digit weaker YoY core earnings at telco, plantation, petrochemical, healthcare, shipping & port, and oil & gas. Building materials fell into core losses again (due to Lafarge), while media’s (ex-Astro) core earnings remained weak. We further lowered our forecasts for the plantation and telco stocks in Jun 2018, post their 1Q18 results reporting. For plantation, we have lowered CPO ASP forecasts for 2018 to MYR2,450/t (-6%), 2019 to MYR2,500/t (-4%). As for telcos, we have tapered our expectations for TM’s retail broadband revenue under Unifi, and Axiata’s Celcom, XL, Smart and the Idea merger. Incorporating these latest changes, core earnings growth forecasts for our research universe are now +5.6% in 2018 (vs. +9.7% forecast in early-2018), +1.0% for the KLCI (vs. +5.0% earlier). July 3, 2018 31 2H 2018 Outlook & Lookouts Quarterly recurring net profit of research universe (those Below/Above expectations ratio with quarters ended Feb/Mar/Apr 2018) x 20,000 1Q18: +2.1% YoY, -4.9% QoQ Below/Above ratio 4.5 3.8 18,000 4.0 3.5 3.4 3.5 3.5 16,000 3.0 3.0 2.5 2.2 2.2 14,000 2.5 2.1 1.8 2.0 1.8 1.6 1.8 1.7 2.0 1.5 12,000 1.1 1.8 2.1 1.5 0.8 1.8 10,000 1.5 1.0 1.3 1.3 1.3 1.3 1.2 0.5 1.0 1.2 1.1 1.2 8,000 0.9 0.8 0.0 (MYR m) 3Q17 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 1Q18 CY 1Q12 CY 3Q16 CY CY 1Q10 CY 3Q10 CY 1Q11 CY 3Q11 CY 3Q12 CY 1Q13 CY 3Q13 CY 1Q14 CY 3Q14 CY 1Q15 CY 3Q15 CY 1Q16 CY 1Q17 CY 3Q17 CY 1Q18 CY Source: Maybank KE Source: Maybank KE 1Q18 YoY core net profit of research universe (qtrs ended Feb/Mar/Apr 2018) Oil & gas(78.4%) Plantation (45.6%) Shipping & port (33.6%) Healthcare (33.1%) Petrochem (18.3%) Telco (12.8%) Construction, infra (7.2%) Property (6.4%) Non-bank financials 1.1% Technology 1.4% REIT 2.9% Media 4.8% Consumer 12.4% Banks 12.7% Gaming 20.6% Glove 23.3% Utility 24.8% Auto 37.8% Aviation 48.2% (90%) (70%) (50%) (30%) (10%) 10% 30% 50% Note: Building material in core losses in 1Q18; Media (ex-Astro) in core losses in 1Q17; Source: Maybank KE Maybank KE research forecast revisions YoY growth (%) Early-2018 forecast Current forecast 2016A 2017E 2018E 2017A 2018E 2019E Corporate earnings: KLCI (2.1) 7.4 5.0 6.3 1.0 6.4 Research universe (2.4) 7.9 9.7 6.7 5.6 10.7 Malaysia real GDP 4.2 5.8 5.3 5.9 5.1 4.9 Global real GDP 3.2 3.6 3.6 3.8 3.9 3.9 Source: Maybank KE July 3, 2018 32 2H 2018 Outlook & Lookouts 2H 2018 OUTLOOK & LOOKOUTS External environment remains precarious The external environment remains precarious into 2H 2018 with many headwinds to destabilise global growth and sustain volatility in the capital markets. We are mindful of the following risk events in 1H continuing or reigniting in 2H: (i) trade tension between US and its major trading partners, i.e. China, EU and Canada, potentially escalating into a full-blown global trade war (which has the potential of reversing global growth), (ii) emerging market (EM) pressure after mid-April’s episode (the driver then was US 10-year Treasury yields breaching 3% for the first time in over 4 years on concerns over US’ fiscal deficit). In addition, a potential new concern in 2H, in our view, is: (iii) tapering of global economic growth (even without the presence of a US-led trade war) stemming from interest rate hikes - 4 in the US in 2018, another 3 hikes in 2019 (as guided by the US Fed at its 12-13 Jun 2018 meeting) – and, major central banks’ balance sheet reduction. Foreign funds net sold USD12.6b of EM debt and equity in Apr-May 2018 (USD16b in Emerging Asia alone), according to IIF estimate. Malaysia remains vulnerable to further EM sell-offs due to still sizeable foreign holdings in bonds (25.9% of MGS+GII end-May 2018, despite coming off from a peak of 36% end-Oct 2016) and equities (24.4% end-May 2018, of which we estimate 7% are strategic holdings, based on our screening of the top 120 market cap stocks on Bursa Malaysia). Risks not sufficiently priced in with valuations (S&P’s PER) at 32x end-Jun 2018, vis-à-vis US Treasury 10-year yield at 2.89% (with potential for upside) 50 18 45 16 40 14 35 12 30 10 25 8 20 6 15 10 4 5 2 0 0 Jul-31 Jul-54 Jul-77 Jul-00 Jan-66 Jan-20 Jan-43 Jan-89 Jan-12 Mar-39 Mar-62 Mar-85 Mar-08 Nov-92 Nov-23 Sep-27 Nov-46 Sep-50 Nov-69 Sep-73 Sep-96 Nov-15 May-35 May-58 May-81 May-04 S&P500 Cyclically-Adjusted PE Ratio (x) US Treasury 10-Year Yield (% p.a., RHS) Source: http://www.econ.yale.edu/~shiller/data.htm Total portfolio flows into EM – debt + equity Total portfolio flows into EM – by geography USD b IIF Portfolio Debt Flows Tracker USD b Africa & Middle East Emerging Europe 60 IIF Portfolio Equity Flows Tracker 60 Latin America Emerging Asia 40 40 20 20 0 0 (20) (20) (40) (40) Jul-16 Jul-17 Jul-16 Jul-17 Jan-17 Jan-18 Jan-17 Jan-18 Mar-17 Mar-18 Sep-16 Nov-16 Sep-17 Nov-17 Mar-17 Mar-18 Sep-16 Nov-16 Sep-17 Nov-17 May-16 May-17 May-18 May-17 May-18 S May-16 Source: IIF Source: IIF July 3, 2018 33 2H 2018 Outlook & Lookouts Foreign holdings (%) of MGS+GII Foreign holdings (MYR b) of MGS+GII 60% MGS Total GII (MYR b) MGS Total GII 300 50% 41.9% 250 40% MYR171.7b 200 25.9% 30% 150 MYR156.9b 20% 100 5.1% 10% 50 MYR14.8b 0% - Jan-14 Jan-13 Jan-15 Jan-16 Jan-17 Jan-18 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 May-13 May-14 May-15 May-16 May-17 May-18 Jan-15 Jan-13 Jan-14 Jan-16 Jan-17 Jan-18 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 May-14 May-15 May-16 May-17 May-18 May-13 Source: CEIC Source: CEIC First 100 days & new government’s GE14 manifesto Since taking oath (and office) on 21 May, the new Pakatan Harapan government has implemented about half of its 10 GE14 manifesto for the first 100 days (ending 29 Aug) while the Finance Minister had announced on 31 May that at least 5 of the initiatives will be deferred until the country’s finances improve. The most significant of the 100-day manifesto implemented is the GST zero-rating from 1 Jun (with the SST to return from 1 Sep), while the most significant of the 100-day manifesto deferred is the equalization and level-up of minimum wage between Peninsular and East Malaysia; the target nonetheless is for an announcement of the minimum wage details in August. Beyond the first 100 days manifesto, there are three other market-significant/ moving decisions pending, in our view, which are also part of the new government’s promises: (i) review of toll concessions, (ii) doubling of telcos’ broadband speeds and halving of prices to consumers, (iii) review of the Petroleum Development Act 1974, a new annual contribution by PETRONAS (subject to a minimum MYR10b p.a.) to Kumpulan Wang Amanah Negara (KWAN), and higher 20% petroleum royalty (vs. the current 5%) to the oil producing States. The review on toll concessions will take longer, in our opinion, for it needs to consider also (i) the impact on outstanding bonds issued to finance the toll roads construction (MYR55.3b for all toll concessions, as per Bond Pricing Agency Malaysia’s figures as of 23 Apr 2018), and (ii) the much larger implication if expropriation clauses in the concessions are to be invoked. Also, (iii) the review needs to be “holistic” (and not “piecemeal”) as any decision on a particular toll road would impact traffic flows on alternative toll roads – e.g. any decision on the NSE would impact LEKAS (south-bound) and WCE (north-bound). Elsewhere, the Communications and Multimedia Minister’s comments on 20 Jun, on broadband prices falling by at least 25% by end-2018, which is to come from the reduction in wholesale access pricing, suggests that: (i) the new government’s broadband initiatives are largely confined to fixed broadband, and (ii) the regulator might not directly regulate retail broadband prices. Interestingly, the Minister made no mention of halving prices in his statement. The devil is in the details, expected sometime in 3Q 2018. As for the amendment to the Petroleum Development Act 1974, it will need to be passed by the Parliament and this may take some time. PETRONAS’ prospective annual contribution to KWAN (minimum MYR10b p.a.) and the higher 20% petroleum royalty to the oil producing States may imply lower Federal government revenues ahead, adding onto concerns on the government’s finances. July 3, 2018 34 2H 2018 Outlook & Lookouts We have articulated the impact of the new government’s GE14 promises in our note on 11 May [link]. Near-term, the 14th Parliament will convene on 16 Jul (for 20 days for the 1st session) where the Sales Tax Bill 2018 and Service Tax Bill 2018 will be tabled for approval; also the government’s revised finances for 2018. Pakatan Harapan’s 10 promises for the first 100 days (21 May – 29 Aug) 1 Abolish GST, reinstate Sales & Services Taxes (SST) – GST zero-rated w.e.f. 1 Jun 2018, SST to return w.e.f. 1 Sep 2018 Stabilise fuel prices; introduce targeted fuel subsidies – fuel prices maintained at MYR2.20/litre (RON 95), MYR2.18/litre (diesel) until 2 end-2018 3 Review mega projects awarded to foreign countries – KVMRT3 cancelled, KL-SG HSR under review, ECRL to be renegotiated Equalise and raise minimum wage i.e. equalise minimum wage between Peninsula Malaysia (MYR1,000/mth now) and East Malaysia (Sarawak, 4 Sabah, Labuan – MYR920/mth now) and increase to MYR1,500/mth over the next five years – implementation deferred but details in August Defer repayments of student loans (PTPTN) for those earnings EPF Contribution Scheme for housewives via additional 2% EPF contribution on working husband plus MYR50/mth from PH Govt – 2% EPF 6 contribution to be taken from husband’s 11% contribution 7 MYR500 p.a. assistance scheme to B40 households/income groups for primary healthcare care at registered private clinics - pending Address FELDA issues i.e. abolish 50% settlers’ debt with FELDA (arising from things like replanting costs; house repairs & renovation; cost of 8 living and income advances); MYR2,000/mth cost of living allowance during replanting; payments to settlers within 45 days after CPO fresh fruit bunch (FFB) collection - pending 9 Set up Royal Commissions to investigate 1MDB, FELDA, MARA, Tabung Haji – established task force on 1MDB 10 Set up Special Cabinet Committee on Malaysia Agreement 1963 - pending Source: Pakatan Harapan’s GE14 Manifesto, Maybank KE compilation Budget 2019 on 2 Nov 2018 is a KEY policy event The government’s fiscal position is of immense importance to investors as it will impact bond and equity markets’ and MYR’s direction. Any downgrade (or step- down in outlook) in the sovereign credit rating (*) will prompt outflow of portfolio funds which will negatively impact the MYR. While people-centric measures like the GST zero-rating are positive for consumer sentiment, thus driving GDP growth via higher private consumption, it has the counter impact on the government’s finances as it reduces government revenue. Meanwhile, a higher dependence on oil-related revenue (via petroleum direct and indirect taxes, and dividends from PETRONAS) to bridge this government revenue “gap” will lift volatility in the capital market and pressure the MYR when crude oil price falls (as seen in 2015-16) as concerns will then return on the government’s fiscal position. Malaysia’s fiscal deficit as a percentage of GDP has positively retraced from a high of -6.6% in 2009 to -3.0% in 2017; the target for 2018 is -2.8%. * S&P Global Ratings has reaffirmed Malaysia's “A-/A-2” foreign currency and “A/A-1” local currency ratings on 29 Jun 2018, with a stable outlook. Present Moody’s rating and outlook for Malaysia is “A3 (Stable)”, while Fitch is “A-/F1 (Stable)” foreign currency. July 3, 2018 35 2H 2018 Outlook & Lookouts For 2018 fiscal year, the Finance Minister had, on 31 May, outlined for the estimated MYR21b revenue gap in the GST zero-rating from 1 Jun to be bridged by higher petroleum taxes (MYR5.4b) following higher crude oil prices above the USD52/bbl (Brent) average assumption for the year (2018 YTD avg.: USD70.80/ bbl), higher dividends from GLCs (MYR5.0b), SST proceeds from 1 Sep (MYR4.0b) and expenditure cut (MYR10.0b). These are expected to “cap” the fiscal deficit at -2.8% of GDP, the target for the year. For 2019 fiscal year, the concern is on the larger gap in the government’s revenue from the full-year removal of the GST. Granted that the SST will provide a full-year of revenue, the off-setting would not be sufficient. Budget 2019, to be unveiled on 2 Nov 2018, two weeks later than the usual 3rd Friday of October, is thus a KEY blueprint and event. We would not be surprised if the government’s development spending for 2019 is lower than 2018’s e.MYR46b as part of its fiscal prudence measures. In addition, Budget 2019 details are important for investors to access the macro growth drivers for 2019 under the new government. Bridging the 2018 fiscal gap MYR’b MYR’b Revenue impact Expenditure impact GST zero-rating from 1 Jun 2018 (21.0) Hari Raya special assistance to civil servants (0.7) Higher petroleum taxes 5.4 Petrol price stabilisation (3.0) Higher dividends from GLCs (Khazanah, Bank 5.0 Expenditure rationalisation 10.0 Negara, PETRONAS) SST proceeds from 1 Sep 2018 * 4.0 Net revenue impact (6.6) Net expenditure impact (6.3) Net effect on overall budget (0.3) * Expect SST revenue to be fully realised only from Nov 2018, considering the bimonthly tax collection mechanism for local manufacturers Source: Ministry of Finance (information), Maybank KE (table) Fiscal deficit as a % of GDP Government’s oil related revenue 80,000 39.7 40.3 45 35.8 36.8 37.0 35.4 33.7 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2005 70,000 31.2 30.0 40 0 60,000 29.1 35 (1) 30 50,000 20.9 25 (2) 40,000 15.7 14.6 14.9 20 30,000 (3) 15 (2.8) (3.2) (3.1) (3.2) (3.1) (3.0) 20,000 (4) (3.4) (3.4) 10 445 959 502 730 358 959 301 105 556 096 825 967 632 763 , , , , , , , , , , , , , (3.8) 10,000 , 5 56 45 51 63 63 66 70 66 66 45 30 33 37 (5) (4.3) 30 (4.6) (4.7) 0 0 (6) (5.3) 2006 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E (7) MYRm (LHS) % of Total Revenues (6.6) Source: Ministry of Finance, Maybank KE (chart) Source: Ministry of Finance, Maybank KE July 3, 2018 36 2H 2018 Outlook & Lookouts Our views on crude oil price, MYR and OPR direction Dated Brent price has climbed +17.6% from early-2018 to USD78.60/bbl as of end- Jun 2018, averaging USD70.80/bbl in 1H 2018 (+30% YoY). At its meeting on 22 Jun 2018, OPEC and its allies have agreed to adhere to a 100% compliance with the previously agreed output cut of 1.8m bpd (OPEC: 1.2m bpd, non-OPEC: 0.6m bpd) after months of over-compliance (of up to 152%/162% in May 2018 for OPEC/ non-OPEC members) due to unexpected supply disruptions. Recall that the original agreement to cut 1.8m bpd started in Jan 2017 for six months, and this was extended by 9 months until Mar 2018 with the option to extend by another 3 months. The next meeting on this matter will be on 4 Dec 2018. Our Economics Team expects 2H 2018 crude oil price to sustain from end-Jun 2018’s level, to average a higher USD70/bbl in 2018 (+30% YoY) than 2017’s USD54/bbl. The MYR meanwhile has strengthened +0.36% against the USD since early-2018 to 4.039 USDMYR end-Jun 2018, averaging 3.937 in 1H 2018 (-8.4% YoY). Our FX Research Team expects the USD to sustain its strength against EM and regional currencies in 2H 2018 on concerns over US-China trade tension impacting China’s growth (THB, MYR and SGD have high correlation with CNY) and tighter monetary conditions globally. At the same time, domestic policy uncertainty may continue to weigh on the MYR in the near-term. Consequently, our forecasts are for the MYR to end the year at about Jun 2018’s level - at 4.03 USDMYR. This assumes a “normalised” pace of foreign funds withdrawal from Malaysian equities and bonds expected over the near-term pending clarity on the country’s longer-term fiscal targets (which should be addressed in Budget 2019 on 2 Nov 2018) and no major external headwinds to trigger a sudden withdrawal of funds. MYR: Expected path Forecast End-3Q18E End-4Q18E End-1Q19E End-2Q19E USDMYR 4.08 4.03 3.98 3.98 EURMYR 4.77 4.84 4.86 4.90 JPYMYR 3.74 3.73 3.72 3.72 MYRCNY 1.65 1.67 1.67 1.66 GBPMYR 5.47 5.56 5.57 5.65 SGDMYR 2.97 2.95 2.93 2.94 USD Index 94.31 92.20 90.79 90.18 Source: Maybank FX Research USDMYR vs. USDMYR 30D implied volatility 20 USDMYR 30D volatility (LHS) 4.800 USDMYR (LHS) 15 4.300 10 3.800 5 3.300 0 2.800 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 May-10 Source: Bloomberg (data), Maybank KE (compilation) July 3, 2018 37 2H 2018 Outlook & Lookouts USDTHB, USDMYR & USDSGD have the highest correlation with the USDCNY 1.5 1.2 1.0 1.0 0.8 0.6 0.5 0.4 0.2 0.0 0.0 (0.2) (0.5) (0.4) (0.6) (1.0) (0.8) Jul 16 Jul 17 Jul Apr 16 Apr 16 Oct 17 Apr 17 Oct 18 Apr Jan 16 Jan 17 Jan 18 Jan Jul 17 Jul Jul 16 Jul Apr 16 Apr 16 Oct 17 Apr 17 Oct 18 Apr Jan 16 Jan 17 Jan 18 Jan USDIDR USDPHP USDTHB USDMYR USDSGD USDTWD USDKRW Note: 120D moving correlation; Source: Bloomberg (data), Maybank FX Research & Strategy (chart) As for the OPR, our Economics Team do not expect Bank Negara to act in 2H 2018 (and even into 2019) after 25 Jan 2018’s 25bps rise to 3.25%. Our view for interest rate to stay at the current level is premised on the need for monetary policy to remain supportive of economic growth after the change in government which could have short-term implications from new policy direction, that could affect investment decisions. For one, the MYR10b reduction in government expenditure for 2018 will impact public sector’s spending growth. Bank Negara’s MPC will meet another three times in 2H 2018: 11 Jul, 5 Sep, 8 Nov. Banking system BLR and OPR (%) May 18: BLR 6.90%, OPR 3.25% 8 7 6 5 4 3 2 1 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-11 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Source: BNM, Maybank KE (compilation) July 3, 2018 38 2H 2018 Outlook & Lookouts Market earnings and valuations +5.6% 2018E core earnings growth for our universe Our latest forecasts are for core earnings of our research universe to grow +5.6% in 2018, continuing their growth momentum for the second consecutive year. As for the KLCI, growth this year is expected to be at a lower +1.0%, due to the demerger of Sime Darby in Nov 2017 and KLCI constituent changes in Dec 2017 and Jun 2018 which affected the growth calculations. Had these changes not taken place, KLCI’s core earnings growth would be +2.4% in 2018. Banks and gaming (casino) will be the big-cap drivers for our research universe/market earnings growth in 2018, supported by strong double-digit core earnings growth expected from the export sectors (gloves and technology) and earnings rebound from healthcare and automotive. We expect telcos, utilities and shipping core earnings to retrace in 2018. Also, plantation will see a small earnings decline. Our major assumptions for the sectors are outlined in the following pages. For the big-cap sectors, we believe we are realistic in our forecasts for their key industry growth parameters: (i) for the banks, +4.5% domestic loans growth in 2018E (May 2018: +4.9% YoY, 2017: +4.1%); (ii) for plantation, MYR2,450/t CPO ASP in 2018E (1H18: MYR2,420/t, 2017: MYR2,791/t). Any unexpected turn in their earnings growth momentum will thus be largely due to stock-specific issues. Maybank KE Research Universe earnings growth, PERs, P/B, ROE (30 Jun 2018) Earnings Growth (%) PE (x) P/B (x) ROE (%) Sector CY17A CY18E CY19E CY17A CY18E CY19E CY17A CY18E CY17A CY18E Banking & Finance 14.2 7.9 6.3 13.5 12.5 11.8 1.5 1.4 11.0 11.1 Non-bank Financials 9.4 3.3 5.6 14.5 14.0 13.3 1.6 1.7 11.4 12.1 Cement & steel NM NM 139.2 NM 27.3 11.4 0.9 0.9 NM 3.3 Consumer (8.4) 6.2 8.0 36.2 34.1 31.5 8.9 8.7 24.5 25.4 Healthcare (22.3) 37.8 14.8 70.9 51.4 44.8 2.3 2.3 3.3 4.5 Automotive (18.4) 39.9 17.1 26.1 18.6 15.9 0.6 0.9 2.4 4.6 Construction, Infra 15.3 11.0 2.7 11.7 10.6 10.3 1.0 1.0 8.5 9.1 Gaming – NFO 0.2 5.4 3.7 13.6 12.9 12.5 2.0 1.9 14.5 15.1 Gaming – Casino 16.1 20.8 22.6 17.0 14.0 11.4 1.1 1.1 6.6 8.0 Gloves 19.8 20.3 12.9 42.8 35.5 31.5 8.9 7.9 20.7 22.2 Media (25.6) 8.5 23.3 15.8 14.6 11.8 2.5 3.3 15.8 22.6 Oil & Gas 32.5 NM 85.3 162.4 38.4 20.7 1.1 1.1 0.7 3.0 Petrochemical 15.4 2.6 14.8 14.9 14.5 12.6 2.2 2.0 15.1 13.8 Plantation 29.5 (0.7) 11.5 25.4 25.5 22.9 2.3 2.1 9.2 8.3 Property – Developer 4.1 (1.6) 29.0 14.1 14.4 11.1 1.0 0.8 7.4 5.4 Property – REIT 3.9 4.5 4.0 19.2 18.4 17.7 1.2 1.2 6.2 6.3 Technology 33.7 21.8 28.5 24.4 20.0 15.6 6.1 5.2 25.0 26.1 Telcos (4.1) (7.0) 8.3 21.5 23.2 21.4 3.2 3.0 15.0 12.8 Transport – Aviation 22.7 13.3 6.9 15.8 14.0 13.1 1.6 1.6 10.0 11.6 Transport – Shipping 4.8 (21.9) 12.3 13.0 16.6 14.8 0.7 0.8 5.4 4.6 Transport – Ports 9.6 (19.4) 14.1 17.1 21.2 18.6 5.6 5.1 32.7 23.9 Utilities (5.8) (4.3) 3.2 13.5 14.1 13.7 1.6 1.5 11.5 10.4 Diversified (4.2) 0.2 24.5 12.9 12.9 10.4 1.0 1.0 8.0 7.4 Stocks under cvrg 6.7 5.6 10.7 17.8 16.8 15.2 1.7 1.6 9.4 9.6 Source: Maybank KE July 3, 2018 39 2H 2018 Outlook & Lookouts 2018E core earnings growth (key sectors) Growth Main assumptions (%) Banks 7.9 (i) 4.5% sector loans growth in 2018E (2017: +4.1%); (ii) average NIMs to expand 3bps YoY to 2.30% (2017: +5bps); (iii) average credit costs to be 2bps higher YoY at 36bps (2017: -7bps to 34bps). Building material NM For LMC: (i) 2018E industry cement demand growth of +5% (2017: -8%); (ii) 9% improvement in blended ASPs. For AJR: (i) +6% increase in billet sales volume; (ii) full utilisation of its bar/rods capacity; (iii) flattish margin as rising domestic supply would cap margin expansion. Consumer 6.2 (i) Normalisation of AEON’s earnings; (ii) resilient earnings for NESZ from its diverse product offerings and sizeable market share; (iii) sustained growth momentum for PAD, Mynews and BFOOD. Downside risks: (i) Slowdown in consumption demand; (ii) a spike in raw material prices; (iii) regulatory risks for the tobacco and brewery sectors. Automotive 39.3 Our earnings recovery expectation is mainly premised on (i) MYR’s strength against USD and JPY (USDMYR: 2018 YTD avg. of 3.93 vs. 2017 avg. of 4.30) and JPY (JPYMYR: 2018 YTD avg. of 3.62 vs. 2017 avg. of 3.83) and (ii) stronger volume sales for players exposed to Mazda and Perodua (i.e. Bermaz, Pecca), benefiting from new car launches; Mazda/ Perodua gained 0.6/8.3ppts in market share in 5M18. Also, despite 5M18 TIV of 225k (-3.8% YoY) making up only 38% of our full-year projection of 595k units (+3% YoY), we remain optimistic as we believe that car registration would peak from Jun-Aug with a 60k unit monthly average, boosted by lower car prices from GST zero-rating window. Downside risks: Further retracement in MYR against USD and JPY from our base case of USD/MYR 3.95 and JPY100/MYR 3.65 average, with 10%-60% of costs of goods sold being USD-denominated. Construction, Infra 11.0 The contractors within our universe all reported YoY earnings growth for their construction operations in their latest end-Mar/Apr 2018 financials. We expect earnings growth momentum to continue in the subsequent quarters supported by their strong orderbook replenishment in 2016/2017. Downside risk could stem from the potential cost review of the KVMRT 2 which could also affect work progress. Gaming – NFO 5.4 (i) 2018E gross NFO sales growth of 2% YoY (2017E: +0% YoY); (ii) theoretical prize payout ratio of 63% for MAG (2017E: 63%) and 59% for BST (2017E: 60%; BST has more jackpot sales which have a lower theoretical prize payout ratio of 55%). Gaming – Casino 20.8 For GENM: (i) 2018E visitor arrivals growth of 9% YoY (2017A: +9% YoY); (ii) 2018E gaming spend/ visitor growth of 8% YoY (2017A: -5% YoY). For GENT: (i) Banten independent power plant will yield ~15% IRR; (ii) GENS’ VIP volume growth of 15% YoY. Glove 20.3 (i) 11-32% YoY volume growth in 2018 (2017: +6-24%) for stocks under our coverage (+15% in 2018E, +15% in 2017 on a combined basis); (ii) USDMYR average of 3.95; (iii) latex and nitrile cost of MYR4.80/kg and USD1.20/kg respectively (2017E: MYR5.93/kg and USD1.12/kg). Media 8.5 (i) 2018E FTA TV and print adex growth of +5% YoY (5M18 FTA TV: +2% YoY, 5M18 print adex: -16% YoY); (ii) average newsprint price of USD530-580/tonne (1Q18: USD587/tonne); (iii) USDMYR average of MYR4.00. Oil & Gas NM (i) DCRs of USD70k-80k for JUs (unchanged YoY) and USD0.90-1.10/bhp for OSVs (vs. USD1.00-1.20/ bhp a year ago) - these are historical lows; (ii) 35%-90% asset utilization (vs. 25%-50% a year ago). Petrochemical 2.6 (i) Flat ASP in MYR term for PCHEM, -2% for LCT; (ii) +1.1% YoY growth in product volumes for PCHEM (2017: +8.9% YoY), +30.7% for LCT (2017: -15.8% YoY); (iii) factory utilisation of 90.0% for PCHEM (2017: 89.0%), 88.0% for LCT (2017: 73.8%). Plantation (0.7) (i) MYR2,450/t CPO ASP in 2018E (2017: MYR2,792/t); (ii) +9.4% FFB output growth for stocks under our coverage (2017: +7.6% YoY). Upside risk: Stronger crude oil (i.e. Brent) price rebound which will help stimulate demand for discretionary palm biodiesel, weaker Ringgit, and/ or weather anomalies at major producing regions. Downside risk: Changes in government policies, unexpected reversal in crude oil (i.e. Brent) price, and weaker-than-expected demand. Property – Developer (1.6) +1.5% YoY higher property sales for the stocks under our coverage (2017E: +6% YoY). Risks: Potential relaxation of bank loan terms for first-time homebuyers which could boost the demand for properties, policy easing and stronger-than-expected economic growth. Property – REIT 4.5 (i) 0% to +15% rental reversions for retail assets; (ii) 0% to +5% in the office segment which are mostly on long-term leases; (iii) 98-99% occupancy rates at prime malls (FY18-19E). July 3, 2018 40 2H 2018 Outlook & Lookouts 2018E core earnings growth (key sectors) Growth Main assumptions (%) Technology 21.8 (i) Further capacity expansion by companies within our coverage for specific clients (i.e. Broadcom for Inari, ams AG for Globetronics, premium vaccuum cleaner brand for VSI), partially offset by (ii) MYR’s strength against USD. Upside risks: Softer MYR against USD from our base case of USDMYR 3.95 avg. which could see net exporters recording higher revenues from translation and forex losses on their USD cash holdings. Telco (7.0) (i) 1.8% decline in Malaysia mobile revenue in 2018E (2017: -1.3% YoY); (ii) margin compression at Celcom (cost-induced) and Maxis (revenue induced); (iii) 26% earnings decline at TM from both revenue softness and cost pressure. Transport – Aviation 13.3 (i) Passenger traffic growth of 4-5% in 2018E at the Malaysia airports (4M18: +3.9% YoY); (ii) an average jet fuel price of USD76/bbl (2017: USD61/bbl); (iii) average yield for the two airliness (AirAsia, AirAsia X) to recede by 0.5% (2017E: -1.3% YoY). Transport – Shipping (21.9) MISC: (i) flattish LNG pretax profit with contribution from 2 other new Seri C class vessels offsetting lower income from Puteri Intan Satu; (ii) 10% drop in blended petroleum tanker rate. Transport – Ports (19.4) Westports: (i) +4% container throughput growth (1Q18: -7%); (ii) 11% hike in local container tariff; (iii) higher effective tax rate of 24% (2017: 4%). Utilities (4.3) (i) Tenaga’s earnings to step down in RP2 (from RP1) as effective tariff in RP1 was 1sen/kWh higher than base; (ii) further earnings decline at Malakoff from the full-year impact of the less lucrative Segari PPA extension along with missed capacity payments at TBE; (iii) offset by full-year earnings contribution from Petronas Gas’ Pengerang regas plant. Source: Maybank KE KLCI: Earnings breakdown by sector – CY18E Research Universe: Earnings breakdown by sector – CY18E Telcos Transport Utilities Petrochem Building 7% 6% 12% Utilities Gloves REITs 7% Transport materials 17% 1% Oil & Gas 3% Telcos 2% 2% 7% 1% Automobiles Property - Banking & Property 1% Developer Finance 2% 4% 35% Plantations 7% Plantation 6% Petrochemical 5% Gaming Banking & Consumer 7% Consumer Financials Media Gloves Healthcare 3% Construction, 3% 45% 1% 1% Gaming 1% 7% Infra 3% Source: Maybank KE Source: Maybank KE Earnings risk from higher minimum wage implementation Higher minimum wage, if it is to be effected this year, will be a negative surprise to us. This will add onto other “mandatory” cost of labour by employers that have risen from 1 Jan 2018, i.e. the implementation of Employer Mandatory Commitment on the increased foreign workers’ levy and the Employees Insurance Scheme. We have yet to impute the higher minimum wage in our earnings forecasts for the stocks/sectors affected. Our house view is for a gradual rise in the minimum wage level to MYR1,500/mth over five years (from the present MYR920-1,000/mth). As highlighted in our note on 7 May [link], the higher minimum wage will affect the total wage bill, and not just those at the present minimum wage level. The sectors most impacted, in our view, are: (i) plantation, as it will not be able to pass-on the additional cost, and (ii) F&B and retail services, where most of the players are not listed. July 3, 2018 41 2H 2018 Outlook & Lookouts Higher minimum wage: Impact on selected sectors Sector Impact Automotive Car assembly/manufacturing plants are mostly located in Peninsular Malaysia. Among the auto players within our coverage, we estimate that Toyota/Perodua/Nissan/Pecca employ about 3,000/6,000/2,000/ 250 workers in their respective production/assembly plants. Sensitivity analysis. On the assumption that half of these production workers are currently paid the prevailing minimum wage of MYR1,000 p.m., every MYR100 rise in the monthly minimum wage would translate to an estimated additional cost of up to MYR1.8m/3.6m/1.2m/0.2m p.a. for Toyota/Perodua/ Nissan/Pecca. This is about <2% of the respective listed groups’ earnings. Consumer 7-Eleven (SEM MK, SELL, TP: MYR1.24) has a staff force of 13-14k at its stores (staff count per store of 6.5), and Mynews (MNHB MK, HOLD, TP: MYR1.44) has 1.4-1.5k (staff count per store of 3.8). We estimate that most employees are currently taking home more than MYR1,200 p.m. (including incentives and allowances). Sensitivity analysis. On the assumption that the higher minimum wage will push up the entire staff costs due to the “knock on” effect, we estimate that every MYR100 rise in the monthly wage would negatively impact 7-Eleven’s earnings by 22% and Mynews by 6% (using FY19E earnings as reference). However, with this being an industry wide cost inflation issue, we expect 7-Eleven, Mynews and their peers to eventually pass on the higher costs through higher merchandise and product prices. Construction The larger cap construction companies under our coverage are unlikely to be significantly affected as the average wage for employees is ~MYR2,000 p.m. (including allowances and overtime). As for the smaller cap construction companies under our coverage, we believe the impact varies. For them, we gather that e.40%-50% of their existing workforce are paid the current minimum wage. Thus, an increase of the minimum wage to MYR1,500 per month could see full year net earnings decreasing by e.3%-5%. That said, as the rise in the minimum wage will be gradual over five years, we expect this rising cost to be priced in into future contract/tender values, and thus, passed on. Building materials For cement, the impact to Lafarge (LMC MK, SELL, TP: MYR3.25) will be minimal as maintenance works, which requires labour from those within the minimal wage category, are outsourced to third parties. There is also minimal earnings impact to Ann Joo (AJR, BUY, TP: MYR3.10) as labour costs represent less than 10% of its total operating costs. Property Minimal direct impact for developers as most of their employees are already paid above MYR1,000 p.m.. development However, the indirect impact will mostly likely come from the contractors used for their property projects. Higher labour cost will be passed on in terms of higher contract values. Our discussions with some contractors revealed that most of them are already paying above MYR1,000 p.m. for unskilled and >MYR1,500 p.m. for skilled labour. We expect margin compression to continue as developers may not be able to pass on the additional costs to buyers if a weak property market prolongs. Glove Glove producers’ factories are mostly situated in Peninsular Malaysia. Labour accounts for 10-12% of the glove makers’ total costs while workers whom are paid the current minimum wage accounts for 20%-30% of the glove makers’ workforce. Sensitivity analysis. We estimate every MYR100 increase in the monthly minimum wage will reduce the glove producers’ bottomlines by 2% in 2019, considering just higher wage bill for 20-30% of their workforce. However, the higher minimum wage may push up the entire staff costs due to the “knock on” effect on workers whom are paid above the current monthly minimum wage of MYR1,000. However, given that Malaysia accounts for c.63% of global rubber glove supply and also in view of the present balanced demand-supply environment, we believe the glove producers can raise the glove ASPs to pass on the minimum wage hike. In addition, we expect automation to continue, to offset rising wage bill. July 3, 2018 42 2H 2018 Outlook & Lookouts Higher minimum wage: Impact on selected sectors Sector Impact Plantation Raising the minimum wage level to MYR1,500 p.m. for Peninsular (+50%) and East Malaysia (+63%) will be negative for the plantation players as the industry is highly labour intensive and employs mostly foreign workers who are paid near or slightly above the current minimum wage. We classify plantation workers into two broad categories, the harvesters and general workers. Harvesters are considered skilled workers and command better take home pay than general workers. Harvesters are generally paid in excess of the MYR1,500 p.m. threshold (inclusive of incentives and allowances). During the peak crop months, harvesters’ take home pay can be in excess of MYR2,000 p.m.. On the other hand, general workers typically takes home about MYR1,100-1,300 p.m. (inclusive of incentives and allowances). While on paper the MYR1,500 p.m. minimum wage will only impact the general workers, in reality the compensation of harvesters will also have to be raised. Hence, in arriving at our earning impact analysis, we have assumed a similar wage increase for all plantation workers. Sensitivity analysis. By our estimate, every MYR100 p.m. increase in minimum wage will reduce bottomlines for companies under our coverage by 1-9% (using FY19E earnings as reference). Companies which operate solely in Malaysia and those with relatively higher cost of production (such as Boustead Plantations [BPLANT MK, HOLD, TP: MYR1.22] and TH Plantations [THP MK, HOLD, TP: MYR0.89]) will be most impacted by the proposed minimum wage hike, while the least impacted will be TSH Resources [TSH MK, HOLD, TP: MYR1.14], KL Kepong [KLK MK, HOLD, TP: MYR25.00], IOI Corp [IOI MK, HOLD, TP: MYR5.13] and Genting Plantations [GENP MK, BUY, TP: MYR10.40]. Nonetheless, as the proposed minimum wage increase would be staggered over a period of 5 years, this will allow companies to improve workers productivity. It will also force companies to invest in more mechanisation so as to reduce the reliance of workers per hectare. A point to note is the higher cost of minimum wage is to be shared on a 50:50 basis between the government and employers in the first three years (under the new government’s GE14 manifesto) – this may provide some relief on the additional cost impact to the plantation companies. Technology Among the three segments of technology stocks under our coverage i.e. automation equipment, outsourced test and assembly (OSAT), electronics manufacturing services (EMS), a minimum wage hike would impact the EMS segment the most due to its high reliance on foreign workers. . In the last minimum wage hike, the EMS players were able to pass on the higher cost to their customers. However, in the recent hike of foreign workers levy, EMS players were not able to pass on the higher cost to their customers, raising concerns that any further increase of labour costs may have to be absorbed by the EMS players. We understand that VS Industry (VSI MK, BUY, TP: MYR2.15), Denko Industrial (DEN MK, Not Rated) and SKP Resources (SKP MK, Not Rated) employ ~8k, ~7k and ~4k operators respectively (only VSI is under our coverage in the EMS space). . As for the automation equipment players, i.e. ViTrox (VITRO MK, HOLD, TP: MYR5.00) and MMS Ventures (MMSV MK, BUY, TP: MYR2.02), most fabrication works are outsourced to third parties, while most of their staff force are highly skilled technical workers focusing on high-value added processes such as R&D, design & prototyping, and final testing & quality control. . Meanwhile, for the OSAT players within our coverage i.e. Inari Amertron (INARI MK, BUY, TP: MYR2.80) and Globetronics (GTB MK, HOLD, TP: MYR2.30), their reliance on manual labour have reduced significantly due to adoption of automation in the last 5 years, while the remaining operators are compensated with performance bonus which can be adjusted to compensate for a higher minimum wage. Sensitivity analysis. For VSI, every MYR100 rise in the monthly wage could translate into an estimated additional cost of up to MYR10m p.a., shaving an average 4% off VSI’s annual forward earnings (FY19-20E). We see no/insignificant impact of a minimum wage hike to the automation equipment and OSAT players within our coverage. Media Raising the minimum wage to MYR1,500 p.m. will have minimal impact to the media companies under our coverage. Total labour costs in the media sector generally comprise of journalists’ salaries, which are above MYR1,500 p.m.. Source: Maybank KE July 3, 2018 43 2H 2018 Outlook & Lookouts Market valuation at LT mean, but low end of 5Y PER range Having retreated by -5.9% in 1H 2018, but tapered by the downward revisions in earnings estimates, the KLCI’s PER valuation has de-rated to 15.6x (as of 30 Jun 2018) from a year-high of 17.6x (on 19 Apr, when the KLCI hit its all-time high). Comparing against its historicals, the KLCI’s present 15.6x is at (i) its long-term mean (since 2001) of 15.6x (1SD is 1.6x), but (ii) lower end of its valuation range of 15.5x to 18.3x over the past 5+ years (since early-2013). The last 5 years has seen several headwinds for the domestic market – falling crude oil price (peak- to-trough by 78%), 1MDB scandal, substantial foreign funds net sell (MYR45.3b between Jun 2013 until Dec 2016) and weaker MYRUSD (peak-to-trough by 30%). Based on 2018E/2019E core earnings, the KLCI is currently at 16.5x/15.5x. On a trailing P/BV basis, the KLCI is currently at 1.79x (as at 30 Jun 2018), which is at about its long-term mean (since 2001) of 1.81x (1SD is 0.32x). Equity risk premium/yield gap, as measured by the inverse of KLCI’s 12M forward PER over the 10-year MGS yield (4.20% as of 30 Jun 2018) is at 223bps, vs. end-2017’s 195bps and its long-term mean of 245bps. Malaysia market earnings growth & valuations as at 30 Jun 2018 2017A 2018E 2019E KLCI @ 1,691.5 PE (x) 17.6 16.5 15.5 Earnings Growth (%) 6.3% 1.0% 6.4% Maybank KE’s Research Universe PE (x) 17.8 16.8 15.2 Earnings Growth (%) 6.7% 5.6% 10.7% Source: Maybank KE KLCI‘s 12M forward PER, at 15.6x (30 Jun 2018) (x) KLCI (LHS) 1-Yr Forward PER (RHS) 1,900 20 18.3x 1,800 19 18.0x 18.2x 17.3x 1,700 17.6x 18 17.1x 1,600 17 1,500 16.5x 16 16.0x 15.6x 15.7x 15.6x 1,400 15.5x 15 1,300 14 13 14 15 16 17 18 2013: MY GE13 on 5 May; US Fed announced start of QE taper on 19 Jun foreign net sell of MY equities started in Jun, totalling MYR15.6b for Jun-Dec 2013 2014: US QE taper in Jan-Oct; Crude oil price started free-fall from Sep to USD56/bbl at YE (2014: -50%); MYRUSD weakened -6.2% foreign net sell of MY equities continued, totalling MYR6.9b for the year 2015: 1MDB scandal broke in Feb; Crude oil price fell further to USD36/bbl at YE (2015: -36%); MYRUSD weakened -18.6% foreign investors net sold a high MYR19.7b of MY equities in the year 2016: US DOJ filed civil lawsuit re: 1MDB in Jul; Crude oil price recovered to USD55/bbl at YE (2016: +44%); MYRUSD weakened -4.3% foreign investors of MY equities continued, totalling MYR3.1b for the year 2017: Crude oil price recovered to USD67/bbl at YE (2017: +21%); MYRUSD strengthened +10.7% foreign investors turned net buyers of MY equities, at MYR10.6b for the year Source: Maybank KE July 3, 2018 44 2H 2018 Outlook & Lookouts KLCI‘s 12M forward PER, at 15.6x (30 Jun) KLCI’s trailing P/B, at 1.79x (30 Jun) (x) 1-Yr Forward PER Mean +1 SD -1 SD (x) 22 2.6 Trailing P/B Mean +1 SD -1 SD 20 2.2 18 16 1.8 14 12 1.4 10 8 1.0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Maybank KE, Bloomberg Source: Maybank KE, Bloomberg KLCI’s dividend yield, at 3.39% (30 Jun) KLCI: Equity premium (over 10Y MGS), at 223bps (30 Jun) 8.0 (%) (%) 6 6.0 5 4 4.0 3 2 2.0 1 0.0 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Maybank KE, Bloomberg Source: Maybank KE, Bloomberg July 3, 2018 45 2H 2018 Outlook & Lookouts STRATEGY Market direction – the way we see it We expect the external markets to remain volatile in 2H 2018 on multiple risk factors and pressure points. A full-blown global trade war (which can reverse growth) is not fully priced-in, with global equities, as represented by the MXWO Index retreating just -0.7% in 2018 YTD, while the INDU Index (-1.8%) is only back to early-Dec 2017’s level, before the trade turmoil started. A full-blown trade war is however not our base-case either. That said, President Trump’s rhetorics will continue (as tactic for negotiation, in our view) inviting counter-retaliation from its trade partners; these noises will continue to destabilise markets. Beyond the concern of a trade war is the probability of a slower global growth in 2019 due to monetary policy normalisation by the major central banks. For Malaysia, we expect investors to remain in a holding position, pending clarity on longer term government’s policy direction and re-assurance on the government’s fiscal position especially beyond 2018. We expect more clarity in Budget 2019 on 2 Nov. Over the near term, we expect foreign net sell of Malaysian equities to continue, but at a tapered pace. After 1H 2018’s net sell of MYR7.0b, foreign funds’ position is still of a net buy, but a smaller MYR3.6b, after considering their net buy since early-2017 (totalling MYR10.6b in 2017). We have taken 2017’s net buy in our analysis here as foreign fund flow into Malaysian equities only resumed in early-2017 after net selling for 3½ years from mid-2013 until end-2016, totalling MYR45.3b. Assuming a daily net sell of MYR300m (average since GE14), we can expect the full reversal of the remaining MYR3.6b net buy in July 2018. This implies that there is still downside risk for Malaysian equities, but small, in our view. Barring a major external event that could trigger a massive fund outflow from this region and emerging markets, we think the KLCI has good support at 15x PER, which implies up to a 3.8% downside from 30 Jun 2018’s level. On balance, our observation is that the new government has shown strong commitment in strengthening the finances it inherited and in stepping up on governance, accountability and transparency; we expect this to lift investors’ confidence over time. We would not be surprised on foreign flows turning positive again, after Budget 2019 realistically reassures investors on the country’s macro growth and addresses the government’s fiscal target. Thenafter, prudent economic management should see long-term investors returning. Having considered the external risk factors for 2H 2018 and near-term domestic factors, we are of the view that our end-2018 KLCI target of 1,840 is no longer realistic. We revise down our target to 1,750 as we re-peg valuation back to its long-term mean of 15.6x 12M forward PER (previously 16.0x). This is also the lower end of the KLCI’s past 5-years valuation range. This, of course, assumes a full-blown global trade war does not happen. In the event of a trade war which will reverse the global growth momentum, the KLCI would have further downside potential – its trough was 11.4x back in 2019 (due to GFC). We expect range-bound trading for the most of 2H 2018, and optimism from Budget 2019 (our base-case) to drive the KLCI higher in the last two months. July 3, 2018 46 2H 2018 Outlook & Lookouts Equity strategy, thematics With volatility to remain dominant, we recommend a trading strategy for most of 2H 2018, with bottom-up stock picking (on dips) as long-term investment strategy. Thematic for 2H 2018 will centre around regulatory risk, which have been substantially priced-in for many of the sectors/stocks affected, but their share prices may have further downside tendency as the details are announced, thus offering better buying opportunity then. Sectors/stocks that are exposed to regulatory risk are: . Telcos – Issue: Halving of broadband charges, doubling of speeds (GE14 manifesto). Here, we take the view that this issue applies only to fixed broadband. With the Minister’s recent comments on broadband prices falling by at least 25% by end-2018, from the reduction in wholesale access pricing (thus not directly regulating retail broadband prices), we think the eventual revenue loss to fixed-line telcos could be less severe than expected. We have lifted TM and Axiata to BUY on 2 Jul 2018 following their significant share price declines (TM: -38% since GE14; Axiata: -28%), after tapering our earnings estimates, with Axiata now our preferred pick for the sector. . Construction/infrastructure – Issue: Cancellation/review of major projects (KVMRT 3, KL-SG HSR, ECRL), cost reviews of projects which have started construction (KVMRT 2, KVLRT 3, Pan Borneo Highway), and toll concession reviews. While we think the significant share price fall for Gamuda (-36% since GE14), IJM Corp (-32%), Kimlun (-33%), Sunway Construction (-24%) and CMS (-43%) have priced-in most of these issues, their share prices may have further weakness when the cost review for some of the ongoing projects (e.g. KVMRT 2) comes through. Gamuda’s share price, at MYR3.27 (as of 30 Jun 2018) for instance, has fully discounted its toll concessions, based on our RNAV estimates. A good re-entry point into these stocks is when further details on the cost reviews come through. . Utilities/“regulatory” assets – Issue: Integrity of the cost pass-through mechanism. Tenaga’s net tariff increase by 7.6% for 2H18, announced by the regulator on 29 Jun 2018, alleviates concerns over the integrity of the pass- through mechanism. Gas Malaysia has also (in Jun 2018) obtained its required tariff surcharge for 2H18 to cover previous under-recoveries. For Petronas Gas, while regulatory clarity has yet to emerge, we continue to believe that it would not be substantially worse-off when it migrates to IBR, possibly in 2019. The regulator’s generally non-punitive stance towards Tenaga and Gas Malaysia makes us believe that Petronas Gas would not be substantially worse-off. Presently, our fair value for the stock, assuming a 50% probability of an adverse TPA outcome, still implies an upside in excess of 10%. . Gaming – Issue: Will the gaming operators be subjected to the SST when it is revived on 1 Sep 2018. With newsflow (unconfirmed) that the upcoming SST targets to generate a revenue of MYR30b p.a. for the government (vs. GST’s MYR44b in 2018E, and SST predecessor’s MYR17b in 2015), our guess is the scope of taxation under the to-be-“revived” SST will be broader than its predecessor but narrower than the GST. The gaming sector has not been subjected to SST in the past, and they have absorbed the GST during its implementation (Apr 2015-May 2018). We do not rule out the possibility that the gaming operators may be subjected to the SST going forward as the government seeks to narrow its revenue shortfall from zero-rating the GST. We have downgraded the NFOs to NEUTRAL on 25 Jun 2018 but we are still POSITIVE on the Casinos due to earnings growth and positive newsflow expectations. We maintain our BUYs on GENM and GENT. Any share price weakness post SST details is a good re-entry point for both stocks. . Plantation – Issue: Minimum wage hike. The industry is highly labour intensive and employs mostly foreign workers who are paid near or slightly above the current minimum wage. Plantation groups which operate solely in Malaysia and with relatively higher cost of production (such as BPLANT and July 3, 2018 47 2H 2018 Outlook & Lookouts THP) will be most impacted by the proposed minimum wage hike, while the least impacted will be TSH, KLK, IOI and GENP. Any share price weakness after details of the minimum hike are announced could be good opportunities to accumulate the big-caps like KLK, IOI and GENP which would otherwise be “pricey” compared to regional valuations. Also, the mid-caps like SOP and TSH offer long-term double-digit FFB growth potential. Another thematic for 2H 2018 is sectors/stocks with strong earnings growth potential; we would not be surprised if they re-rate higher, as we expect some repositioning of funds from sectors/stocks which now face uncertainties on their longer term earnings growth sustainability. Sectors with growth (incidentally, they are also the export sectors) are: . Gloves – we forecast +20% core earnings growth for the sector in 2018, +13% in 2019. The sector has further re-rated in 2018 YTD to 33x on 12M forward PER but we think current valuation could stay in 2H 2018 supported by the sector’s above-market earnings growth prospect. We have, on 19 Jun 2018, upgraded Top Glove to BUY as we believe its strong earnings growth, rising EBITDA margin and ROE, and bonus issue will propel further re-rating. . Technology – we forecast +22% core earnings growth for the sector in 2018, +29% in 2019. Sector’s PER valuations meanwhile are still undemanding at 20x for 2018E, 16x for 2019E earnings. Please see further justification for our POSITIVE sector call despite the external headwinds, in the paragraph below. Sector weights, top BUYs From a top-down (fundamental) perspective, we remain POSITIVE on the following sectors for 2H 2018: (i) Oil & Gas - the sector’s fundamentals have improved and it is on a cyclical recovery, albeit protracted, amid higher oil price. Our sector top BUY is Yinson, which offers growth visibility, steady financials, sound management and business; (ii) Automotive – catalysts are recovery in industry TIV (we forecast +3% YoY in 2018) on the back of improving consumer sentiment, alongside the higher MYRUSD (relative to 2017) which will lift earnings. BAuto is our top BUY in the sector, on track for a 56% earnings growth in FY19E. Elsewhere, while we acknowledge headwinds in the Technology and Gaming (Casino) sectors in the forms of a protracted US-China trade tension (affecting investors sentiment on Technology stocks), and the upcoming SST potentially hitting on gaming revenues (this would be more of a sentiment-negative event as we have yet to revise our earnings forecasts for the GST zero-rating in the first place), we remain POSITIVE on both sectors, due to: (iii) Technology - developed markets’ transition into 5G cellular, and dollar- content growth with the proliferation of latest technologies into medium- range smart devices from just premium devices currently; this would sustain growth. Our sector’s top BUY is Inari, with growth to be driven by three new component wins, while its recent win from OSRAM will also diversify its earnings base going forward; (iv) Gaming (Casino) – added capacity at Resorts World Genting and more Chinese and Malaysian gamblers expected at Resorts World Sentosa. Our preferred BUY is GENT as a cheaper proxy to GENM and GENS, with GENT’s valuations at a wide 40% discount to our SOP valuation. From a bottom-up (valuation) perspective, we are POSITIVE on Aviation as the market has overpriced the fears of rising fuel prices and policy uncertainty post GE14. AirAsia is our top BUY pick in the sector - the potential of special dividends remains as AirAsia has been monetizing its ancillary assets. July 3, 2018 48 2H 2018 Outlook & Lookouts We are NEUTRAL on the other sectors as sector risks have not fully dissipated amid attractive valuations for some. But, we are not NEGATIVE on any sectors either (except Cement) as we think their current valuations can be supported. For the sectors that we are NEUTRAL on, we still have selective stock BUYs: . Banks – we continue to see values in the smaller banks and are reiterating our BUYs on Alliance, AMMB (top BUY in the sector) and BIMB, and bigger cap HLFG as a cheaper exposure to HL Bank. . Property – while downside risks are waning supported by undemanding sector valuation at 56% discount to our RNAV estimates (45-50% previously), sector fundamentals remain weak as the number of overhang units were at a record high in 1Q 2018. We are selective in our picks – our BUYs are Sunway (top BUY in the sector), UEMS, Ecoworld and Ecoworld Int’l. Sector weights and top BUYs in the sectors Sector Weight Top BUY in Sector Weight Top BUY in the sector the sector Automotive +VE BAuto Oil & Gas +VE Yinson Aviation +VE AirAsia Petrochemical NT LCT Banks NT AMMB Plantation NT GENP Building mat -VE (Cement), +VE (Steel) AJR Property NT Sunway Construction/infra NT CMS REITs NT IGB REIT Consumer NT AEON Shipping & Ports NT - Non-bank financials NT Allianz Technology +VE Inari Gaming NT (NFO), +VE (Casino) GENT Telecom NT Axiata Gloves NT Top Glove Utility +VE Malakoff Media NT Star Note: +VE – Positive, NT – Neutral, -VE - Negative Source: Maybank KE Top BUYs for the market. We have largely maintained the list revised during our 1Q18 Results Roundup (see our Strategy note on 4 Jun 2018) with the exception of IGBREIT, RCE and MMSV as their upside potential to our targets have narrowed. Instead, we have replaced them with Axiata, Malakoff and AEON; we maintain GENT, AMMB, Inari, Alliance Bank, Yinson, BAuto and Allianz in our top BUY list for the market. Many of these stocks are for the longer term, from our list of BUYs, based on price points as at 30 Jun 2018. Top BUYs Price TP EPS (sen) PE (x) EPS Growth (%) Net yield ROE P/B Px chg (%) (%) (x) (%) 30 Jun MYR CY18E CY19E CY18E CY19E CY18E CY19E CY18E CY18E CY18E YTD Axiata 3.80 4.80 12.0 16.7 31.7 22.8 (10.4) 39.2 2.7 4.4 1.4 (30.8) Genting 8.41 12.35 58.7 69.1 14.3 12.2 6.3 17.7 2.1 7.0 0.9 (8.6) AMMB 3.75 4.20 43.1 46.9 8.7 8.0 7.8 8.8 4.5 7.6 0.6 (15.0) Inari Amertron 2.26 2.80 10.4 12.8 21.7 17.7 32.6 22.6 3.4 33.7 6.6 (0.3) Alliance Bank 4.04 5.00 35.5 37.8 11.4 10.7 3.5 6.5 3.9 9.7 1.0 (1.0) Yinson 4.58 4.60 27.3 25.6 16.8 17.9 (10.6) (6.1) 2.2 10.6 1.7 13.1 Malakoff Corp 0.83 1.15 5.6 7.2 14.7 11.5 (9.7) 28.6 6.8 4.2 0.6 (15.8) AEON Co 2.27 2.50 8.2 8.8 27.7 25.8 7.9 7.3 1.8 5.7 1.5 29.0 Bermaz Auto 2.20 3.00 16.9 20.7 13.0 10.6 45.7 22.3 6.2 38.8 4.1 0.0 Allianz Malaysia 12.70 15.50 92.2 101.4 13.8 12.5 0.4 10.0 0.9 9.1 2.5 (5.9) Source: Maybank KE July 3, 2018 49 2H 2018 Outlook & Lookouts Top BUYs Stocks Investment thesis Axiata . We believe Axiata’s quarterly results have likely bottomed in 1Q18, with operating conditions at various op-cos having (AXIATA MK) improved since (weaker Ringgit, improved pricing environment in Indonesia). . We think the government’s broadband pledges will be confined to just fixed broadband, thus we do not expect Axiata to face incremental regulatory risks. . Our MYR4.80 TP is based on a sum-of-parts, with each op-co being valued on a DCF. Genting Berhad . Exposure to Genting Integrated Tourism Plan is not just through GENM but also via licensing (3% of RWG gross revenue) (GENT MK) and management fees (3% of RWG net revenue and 10% of RWG EBITDA). . Forecast 3-year forward CAGR of 16% driven not just by 49% share of earnings from GENM but also by highly profitable licensing and management fees it charges GENM. . Excellent proxy to GENS potentially winning a Japanese IR license in 2019/2020. When GENS won the Sentosa IR license in 2006, GENT even traded at 20% premium to SOP/sh. . GENT’s current valuation is at a 40% discount to its SOP/sh or nearly double the 20-year average discount to SOP/sh of 22%. We continue to prefer it as a cheaper proxy to GENM and GENS. AMMB . Issues faced by its SME division last year (dispute with Alliance Bank) have since been resolved, paving the way for (AMM MK) renewed focus and growth in this division, which is expected to push up margins for the group. . Cost efficiency drives in FY18 (including a MSS) should contribute to cost savings from FY19E onwards, providing support to overall earnings growth. . Our MYR4.20 TP pegs on a CY19 PBV of 0.7x, supported by ROEs of about 8% and dividend yields of >4.5%. Inari . We are positive on Inari’s aggressive floor space expansion to 1.35m sq ft (+34%) by end-2018 and 1.68m sq ft by mid- (INRI MK) 2019. These floor space expansion are mainly driven by new and existing client’s requirement to cater for new components outsourcing to Inari. . Further component wins will diversify Inari’s exposure to Broadcom as well as the smartphone segment, adding appeal to Inari as a competitive regional multi-expertise outsourced test and assembly house; we project Inari’s earnings growth to grow at a 30% 3-year earnings CAGR. . Inari is our Top BUY Pick in the technology sector for its solid track record in generating new growth angles consistently. . Our MYR2.80 TP is based on 22x CY19 EPS (20% premium to our target PER for tech companies within our coverage). Alliance Bank . New products introduced in FY18 such as its higher yielding Alliance One Account are beginning to gain traction, which (ABMB MK) should lead to faster loan growth and better yields. . SME lending has slowed in recent years but renewed efforts to expand the staff force in this area should contribute to faster growth. . Much of the investment/restructuring costs were incurred in FY18, paving the way for cost savings to kick in, from FY19E onwards. . Our MYR5.00 TP pegs on a CY19 PBV of 1.3x, supported by ROEs of about 10% and dividend yields of ~4%. Yinson . A steady cash flow and earnings growth stock with proven execution capabilities. Attractive valuations and Shariah (YNS MK) compliant. . Has demonstrated ability to consistently create value. Sale of 50% Petroleo Nautipa and 26% FPSO JAK at attractive prices and securing contract extensions are testament to its ability to de-risk, monetize assets and recycle capital. . Prospecting for 2-3 new FPSO jobs for 2018 is another positive. New charter for FEP is a catalyst, not priced in yet, as it eliminates redeployment risk and ensures cash flow continuity. . Our MYR4.60 SOP-based TP excludes the conservative impact from FEP FPSO (as we await contract clarity), which could add MYR80-120m p.a. in net profit and 30-52sen in TP, based on firm charter basis. July 3, 2018 50 2H 2018 Outlook & Lookouts Top Buys (continued) Stocks Investment thesis Malakoff . Malakoff is one of the highest dividend-yielding stock in the market, offering yields in excess of 6.5%. (MLK MK) . Tj Bin Energy has resumed normal operations (after its outage in Feb 2018), and there have been no other major unscheduled outages domestically to-date. . Our MYR1.15 TP is based on a sum-of-parts, with each of the domestic plants being valued on a DCF. Aeon Co. . We are positive on AEON’s near-term prospects, on improving consumer sentiment and spending which would lift AEON’s (AEON MK) retailing revenue. We also expect retailing margins to be enhanced by lower opex at new malls and better product mix. . Longer-term earnings continue to be supported by Property Management Services’ resilient rental income from its AEON malls. We have pencilled in one new store p.a. for FY18-20 which would support our single-digit topline growth estimates for the segment. . AEON is our Top BUY pick in the consumer sector for its near-term earnings upside potential. We think current valuation of 26x (CY19) is an attractive entry point based on its 7%-9% CY18-19E EPS growth. . Our MYR2.50 TP is pegged to 28x FY19 PER (at +0.5SD of mean). Bermaz Auto . With strong domestic and export sales outlook, BAuto is on track for a 56% earnings growth in FY19. (BAUTO MK) . Sequential quarter results are expected to be solid, driven by a surge in domestic sales, driven by lower car prices from the GST zero-rating. Into 2019, active refreshment in its model offerings to incorporate Mazda’s SkyActiv X technology should sustain interest and demand for Mazda cars. . At 11x CY19 PER currently, we believe that current valuations are still a good entry point. Besides its growth angle, dividend yield is also attractive at 6.6% for FY19 (based on 80% DPR). . Our MYR3.00 TP is based on 14.5x CY19 EPS (mean valuations). Allianz Malaysia . Exposure to the largest general insurer and fifth largest life insurer in the country, with strong parental support from (ALLZ MK) Allianz SE (67% stake). . Strong cost efficiencies provide room for ongoing product innovation and potential pricing power amid detariffication of the general insurance industry. . Much room for growth in Malaysia’s life insurance industry. . SOP-TP of MYR15.50 values Allianz Life at 1x Embedded Value and Allianz General at a historical P/BV of 2x. Source: Maybank KE July 3, 2018 51 2H 2018 Outlook & Lookouts Dividend stocks (Maybank KE’s coverage: Stocks with more than 4% net yield) Stocks Rec Shr px at Market Cap TP (RM) 2018 Upside to Potential total 30-Jun-18 (MYR m) Net Yld (%) TP (%) returns (%) Ann Joo Resources Buy 1.99 1,065.8 3.10 9.5 55.8 65.3 Pecca Group Buy 0.87 159.8 1.25 6.9 43.7 50.6 Maybank NR 9.00 98,376.8 NR 6.8 NR NR Malakoff Corporation Buy 0.83 4,059.9 1.15 6.8 39.4 46.2 Astro Malaysia Holdings Hold 1.59 8,290.1 2.00 6.7 25.8 32.5 MRCB-Quill REIT Buy 1.14 1,221.8 1.30 6.6 14.0 20.6 Berjaya Sports Toto Hold 2.45 3,300.2 2.65 6.5 8.2 14.7 MCIL Hold 0.30 497.7 0.33 6.5 11.9 18.4 YTL REIT Buy 1.17 1,994.1 1.40 6.5 19.7 26.1 Star Buy 1.09 804.3 1.29 6.4 18.3 24.8 Magnum Hold 2.09 2,974.0 2.25 6.2 7.7 13.9 Bermaz Auto Buy 2.20 2,555.9 3.00 6.2 36.4 42.6 Tambun Indah Land Hold 0.82 353.1 0.91 6.1 11.7 17.8 Telekom Buy 3.11 11,687.2 3.70 6.0 19.0 25.0 CMMT Hold 1.20 2,448.8 1.15 5.9 (4.2) 1.7 Litrak Hold 4.23 2,233.1 5.10 5.9 20.6 26.5 Al-Salam REIT Hold 0.83 481.4 0.90 5.9 8.4 14.3 Axis REIT Hold 1.46 1,799.2 1.55 5.5 6.2 11.7 Asia File Corporation Hold 2.70 525.8 3.13 5.3 15.9 21.2 IGB REIT Buy 1.74 6,132.8 1.85 5.1 6.3 11.4 Sunway REIT Buy 1.77 5,212.8 1.85 5.1 4.5 9.6 MISC Hold 5.92 26,425.7 6.30 5.1 6.4 11.5 CIMB Hold 5.45 51,043.6 6.50 5.0 19.3 24.2 Mah Sing Hold 1.07 2,597.6 1.31 4.9 22.4 27.3 YTL Power Hold 1.03 8,084.5 0.85 4.9 (17.5) (12.6) Kimlun Corporation Hold 1.37 439.3 1.70 4.8 24.1 28.9 CSC Steel Hold 1.30 480.1 1.48 4.8 13.8 18.6 Gas Malaysia Hold 2.87 3,685.1 3.00 4.7 4.5 9.2 Pavilion REIT Hold 1.78 5,401.4 1.55 4.7 (12.9) (8.3) DiGi.Com Hold 4.15 32,266.3 4.80 4.6 15.7 20.3 RCE Capital Buy 1.52 515.1 1.76 4.6 15.8 20.4 AMMB Holdings Buy 3.75 11,303.2 4.20 4.5 12.0 16.5 Cahya Mata Sarawak Buy 2.35 2,518.5 4.10 4.5 74.5 78.9 Carlsberg Hold 19.30 5,937.1 18.00 4.3 (6.7) (2.4) Heineken Malaysia Hold 21.88 6,609.9 20.20 4.3 (7.7) (3.4) KLCC Prop Hold 8.00 14,442.7 8.00 4.2 - 4.2 BAT (M) Hold 34.78 9,930.7 31.75 4.2 (8.7) (4.5) BIMB Holdings Buy 3.85 6,520.2 4.80 4.1 24.7 28.8 Atlan Holdings Buy 4.49 1,138.9 6.60 4.0 47.0 51.0 Tenaga Hold 14.64 83,128.6 16.00 4.0 9.3 13.3 Source: Maybank KE July 3, 2018 52 2H 2018 Outlook & Lookouts Foreign shareholding of selected stocks under coverage (%) Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Mar-17 Jun-17 Sept-17 Dec-17 Mar-18 YTD chg Malayan Banking 19.6 21.4 22.5 17.4 15.7 19.7 20.8 21.0 20.7 20.#5 (0.2) CIMB Group 40.4 33.8 32.7 27.0 25.8 29.0 31.0# 24.0 27.5 28.8# 1.3 Public Bank 31.2 30.7 31.0 31.3 35.9 36.0 37.2 37.6 38.1 39.5 1.4 Axiata Group 28.0 23.0 21.0 15.2 10.3 10.3 10.4 10.4 10.0 9.4# (0.6) Sime Darby 19.5 17.4 13.9 13.7 12.6 14.8 15.3 15.1 18.8 17.8 (1.0) Petronas Chemicals 9.0 12.0 8.5 9.0 8.0 10.0 10.0 10.0 11.0 11.4 0.4 Maxis * 7.5 7.5 6.7 6.2 5.7 6.1 7.6 6.4 6.4 6.6 0.2 Tenaga Nasional 15.0 27.8 25.8 23.1 27.7 25.3 24.8 24.3 24.1 24.1 0.0 Petronas Gas 3.0 3.0 7.5 8.5 8.8 8.2 8.5# 8.5# 8.4 8.7 0.3 Genting Berhad 45.0 45.0 46.0 39.0 44.0 45.0# 45.0 46.0 45.0 45.0# 0.0 Digi.com 12.6 12.5 15.6 10.1 9.9 10.0 9.6 9.3 9.1 10.1# 1.0 IOI Corporation 17.6 18.0 17.4 16.0 15.0 15.0 16.0 14.0 11.0 11.0 0.0 Hong Leong Bank 8.1 8.1 9.5 8.1 9.1 9.4 11.2 11.9 12.1 12.5 0.4 Sapura Energy 22.0 32.0 28.0 25.0 22.0 22.0 22.0 19.0 20.0 23.0 3.0 KL Kepong 15.0 12.7 12.4 11.5 13.5 13.9 15.0 15.5 16.3 17.4 1.1 Genting Malaysia 38.0 39.0 39.0 39.0 40.0 40.0# 40.0 40.0 40.0 39.0# (1.0) RHB Bank 8.9 8.3 9.5 9.8 9.9 9.8 9.9# 9.8# 9.8 9.6 (0.2) AMMB Holdings * 29.0 32.0 32.0 26.0 25.0 26.0 27.0 25.0 24.0 23.0 (1.0) MISC Bhd 5.5 5.9 7.8 10.8 8.0 8.3 8.6 8.7 9.0 8.9 (0.1) Telekom Malaysia 16.2 13.0 16.7 11.7 12.8 12.3 12.2 11.9 11.3 10.4# (0.9) British American 28.4 28.0 33.2 33.6 36.3 35.9 36.9# 37.5 37.0 36.4 (0.6) Tobacco YTL Corporation 27.0 28.0 29.0 28.0 28.0 27.0 27.0 25.0 25.0 25.0 0.0 UMW Holdings 25.8 16.9 18.8 12.6 10.9 11.2 11.1 11.3# 11.1 11.3 0.2 UEM Sunrise 17.3 14.9 13.1 9.1 8.4 8.7 9.0 9.0 7.9 7.9 0.0 Bumi Armada 18.0 12.3 13.2 12.7 11.0 11.6 10.9 11.4 12.4 12.6 0.2 Gamuda 37.0 40.0 29.0 22.0 22.0 28.0 31.0 33.0# 30.0 31.0 1.0 YTL Power Int'l 8.0 9.0 12.0 12.0 12.0 11.0 11.0 11.0 12.0 11.0 (1.0) S P Setia 1.7 8.8 8.1 7.6 4.9 4.9 4.9 5.5 9.7 10.7 1.0 AirAsia 48.3 50.2 60.8 47.6 43.4 42.8# 43.9 44.5 44.4 43.2 (1.2) IJM Corp 36.6 40.5 40.4 29.7 28.2 28.7 28.6 28.0 27.0 25.9 (1.1) MAHB 11.3 15.0 18.9 19.0 19.0 22.1 33.0 34.7 39.3 44.6 5.3 Dialog Group 16.0 16.0 16.0 15.0 16.0 20.0 20.0 20.0 20.0 20.0 0.0 Genting Plant 9.0 8.0 7.2 7.0 8.0 8.4 8.0 8.0 8.7 8.7 0.0 Sunway Berhad 20.5 14.2 8.1 7.6 7.8 8.3 9.1 10.3 9.5 8.8 (1.3) MMHE 4.6 2.0 1.9 2.2 2.4 2.5 2.5 2.8 2.9 2.5 (0.4) Mah Sing 24.8 23.7 19.2 14.8 15.7 15.8 16.6 16.6 17.0 15.6 (1.4) WCT 10.0 13.0 10.7 12.8 12.2 11.0 10.2# 8.8# 8.6# 9.0# 0.4 Glomac NA 8.4 6.3 5.2 5.2 5.1# 5.5 6.8 6.9 7.0 0.1 Market 24.4 24.0 24.3 22.3 22.3 22.4 23.0 23.3 23.2 24.2 1.0 * Maxis: Excludes Saudi Telecom’s 16.2% effective stake * AMMB: Excludes ANZ’s 23.8% # Maybank: As at 22 Jun 2018 # AirAsia, Glomac, PetChem: As at 30 Apr 2017 # GENM, GENT: As at 25 May 2017 # Axiata, Maxis, Digi, Telekom: As at 31 May 2018 # PetGas: As at 31 May 2017 # CIMB, RHB, BAT, WCT: As at 31 Jul 2017 # RHB, UMWH, GAM, WCT: As at 31 Oct 2017 # WCT: As at 31 Jan 2018 # CIMB, SAPE, WCT: As at 30 Apr 2018, GENT: As at 2 Apr 2018, GENM: As at 7 May 2018 Note: Highlighted/shaded are stocks which have foreign shareholding close to, or above 20% (based on latest data available) Sources: Companies, compiled by Maybank KE July 3, 2018 53 2H 2018 Outlook & Lookouts Maybank KE Equity Research Stock Universe Ticker Company FYE Price Market TP Rec Core Net Profit EPS CAGR PER PER PER ROE Div Yld PBV Px chg 30 Jun Cap CY17A CY18E CY19E CY17A CY18E CY19E 17-19 CY17A CY18E CY19E CY18E CY18E CY18E YTD MYR MYR m MYR |------MYR m ------| |------MYR sen ------| (%) |------(x) ------| (%) (%) (x) (%) Auto BAUTO MK Bermaz Auto * 4 2.20 2,556 3.00 Buy 135.2 196.7 240.8 11.6 16.9 20.7 33.5 19.0 13.0 10.6 38.8 6.2 4.8 0.0 TCM MK Tan Chong * 12 1.80 1,175 2.15 Buy (74.4) 34.8 79.1 (11.4) 5.3 12.1 n.a. n.a. 34.0 14.9 1.2 1.1 0.4 27.7 PECCA MK Pecca Group * 6 0.87 160 1.25 Buy 15.3 17.7 20.5 8.2 9.6 11.1 16.3 10.6 9.1 7.8 10.2 6.9 0.9 (43.9) SIME MK Sime Darby * 6 2.45 16,662 2.45 Hold 894.7 869.3 894.5 13.2 12.8 13.2 - 18.6 19.1 18.6 6.8 3.4 1.3 10.9 Banks MAY MK Maybank 12 9.00 98,377 NR NR 7,340.5 7,718.9 8,154.9 69.7 71.6 75.6 4.1 12.9 12.6 11.9 10.3 6.8 1.3 (8.2) AMM MK AMMB Holdings 3 3.75 11,303 4.20 Buy 1,200.7 1,297.0 1,412.6 40.0 43.1 46.9 8.3 9.4 8.7 8.0 7.6 4.5 0.7 (15.0) BIMB MK BIMB Holdings * 12 3.85 6,520 4.80 Buy 583.8 603.5 628.1 35.7 35.6 37.1 1.9 10.8 10.8 10.4 12.5 4.1 1.4 (12.5) ABMB MK Alliance Bank 3 4.04 6,254 5.00 Buy 529.7 550.1 585.8 34.3 35.5 37.8 5.0 11.8 11.4 10.7 9.7 3.9 1.1 (1.0) CIMB MK CIMB 12 5.45 51,044 6.50 Hold 4,355.2 4,810.7 5,273.4 49.6 63.8 57.2 7.4 11.0 8.5 9.5 9.3 5.0 1.0 (16.7) HLBK MK Hong Leong Bk 6 18.20 37,230 18.75 Hold 2,360.3 2,644.6 2,803.3 114.2 126.7 134.3 8.5 15.9 14.4 13.6 10.6 3.0 1.6 7.1 HLFG MK HL Financial 6 18.00 20,614 20.80 Buy 1,713.7 1,870.1 1,973.9 149.8 163.5 172.6 7.3 12.0 11.0 10.4 10.9 2.6 1.2 0.7 PBK MK Public Bank 12 23.36 91,169 22.70 Hold 5,470.0 5,745.6 6,034.1 142.0 149.0 156.0 4.8 16.5 15.7 15.0 14.2 2.9 2.2 12.4 RHBBANK MK RHB Bank 12 5.46 21,895 5.90 Hold 1,950.1 2,285.0 2,399.1 50.6 57.0 59.8 8.7 10.8 9.6 9.1 9.2 3.3 0.9 9.2 Building Materials AJR MK Ann Joo * 12 1.99 1,066 3.10 Buy 199.8 219.5 223.7 35.7 39.2 39.9 5.7 5.6 5.1 5.0 16.3 9.5 0.8 (48.4) LMC MK Lafarge * 12 3.10 2,634 3.25 Sell (230.0) (83.8) 100.9 (25.3) (9.9) 11.9 n.a. n.a. n.a. 26.1 (3.0) 0.0 1.0 (50.0) Construction / Infra EVSD MK Eversendai 12 1.01 789 1.05 Hold 70.5 69.8 71.9 9.0 8.9 9.2 1.1 11.2 11.3 11.0 7.3 0.7 0.8 16.8 GAM MK Gamuda * 7 3.27 8,070 4.00 Hold 755.4 855.2 878.2 31.1 35.2 36.1 7.8 10.5 9.3 9.1 10.4 3.7 1.0 (34.1) HSL MK HSL * 12 1.40 769 1.40 Hold 46.6 62.5 83.2 8.5 11.4 15.1 33.3 16.5 12.3 9.3 8.0 1.7 1.0 (2.1) IJM MK IJM Corp * 3 1.79 6,499 2.10 Hold 410.3 455.1 504.4 11.3 12.5 13.9 10.8 15.8 14.3 12.9 4.7 3.8 0.7 (41.3) LTK MK Litrak * 3 4.23 2,233 5.10 Hold 225.4 237.7 284.1 42.9 45.3 54.1 12.3 9.9 9.3 7.8 26.6 5.9 2.5 (23.8) CMS MK CMS * 12 2.35 2,519 4.10 Buy 263.2 283.1 310.2 24.5 26.3 28.9 8.6 9.6 8.9 8.1 11.2 4.5 1.0 (39.7) SCGB MK Sunway Con * 12 1.81 2,339 2.30 Hold 137.8 164.5 196.5 10.7 12.7 15.2 19.2 16.9 14.3 11.9 24.9 2.5 3.4 (27.9) KICB MK Kimlun Corp * 12 1.37 439 1.70 Hold 80.1 74.4 80.8 26.2 24.3 26.4 0.4 5.2 5.6 5.2 11.2 4.8 0.6 (38.3) Consumer AEON MK AEON Co * 12 2.27 3,187 2.50 Buy 106.0 115.7 124.4 7.6 8.2 8.8 7.6 29.9 27.7 25.8 5.7 1.8 1.6 29.0 ROTH MK BAT (M) 12 34.78 9,931 31.75 Hold 522.4 423.2 486.5 183.0 148.2 170.4 (3.5) 19.0 23.5 20.4 108.3 4.2 25.4 (13.1) CAB MK Carlsberg 12 19.30 5,937 18.00 Hold 236.2 256.2 275.2 77.2 83.8 90.0 8.0 25.0 23.0 21.4 91.5 4.3 21.0 26.1 HEIM MK Heineken Msia 12 21.88 6,610 20.20 Hold 270.1 287.3 294.1 89.4 95.1 97.3 4.3 24.5 23.0 22.5 76.4 4.3 17.6 15.8 PAD MK Padini Holdings * 6 5.97 3,928 5.00 Hold 160.7 173.7 184.3 24.4 26.4 28.1 7.2 24.5 22.6 21.3 24.4 1.7 5.5 13.1 NESZ MK Nestle * 12 147.50 34,589 105.20 Sell 635.0 683.5 729.4 270.8 291.5 311.1 7.2 54.5 50.6 47.4 106.6 2.0 53.8 42.9 QLG MK QL Resources * 3 6.00 9,735 4.00 Sell 202.5 228.2 251.0 12.5 14.1 15.5 11.4 48.1 42.6 38.8 11.7 0.9 5.1 37.9 SEM MK 7 - Eleven 12 1.48 1,671 1.24 Sell 51.0 47.6 56.4 4.2 3.9 4.6 4.7 35.2 37.9 32.2 48.7 1.3 18.5 (2.3) MNHB MK Mynews Holdings 10 1.60 1,091 1.44 Hold 24.8 29.7 35.5 3.6 4.3 5.2 19.5 44.2 36.9 31.0 11.1 0.7 4.1 11.1 ALN MK Atlan Holdings 2 4.49 1,139 6.60 Buy 42.1 44.4 45.9 16.6 17.5 18.1 4.4 27.0 25.7 24.8 12.6 4.0 3.2 4.7 BFD MK Berjaya Food 4 1.53 576 1.70 Hold 20.2 22.7 27.3 5.4 6.1 7.2 16.1 28.5 25.2 21.2 5.9 2.7 1.5 (17.3) * Shariah compliant, based on Securities Commission’s latest Shariah compliant list effective 25 May 2018; Source: Maybank KE July 3, 2018 54 2H 2018 Outlook & Lookouts … continued Ticker Company FYE Price Market TP Rec Core Net Profit EPS CAGR PER PER PER ROE Div Yld PBV Px chg 30 Jun Cap CY17A CY18E CY19E CY17A CY18E CY19E 17-19 CY17A CY18E CY19E CY18E CY18E CY18E YTD MYR MYR m MYR |------MYR m ------| |------MYR sen ------| (%) |------(x) ------| (%) (%) (x) (%) Gaming BST MK BToto 4 2.45 3,300 2.65 Hold 254.7 263.9 273.1 18.9 19.6 20.3 3.6 13.0 12.5 12.1 34.4 6.5 3.5 9.4 MAG MK Magnum 12 2.09 2,974 2.25 Hold 206.3 221.7 230.4 14.5 15.6 16.2 5.7 14.4 13.4 12.9 8.8 6.2 1.2 20.1 GENT MK Genting Bhd 12 8.41 32,225 12.35 Buy 2,117.6 2,491.3 2,954.5 55.2 58.7 69.1 11.9 15.2 14.3 12.2 7.0 2.1 0.9 (8.6) GENM MK Genting Msia 12 4.88 27,604 5.70 Buy 1,412.0 1,773.4 2,273.1 24.9 31.1 39.9 26.6 19.6 15.7 12.2 8.7 2.3 1.4 (13.3) Glove HART MK Hartalega Hldgs * 3 5.99 19,845 5.20 Sell 400.3 472.9 524.8 12.0 14.3 15.8 14.6 49.8 42.0 37.9 22.1 1.4 9.3 12.2 KRI MK Kossan Rubber * 12 8.44 5,397 9.20 Buy 182.1 198.2 224.4 28.5 31.0 35.1 11.0 29.6 27.2 24.0 15.5 1.5 4.2 4.1 TOPG MK Top Glove * 8 12.14 15,514 12.90 Buy 370.9 475.8 545.4 29.5 37.6 42.8 20.4 41.2 32.3 28.4 20.5 1.5 6.6 51.9 Healthcare IHH MK IHH * 12 6.10 50,292 7.00 Buy 608.3 898.3 1,048.6 7.4 10.9 12.7 31.0 82.4 56.0 48.0 4.0 0.5 2.3 4.1 KPJ MK KPJ Healthcare * 12 1.02 4,299 1.08 Hold 161.9 163.2 170.3 3.7 3.8 4.0 4.0 27.6 26.8 25.5 9.0 1.9 2.4 5.2 Media ASTRO MK Astro Malaysia 1 1.59 8,290 2.00 Hold 676.4 613.4 737.4 13.0 11.7 14.1 4.2 12.3 13.6 11.3 86.5 6.7 8.1 (40.0) MCIL MK MCIL * 3 0.30 498 0.33 Hold 57.3 48.0 55.1 3.4 2.8 3.3 (2.2) 8.7 10.4 9.1 6.1 6.5 0.6 (25.3) MPR MK Media Prima 12 0.48 532 0.50 Hold (153.2) (15.6) 10.2 (13.8) (1.4) 0.9 n.a. n.a. n.a. 53.3 (2.1) 0.0 0.7 (36.8) STAR MK Star * 12 1.09 804 1.29 Buy 60.6 49.6 54.5 8.2 6.7 7.4 (5.0) 13.3 16.3 14.7 5.7 6.4 0.9 (33.9) Non-Banking Financials BURSAFi MK Bursa Malaysia 12 7.35 5,926 7.25 Hold 223.0 233.9 239.3 27.7 29.0 29.7 3.5 26.5 25.3 24.7 27.0 3.7 6.9 8.9 MPHB MK MPHB Capital 12 1.28 915 1.34 Hold 37.6 42.5 42.9 5.3 5.9 6.0 6.4 24.2 21.7 21.3 2.5 0.0 0.5 4.9 ALLZ MK Allianz Malaysia 12 12.70 2,244 15.50 Buy 317.4 317.1 346.9 91.8 92.2 101.4 5.1 13.8 13.8 12.5 9.1 0.9 2.8 (5.9) RCE MK RCE Capital 3 1.52 515 1.76 Buy 85.0 91.3 94.3 25.5 25.9 26.5 2.0 6.0 5.9 5.7 16.2 4.6 1.0 1.3 Oil & Gas AMRB MK Alam Maritim * 12 0.14 129 0.30 Buy (99.6) (25.3) (18.6) (10.8) (2.7) (2.0) n.a. n.a. n.a. n.a. (4.4) 0.0 0.2 (22.2) DLG MK Dialog * 6 3.09 17,422 3.58 Hold 381.1 451.7 509.1 7.1 8.4 9.5 15.4 43.5 36.8 32.7 12.7 1.2 4.7 23.1 ICON MK Icon Offshore * 12 0.13 153 0.22 Buy (22.9) (2.6) 11.7 (1.9) (0.2) 1.0 n.a. n.a. n.a. 13.0 (0.5) 0.0 0.3 (43.5) WSC MK Wah Seong * 12 1.27 981 1.86 Buy 94.2 114.5 115.8 12.2 14.8 15.0 10.9 10.4 8.6 8.5 11.3 0.0 1.0 14.4 MMHE MK MMHE * 12 0.66 1,056 1.00 Buy (61.3) (61.4) 2.7 (3.8) (3.8) 0.2 n.a. n.a. n.a. 330.0 (2.5) 0.0 0.4 (20.0) BAB MK Bumi Armada 12 0.72 4,227 1.02 Buy 219.0 478.7 481.2 3.7 8.2 8.2 48.9 19.5 8.8 8.8 8.0 0.0 0.7 (5.9) YNS MK Yinson * 1 4.58 4,971 4.60 Buy 331.4 298.0 280.4 30.5 27.3 25.6 (8.4) 15.0 16.8 17.9 10.6 2.2 1.8 13.1 BARAKAH MK Barakah * 12 0.13 107 0.09 Hold (161.9) (98.2) 2.8 (18.8) (11.4) 0.3 n.a. n.a. n.a. 43.3 (93.4) 0.0 0.9 (55.2) KNMG MK KNMG * 12 0.18 422 0.25 Hold (8.6) 45.2 78.4 (0.4) 1.9 3.3 n.a. n.a. 9.5 5.5 1.9 0.0 0.2 (20.0) SAPE MK Sapura Energy * 1 0.64 3,835 1.20 Buy (311.9) (285.0) 233.6 (5.2) (4.8) 3.9 n.a. n.a. n.a. 16.3 (3.1) 1.6 0.4 (9.9) VEB MK Velesto Energy * 12 0.28 2,300 0.33 Buy (140.3) 12.3 21.9 (1.7) 0.2 0.3 n.a. n.a. 140.0 93.3 0.5 0.0 0.8 (8.2) Petrochemical PCHEM MK Petronas Chem * 12 8.41 67,280 8.60 Hold 4,192.0 4,117.7 4,708.6 52.4 51.5 58.9 6.0 16.0 16.3 14.3 13.7 3.1 2.2 9.2 TTNP MK Lotte Chemical * 12 4.95 11,251 7.10 Buy 1,091.9 1,304.8 1,518.5 55.0 57.4 66.8 10.2 9.0 8.6 7.4 10.7 3.8 0.9 5.3 * Shariah compliant, based on Securities Commission’s latest Shariah compliant list effective 25 May 2018; Source: Maybank KE July 3, 2018 55 2H 2018 Outlook & Lookouts … continued Ticker Company FYE Price Market TP Rec Core Net Profit EPS CAGR PER PER PER ROE Div Yld PBV Px chg 30 Jun Cap CY17A CY18E CY19E CY17A CY18E CY19E 17-19 CY17A CY18E CY19E CY18E CY18E CY18E YTD MYR MYR m MYR |------MYR m ------| |------MYR sen ------| (%) |------(x) ------| (%) (%) (x) (%) Plantation GENP MK Genting Plant * 12 9.45 7,606 10.40 Buy 335.1 321.5 386.9 41.7 40.0 48.2 7.5 22.7 23.6 19.6 7.1 1.7 1.7 (10.0) IOI MK IOI Corp * 6 4.54 27,723 5.13 Hold 1,087.2 1,154.1 1,191.9 17.3 18.4 19.0 4.7 26.2 24.7 24.0 12.0 3.5 3.0 0.0 KLK MK KL Kepong * 9 24.16 25,730 25.00 Hold 1,053.8 1,056.7 1,181.1 99.0 99.2 110.9 5.9 24.4 24.4 21.8 8.7 2.5 2.1 (3.4) SDPL MK Sime Plantation * 6 5.33 36,248 5.40 Hold 1,176.5 1,197.1 1,220.6 17.3 17.6 18.0 1.9 30.8 30.3 29.7 8.3 1.7 2.5 (11.2) BPLANT MK Boustead Plant * 12 1.25 2,800 1.22 Hold 134.7 71.7 92.7 6.0 3.2 4.1 (17.3) 20.8 39.1 30.5 2.8 3.5 1.1 6.0 SOP MK SOP * 12 3.15 1,798 4.62 Buy 239.3 188.5 239.9 41.9 33.0 42.0 0.1 7.5 9.5 7.5 8.4 2.1 0.8 (19.2) TSH MK TSH Resources * 12 1.15 1,588 1.14 Hold 100.8 82.9 103.0 7.4 6.0 7.5 0.7 15.5 19.2 15.3 5.8 1.2 1.4 (30.3) THP MK TH Plantations * 12 0.66 579 0.89 Hold 46.2 34.7 48.2 5.2 3.9 5.4 1.9 12.6 16.8 12.1 2.5 1.8 0.4 (43.0) TAH MK Ta Ann * 12 2.63 1,169 2.70 Hold 119.5 92.4 119.0 26.9 20.8 26.8 (0.2) 9.8 12.6 9.8 6.4 3.2 0.8 (28.1) Property Dev MSGB MK Mah Sing * 12 1.07 2,598 1.31 Hold 294.9 317.6 317.0 12.2 13.1 13.1 3.6 8.8 8.2 8.2 10.5 4.9 0.9 (26.2) SPSB MK SP Setia * 12 3.10 12,060 3.24 Hold 890.1 570.6 587.2 22.3 13.2 13.6 (21.9) 13.9 23.5 22.8 4.4 2.2 1.1 (22.5) UEMS MK UEM Sunrise * 12 0.71 3,222 1.25 Buy 278.2 222.2 277.9 5.4 4.3 5.4 - 13.1 16.5 13.1 3.1 1.4 0.4 (31.7) SWB MK Sunway Berhad * 12 1.55 7,541 1.99 Buy 566.3 577.1 638.5 11.8 12.0 13.3 6.2 13.1 12.9 11.7 7.0 3.5 0.9 (4.9) ECW MK Ecoworld * 10 1.23 3,622 1.42 Buy 121.1 189.6 371.1 4.2 6.5 12.6 73.9 29.5 19.0 9.8 4.2 0.1 0.8 (10.9) ECWI MK Ecoworld Intl * 10 0.92 2,208 1.11 Buy (55.4) 149.5 421.4 (4.1) 6.2 17.6 n.a. n.a. 14.8 5.2 5.6 0.7 0.8 (10.7) GLMC MK Glomac * 4 0.45 353 0.56 Hold 17.5 20.8 30.0 2.4 2.9 4.2 30.9 18.3 15.5 10.7 0.5 2.8 0.3 (19.8) TILB MK Tambun Indah * 12 0.82 353 0.91 Hold 83.4 54.1 55.2 19.2 12.5 12.7 (18.7) 4.2 6.5 6.4 8.9 6.1 0.6 (20.1) SDPR MK Sime Darby Prop * 6 1.20 8,161 1.53 Buy 639.3 687.9 900.2 9.4 10.1 13.3 18.8 12.8 11.8 9.1 8.2 3.2 1.0 (32.6) REIT AXRB MK Axis REIT * 12 1.46 1,799 1.55 Hold 90.8 111.2 127.5 8.1 9.0 10.3 12.8 18.0 16.2 14.2 7.0 5.5 1.1 (2.7) SALAM MK Al-Salam REIT * 12 0.83 481 0.90 Hold 35.5 34.1 38.7 6.1 5.7 5.9 (1.7) 13.6 14.6 14.1 4.3 5.9 0.7 (17.0) KLCCSS MK KLCC Prop * 12 8.00 14,443 8.00 Hold 720.4 733.3 755.0 39.9 40.6 41.8 2.4 20.1 19.7 19.1 5.4 4.2 1.1 (7.4) MQREIT MK MRCB-Quill REIT 12 1.14 1,222 1.30 Buy 88.0 88.5 88.8 8.2 8.2 8.2 - 13.9 13.9 13.9 6.4 6.6 0.9 (8.8) CMMT MK CMMT 12 1.20 2,449 1.15 Hold 157.9 152.9 153.8 7.8 7.5 7.5 (1.9) 15.4 16.0 16.0 5.7 5.9 0.9 (34.4) SREIT MK Sunway REIT 6 1.77 5,213 1.85 Buy 281.1 295.9 307.8 9.6 10.0 10.4 4.1 18.5 17.7 17.1 7.1 5.1 1.3 (6.8) IGBREIT MK IGB REIT 12 1.74 6,133 1.85 Buy 303.4 308.3 319.4 8.7 8.7 9.0 1.7 20.0 20.0 19.3 8.2 5.1 1.6 (3.3) PREIT MK Pavilion REIT 12 1.78 5,401 1.55 Hold 232.4 262.4 269.7 7.7 8.6 8.9 7.5 23.1 20.7 20.0 6.6 4.7 1.4 10.6 YTLREIT MK YTL REIT 6 1.17 1,994 1.40 Buy 126.2 140.7 152.7 7.9 8.3 9.0 6.8 14.9 14.2 13.1 5.7 6.5 0.8 (8.6) Technology INARI MK Inari Amertron * 6 2.26 7,099 2.80 Buy 254.9 345.3 422.4 7.8 10.4 12.8 27.5 28.8 21.7 17.7 33.7 3.4 7.4 (0.3) VITRO MK ViTrox Corp * 12 5.58 2,624 5.00 Hold 82.0 91.7 124.2 17.4 19.4 26.3 22.9 32.1 28.8 21.2 23.0 0.9 6.6 (10.1) GTB MK Globetronics * 12 2.21 1,474 2.30 Hold 50.0 61.8 85.6 7.5 9.2 12.8 30.6 29.5 24.0 17.3 20.6 2.9 4.9 (21.9) VSI MK V.S. Industries * 7 1.55 2,601 1.95 Buy 166.4 182.9 242.7 8.4 9.3 12.3 20.8 18.4 16.7 12.6 15.5 3.0 2.6 (35.6) MMSV MK MMS Ventures * 12 1.30 208 2.02 Buy 21.1 17.9 24.1 13.1 11.1 15.0 7.0 9.9 11.7 8.7 25.4 3.1 3.0 (25.3) * Shariah compliant, based on Securities Commission’s latest Shariah compliant list effective 25 May 2018; Source: Maybank KE July 3, 2018 56 2H 2018 Outlook & Lookouts … continued Ticker Company FYE Price Market TP Rec Core Net Profit EPS CAGR PER PER PER ROE Div Yld PBV Px chg 30 Jun Cap CY17A CY18E CY19E CY17A CY18E CY19E 17-19 CY17A CY18E CY19E CY18E CY18E CY18E YTD MYR MYR m MYR |------MYR m ------| |------MYR sen ------| (%) |------(x) ------| (%) (%) (x) (%) Telecommunication DIGI MK DiGi.Com * 12 4.15 32,266 4.80 Hold 1,476.7 1,495.2 1,555.6 19.0 19.2 20.0 2.6 21.8 21.6 20.8 288.3 4.6 59.3 (18.6) T MK Telekom * 12 3.11 11,687 3.70 Buy 863.3 638.7 548.0 23.0 17.0 14.6 (20.3) 13.5 18.3 21.3 8.2 6.0 1.5 (50.6) AXIATA MK Axiata * 12 3.80 34,389 4.80 Buy 1,205.0 1,089.5 1,511.1 13.4 12.0 16.7 11.6 28.4 31.7 22.8 4.4 2.7 1.4 (30.8) MAXIS MK Maxis * 12 5.46 42,679 5.90 Hold 2,103.1 1,967.1 1,989.4 27.5 25.7 26.0 (2.8) 19.9 21.2 21.0 26.3 3.7 5.6 (9.2) TDC MK Time dotCom * 12 7.64 4,442 8.50 Hold 175.4 227.2 262.3 30.2 39.1 45.1 22.2 25.3 19.5 16.9 11.3 1.3 2.2 (16.0) Transport AAGB MK AirAsia 12 2.99 9,993 3.70 Buy 1,415.9 1,241.5 1,242.9 42.4 37.1 37.2 (6.3) 7.1 8.1 8.0 17.0 2.7 1.4 (10.7) AAX MK AirAsia X * 12 0.34 1,410 0.47 Buy 85.5 179.1 221.6 2.1 4.3 5.3 58.9 16.2 7.9 6.4 15.2 0.0 1.2 3.0 MAHB MK MAHB 12 8.80 14,601 9.00 Hold 143.2 443.1 527.6 8.6 26.3 30.6 88.6 102.3 33.5 28.8 4.7 1.0 1.6 0.1 WPRTS MK Westports * 12 3.39 11,560 3.70 Hold 675.5 544.4 621.4 19.8 16.0 18.2 (4.1) 17.1 21.2 18.6 22.6 3.5 4.8 (8.4) HALG MK Harbour-Link * 6 0.71 284 0.78 Buy 31.0 37.7 42.5 7.8 9.4 10.6 17.0 9.2 7.6 6.7 9.7 3.0 0.7 (11.3) MISC MK MISC * 12 5.92 26,426 6.30 Hold 2,027.7 1,568.6 1,761.9 45.4 35.1 39.5 (6.7) 13.0 16.9 15.0 4.5 5.1 0.8 (20.2) CLH MK Century Logistics * 12 0.62 244 0.71 Hold 15.3 13.0 13.4 3.9 3.3 3.5 (5.3) 15.9 18.8 17.7 4.0 1.3 0.7 (38.6) Utility TNB MK Tenaga * 12 14.64 83,129 16.00 Hold 6,990.1 6,571.2 6,692.0 123.5 115.8 117.9 (2.3) 11.9 12.6 12.4 10.9 4.0 1.4 (4.1) PTG MK Petronas Gas * 12 17.30 34,232 19.50 Buy 1,777.6 1,861.7 1,894.5 89.8 94.1 95.7 3.2 19.3 18.4 18.1 14.2 3.8 2.6 (1.0) GMB MK Gas Msia * 12 2.87 3,685 3.00 Hold 194.6 173.2 184.1 15.2 13.5 14.3 (3.0) 18.9 21.3 20.1 16.5 4.7 3.5 (0.7) MLK MK Malakoff Corp * 12 0.83 4,060 1.15 Buy 310.0 280.7 359.1 6.2 5.6 7.2 7.8 13.3 14.7 11.5 4.2 6.8 0.6 (15.8) YTLP MK YTL Power 6 1.03 8,085 0.85 Hold 607.9 566.1 626.4 7.8 7.3 8.1 1.6 13.2 14.2 12.8 4.2 4.9 0.6 (20.2) Diversified CSCS MK CSC Steel * 12 1.30 480 1.48 Hold 70.7 46.0 51.9 19.1 12.5 14.1 (14.1) 6.8 10.4 9.2 5.5 4.8 0.6 (15.6) TOMY MK Tomypak Hldgs * 12 0.82 344 0.81 Hold 12.8 11.6 20.3 3.1 2.8 4.9 25.7 26.5 29.3 16.7 5.8 1.3 1.7 (15.9) AF MK Asia File Corp * 3 2.70 526 3.13 Hold 58.3 53.9 56.3 30.1 27.9 29.2 (1.5) 9.0 9.7 9.3 8.9 5.3 0.9 (6.6) MFCB MK Mega First * 12 3.64 1,421 4.20 Buy 131.7 120.0 92.5 34.3 31.3 24.1 (16.2) 10.6 11.6 15.1 9.0 0.5 1.1 (0.8) YTB MK Yong Tai 6 1.47 710 1.71 Buy 16.2 67.9 143.8 2.9 9.2 19.6 161.9 51.6 16.0 7.5 11.0 0.0 1.1 (3.3) WHIT MK White Horse * 12 1.85 423 1.84 Hold 11.9 2.9 11.5 5.2 1.3 5.0 (1.9) 35.6 142.3 37.0 0.4 3.8 0.6 (4.6) * Shariah compliant, based on Securities Commission’s latest Shariah compliant list effective 25 May 2018; Source: Maybank KE July 3, 2018 57 2H 2018 Outlook & Lookouts SECTOR OUTLOOK July 3, 2018 58 2H 2018 Outlook & Lookouts AUTOMOTIVE: Pedal to the metal POSITIVE (unchanged) . We expect Jun-Aug monthly TIV to average above 60k units due to lower car prices from GST zero-rating. Our 2018 TIV forecast of 595k units (+3% YoY) is unchanged; 5M18 TIV of 225k units is down 3.8% YoY. . Auto earnings growth should see further improvement in the sequential quarters (1Q18: +38% YoY), underpinned by sales volume spike in 2H18 and carried forward benefit from MYR’s strength against USD and JPY. . Our Top BUY pick is BAuto. 1H 2018. While 5M18 TIV of 225k (-3.8% YoY) made up only 38% of our full-year projection of 595k units (+3% YoY), we remain optimistic as we believe that car registration would peak from Jun-Aug with a 60k unit monthly average, boosted by lower car prices from GST zero-rating window. The slow start in 2018 are largely attributed to (i) suppressed consumer sentiment from uncertainties surrounding the 14th General Election in May, and (ii) still high auto loan rejection rate 46%. For 5M18, Perodua remains the largest player in the market, gaining 19%/8.3ppts YoY in volume/market share followed by Mazda with 31%/0.6ppts. Despite lackluster demand, auto companies within our coverage reported a 38% YoY growth in core earnings, lifted by MYR’s recovery against USD earlier this year (USDMYR: 2018 YTD avg. of 3.94 vs. 2017 avg. of 4.30) and JPY (USDMYR: 2018 YTD avg. of 3.62 vs. 2017 avg. of 3.83); our earnings forecasts assume average forex of USD1/MYR3.95 and JPY100/MYR3.65. Outlook. Ahead of Hari Raya Aidilfitri, auto players typically engage in price war (via discounts and freebies) to boost sales, sacrificing margins during the period. However, with the announcement of GST zero-rating, price wars during this festive period was not as intense as it took less efforts/incentives to convince buyers to make their purchases. This should translate to slightly better auto margins in 2Q-3Q18 compared to the year before. Coupled with carried forward impact from MYR’s strength in 1H18 (auto players hedge their forex exposure by 3-6 months depending on internal purchasing policy), auto earnings growth should see further improvement in sequential quarters. Sector top pick. BAuto is on track for a 56% earnings growth in FY19E, riding on strong domestic and export sales outlook, especially for its bestseller CX-5 model. Product refreshment pipeline also looks attractive with Mazda6 (3Q18), CX-8 (3Q19) and Skyactiv-X Mazda3 (2H19); Mazda’s flagship model, Mazda3, will be the first model to be equipped with Skyactiv-X technology which boasts an unprecedented level of sharp engine response and torqueful acceleration while raising fuel efficiency and cleaner emissions with the use of compression ignition. The unveiling of Skyactiv-X technology would be followed by adoption by other key models, supporting demand/interest continuity in Mazda cars. At 11x CY19 PER (10x ex-cash), we believe that current valuations are still a good entry point. Besides its growth angle, dividend yield is also attractive at 6.2% for FY19. Automotive sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Bermaz Auto Buy 2.20 2,555.9 3.00 19.0 13.0 10.6 4.8 4.1 38.8 43.4 6.2 Tan Chong Motor Buy 1.80 1,174.8 2.15 n.a. 34.0 14.9 0.4 0.4 1.2 2.7 1.1 Sime Darby Bhd Hold 2.45 16,662.1 2.45 18.6 19.1 18.6 1.3 1.3 6.8 6.8 3.4 Pecca Group Buy 0.87 159.8 1.25 10.6 9.1 7.8 0.9 0.9 10.2 11.3 6.9 Simple average 16.1 18.8 13.0 1.9 1.7 14.3 16.1 4.4 Source: Bloomberg, Maybank KE July 3, 2018 59 2H 2018 Outlook & Lookouts Other sector BUYs. We are also positive on Perodua as it continues to refresh its model line-up (for the third time in 4 years) in end-2018 with the introduction of the all-new SUV model (codename: D38). For this, we expect Pecca to benefits as the sole supplier of leather car seat covers to Perodua. We also like TCM as a turnaround story, after recording two years of losses, lifted by MYR’s strength and new model launches. P/NTA valuation remains undemanding, near its trough of 0.4x; we see limited downside to the stock. Further earnings recovery in the sequential quarters should draw some interest back to this stock. Risks. A weaker MYR was the culprit in 2017’s severe margin pressure on the auto players. For 2018, factors that could blight the outlook for autos are: (i) margin pressure from the reversal of MYR’s strength, and (ii) sharper-than-expected sales decline with the reintroduction of SST which would raise car prices. Total industry volume (TIV) vs GDP Growth Market share breakdown by major brands Yearly TIV (LHS) GDP growth (%) Others Nissan Honda units units Toyota Perodua Proton 700,000 8.0% 700,000 7.0% 600,000 6.0% 600,000 5.0% 500,000 500,000 4.0% 3.0% 400,000 400,000 2.0% 300,000 1.0% 200,000 300,000 0.0% -1.0% 100,000 200,000 -2.0% 0 2007 2010 2001 2002 2003 2004 2005 2006 2008 2009 2011 2012 2013 2014 2015 2016 2017E 2018E 2004 2006 2015 2005 2007 2008 2009 2010 2011 2012 2013 2014 2016 2003 10M17 Source: MAA, Maybank Kim Eng Source: MAA, Maybank Kim Eng USD-MYR daily movement JPY-MYR daily movement USD/MYR Currency JPY/MYR Currency 4.6 4.3 4.1 4.2 3.9 3.7 3.8 3.5 3.3 3.4 3.1 3.0 2.9 2.7 2.6 2.5 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Apr-14 Apr-15 Apr-12 Apr-13 Apr-16 Apr-17 Jan-14 Jan-15 Jan-12 Jan-13 Jan-16 Jan-17 Oct-16 Oct-17 Oct-12 Oct-13 Oct-14 Oct-15 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-16 Oct-17 Oct-12 Oct-13 Oct-14 Oct-15 Source: Bloomberg, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng July 3, 2018 60 2H 2018 Outlook & Lookouts AVIATION: Capacity discipline POSITIVE (unchanged) . Capacity discipline by airlines ensures high levels of load factor and stable yields. . Valuations are at attractive levels as market overpriced in fears of rising fuel prices and policy uncertainty post GE14. . We have a BUY on AirAsia and AirAsia X. 1H 2018. The aviation sector surprised positively in 1Q18 with a core net profit growth of 48% YoY to MYR530m on the back of 11.9% YoY revenue growth. Unit cost declined significantly as companies boosted asset utilization rate to derive scalability benefits. Outlook is better than our initial expectations and the industry seems to be more adept in handling the rising fuel price environment. We have upgraded the sector to POSITIVE on 11 Jun 2018 following our upgraded BUY calls on AirAsia and AirAsia X during the recent results reporting season. MAHB remains a HOLD due to its fair valuations. Outlook has improved. There is strong evidence that passenger traffic growth has tapered to 4-5% growth range, which is lower than initial growth forecast of 6-7%. However, the shortfall has been managed well by the airlines whereby they have deployed matching capacity growth against demand growth. Industry load factor has remained flattish YoY whilst yields are marginally lower YoY for the budget airlines and Malaysian Airlines Berhad (MAB) has managed to raise its yields by +6.6% YoY in 1Q18. Tangible improvements have been derived on unit operating costs, as companies boost asset utilization to derive economies of scale benefits. In short, this is the best level of industry efficiency that we have ever seen. We raised our sector core net profit forecast for a growth of 13.4% YoY in 2018; our original profit growth forecast was only 2%. Stock picks. AirAsia is our top BUY pick with a TP of MYR3.70 (based on 10x 2018 PER — mid-point of the typical airline cycle of 6-15x). The potential of special dividends remains as AirAsia has been monetizing its ancillary assets. We have also raised AirAsia X to BUY with a TP of MYR0.47 (based on 10.9x 2018 PER – 10% discount to peer group average) on its incredible Thai associate performance as well as its operational progress in the Malaysian operations. We are neutral on MAHB as all the positives have been priced in whilst the implications of MAVCOM service level standard has not been quantified. There is a risk that this will bring on negative sentiment on MAHB as some of its airports are overfull. Risks to our call. (i) Fuel price could suddenly spike and change the industry outlook as AirAsia and AirAsia X are both lightly hedged at ~15% in 2018; (ii) MYR weakness against USD would raise operating costs and taper consumer demand; (iii) any material governmental policy change towards the aviation industry. Aviation sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY16A CY17E CY18E CY17E CY18E CY17E CY18E CY18E MAHB Hold 8.80 14,600.9 9.00 102.3 33.5 28.8 1.6 1.5 4.7 5.3 1.0 AirAsia Buy 2.99 9,992.5 3.70 7.1 8.1 8.0 1.4 1.2 17.0 15.1 2.7 AirAsia X Buy 0.34 1,410.4 0.47 16.2 7.9 6.4 1.2 1.0 15.2 15.8 0.0 Simple average 41.9 16.5 14.4 1.4 1.3 12.3 12.1 1.2 Source: Bloomberg, Maybank KE July 3, 2018 61 2H 2018 Outlook & Lookouts Singapore jet kerosene Malaysia air passenger traffic Singapore Jet Kerosene 365-day Moving Average 20% USD / bbl 150 15% 125 10% 100 5% 75 0% 50 25 -5% 0 -10% 2012 2013 2014 2015 2016 2017 2018 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Sources: Bloomberg, Maybank KE Source: MAHB Malaysian carriers’ load factor Malaysian carriers’ yield AirAsia AirAsia X AirAsia AirAsia X MAB Industry Average sen / km MAB Industry 90% 25 85% 80% 20 75% 70% 15 65% 60% 10 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Sources: AirAsia, AirAsia X, MAB, MAVCOM Sources: AirAsia, AirAsia X, MAB, MAVCOM July 3, 2018 62 2H 2018 Outlook & Lookouts BANKING: Earnings momentum to be sustained NEUTRAL (unchanged) . Earnings growth momentum is expected to be sustained for the second consecutive year and we forecast operating profit growth of 6.0% in 2018, while aggregate core net profit growth is projected at a faster 7.7%. . Providing support to growth would be slightly faster loan growth, NIM expansion, cost efficiencies and generally stable credit costs. Downside risk is of slower corporate activity amid government fiscal consolidation. . Our top BUYs for 2018 are AMMB and Alliance Bank. 1H 2018. The 1Q18 results season was generally decent for the banks, most of which reported results that were within our expectations. Although NIMs expanded QoQ courtesy of the 25bps OPR hike in Jan 2018, they were still lower YoY across most banks and overall loan growth remained relatively subdued due largely to the currency effect. As a result, the cumulative net interest income of the banks was flat YoY. Nevertheless, non-interest income (NOII) expanded a decent 10% YoY. Coupled with positive JAWS and lower credit costs, aggregate core net profit for banks in our coverage expanded a respectable 12% YoY. Outlook. Cumulative earnings growth for the banks in our coverage stagnated between 2014 and 2016 before jumping 14.7% YoY in 2017. We expect earnings growth momentum to continue in 2018, albeit at a slower pace. We forecast a 6.0% expansion in aggregate core operating profit in 2018, largely on account of better NOII and slightly higher NIM expansion. Our aggregate core net profit growth forecast is a faster 7.7% YoY, on factoring in lower credit costs. This is all against the backdrop of a domestic economic growth forecast of 5.1% for 2018. For the sector, we expect ROEs to be relatively stable YoY (10.7%/10.5% for 2018/19), with an expansion into 2019 for most banks except Public Bank. Sector top picks. We have a BUY on AMMB, Alliance Bank, HLFG and BIMB. We expect AMMB to see operational improvements as it focuses efforts on growing its SME business, while cost savings from initiatives should start to filter through. Alliance Bank (BUY) meanwhile, should see a pick-up in activity, following a year of consolidation in FYE3/18. HLFG (BUY) is a cheaper proxy to HL Bank while BIMB will continue to see earnings growth supported by both the Islamic Bank and its takaful business. Banking sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Public Bank Hold 23.36 91,169 22.70 16.5 15.7 15.0 2.2 2.1 14.2 13.8 2.9 CIMB Hold 5.45 51,044 6.50 11.0 8.5 9.5 1.0 0.9 9.3 9.7 5.0 Hong Leong Bank Hold 18.20 37,230 18.75 15.9 14.4 13.6 1.6 1.5 10.6 10.6 3.0 RHB Bank Hold 5.46 21,895 5.90 10.8 9.6 9.1 0.9 0.8 9.2 9.1 3.3 Hong Leong Fin Grp Buy 18.00 20,614 20.80 12.0 11.0 10.4 1.2 1.1 10.9 10.6 2.6 AMMB Holdings Buy 3.75 11,303 4.20 9.4 8.7 8.0 0.7 0.6 7.6 7.9 4.5 BIMB Holdings Buy 3.85 6,520 4.80 10.8 10.8 10.4 1.4 1.3 12.5 12.2 4.1 Alliance Bank Malaysia Buy 4.04 6,254 5.00 11.8 11.4 10.7 1.1 1.0 9.7 9.8 3.9 Simple Average 12.3 11.4 11.0 1.3 1.2 10.5 10.5 4.0 Source: Bloomberg, Maybank KE July 3, 2018 63 2H 2018 Outlook & Lookouts Loan growth maintained at 4.5%. We maintain our 2018 industry loan growth forecast of 4.5% for now (+4.1% YoY in 2017) – household loan growth should be stronger YoY but the sustainability of corporate loan growth into 2H18 is uncertain at this stage, given the expected cutback in infrastructure spending. Much as NIMs expanded in 1Q18 aided by the OPR hike, we expect deposits to gradually reprice and NIMs should somewhat normalize in 2H18. We do nevertheless continue to expect overall margins in 2018 to be higher YoY and project an aggregate 3bps YoY expansion in NIM to 2.30%. Risks. The primary risk at this stage is of slower-than-expected economic growth amid the consolidation of the Government’s finances. Meanwhile, the deferment of several large infrastructure projects will have a knock-on effect on corporate loan growth as well as bond market activity. Total industry loan growth (Jan 2007 – Apr 2018) Consumer loan growth by segment (Jan 2010 – Apr 2018) MYR'm YoY chg 30.0% 1,800,000 25.0% 1,600,000 15% 1,400,000 13% 20.0% 1,200,000 11% 15.0% 1,000,000 800,000 9% 10.0% 600,000 7% 5.0% 400,000 5% 0.0% 200,000 0 3% -5.0% Jan-16 Jan-10 Jan-12 Jan-14 Jan-18 Sep-10 Sep-12 Sep-14 Sep-16 May-11 May-13 May-15 May-17 Mortgages Passenger vehicles Jan-09 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Personal Loans Credit Cards Gross Loans (LHS) YoY gwth (RHS) Comm prop Source: BNM, Maybank Kim Eng Source: BNM, Maybank Kim Eng Total industry YoY change in NPLs Quarterly NIM movement (4Q12 – 1Q18) 15.0% 2.80% 10.0% 2.60% 5.0% 0.0% 2.40% -5.0% Jul-13 Apr-12 Apr-17 Jan-11 Jan-16 Oct-14 Jun-11 Jun-16 Sep-12 Sep-17 Mar-15 Feb-13 Feb-18 Aug-15 Dec-13 Nov-11 Nov-16 May-14 -10.0% 2.20% -15.0% -20.0% 2.00% 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17 1Q18 Source: BNM, Maybank Kim Eng Source: Banks, Maybank Kim Eng July 3, 2018 64 2H 2018 Outlook & Lookouts Building Material: A mixed view NEUTRAL (unchanged) . Cancellation of two mega infrastructure projects have limited impact to domestic cement and steel volume as construction have yet to start. . We think LMC could stay in the red until there is significant improvement in ASPs and demand. As for AJR, we project net profit to grow 10% in 2018 on low volume growth and slight margin improvement. . We have a BUY on AJR. 1H 2018. Share prices of LMC and AJR underperformed significantly by 48-50% YTD: (i) LMC - Reported wider losses YoY in 1Q18 on softer cement ASPs and higher fuel costs (i.e. coal, petroleum coke), albeit better sales volume. Additionally, share price also took a hit from the uncertainties surrounding the construction sector post-GE14 in May; (ii) AJR – Posted a weaker 1Q18 earnings YoY (but stronger QoQ) owing to a higher base in 1Q17 where a steep run-up in steel ASPs and low raw material inventory cost resulted in supernormal EBITDA margins. The stock was under heavy selling due to the announcement of import tariff of steel in US in Mar 2018 and also poor sentiment towards construction- related sectors post-GE14 in May 2018. Outlook. Presently, amongst the mega infrastructure projects, only ECRL is contributing to the industry’s cement and steel demand. Both LMC and AJR are suppliers to the ECRL project, but volume contribution to both companies are minimal at <5% of total sales volume. However, the cancellation/deferment of the KL-SG HSR and KVMRT 3 will have an impact to industry’s volume from 2021 onwards when the demand from current mega projects (i.e. KVMRT 2, KVLRT 3) ends and there are no mega projects to replenish the demand. In the near-term, we expect LMC to post wider losses on the persistently keen competition. As for AJR, we expect the company to post stronger YoY 2Q18 earnings (but weaker QoQ on seasonal factors) given the rise in steel bar ASPs YoY (in-line with China’s ASPs) and stable sales volume growth YoY. We also think that the recent tariff on steel import into US would not undermine the steel ASPs. Assuming the affected imports into the US is substituted with local US production, US steel plant utilization will jump to 97% (2017: 74%) and increase global steel production by 2%, which could be countered by China’s ongoing capacity cut. Sector top pick. We have a SELL call on LMC with a TP of MYR3.25 (1.0x FY18E P/B; -3SD to mean) as we do not expect any ASP hikes in 2018 to improve its earnings. As for AJR, we have a BUY call with a TP of MYR3.10 (8x 2018 PER, - 0.5SD to mean) as we think the stock is oversold with its 12M forward PER at 5x, significantly below its historical mean of 10x. Risks. Key downside risks include: (i) a significant drop in sales volume, potentially due to cancellation of various small projects; (ii) a significant drop in ASPs for cement (more intense competition) and steel (supply surplus from higher US production and affected volume (previously sold to US) are rechanneled to this region). Building Material – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Ann Joo Resources Buy 1.99 1,065.8 3.10 5.6 5.1 5.0 0.8 0.7 16.3 15.2 9.5 CSC Steel Hold 1.30 480.1 1.48 6.8 10.4 9.2 0.6 0.6 5.5 0.0 4.8 Lafarge Sell 3.10 2,634.1 3.25 n.a. n.a. 26.1 1.0 1.0 n.a. 3.6 0.0 Simple average 6.2 7.7 13.4 0.8 0.7 6.2 6.3 4.8 Source: Bloomberg, Maybank KE July 3, 2018 65 2H 2018 Outlook & Lookouts Malaysia: Demand vs Capacity (Utilisation rate: 65% in Malaysia: Bulk cement ASPs (-36% from peak in 2015) 2018F) Peninsular M'sia: Demand Peninsular M'sia: Capacity MYR/mt m tonne 320 30 28 28 28 28 28 300 25 24 24 22 22 22 22 280 20 21 20 19 19 20 18 18 260 17 18 17 16 15 240 220 10 200 5 180 0 Jul-17 Apr-11 Apr-18 Jan-17 Sep-14 Sep-16 Sep-17 Mar-15 Mar-18 Aug-08 Dec-17 May-10 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F Source: Companies, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng Steel bar ASP: Malaysia’s ASP at 8% discount to that of Raw material prices: Benign iron ore price (key input to China AJR) but higher coke and scrap prices Bar ASP (China) Bar ASP (Malaysia) Iron ore fine Coke Scrap MYR/mt USD/mt 3,500 450 400 3,000 350 300 2,500 250 200 2,000 150 1,500 100 50 1,000 0 Jul-15 Jul-16 Jul-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Sep-15 Sep-13 Sep-14 Sep-16 Sep-17 Apr-18 Apr-15 Apr-16 Apr-17 Jan-18 Jan-15 Jan-16 Jan-17 Oct-15 Oct-16 Oct-17 May-13 May-14 May-15 May-16 May-17 May-18 Source: MITI, Bloomberg, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng July 3, 2018 66 2H 2018 Outlook & Lookouts Construction: Derailed NEUTRAL (unchanged) . Infrastructure project awards are expected to be muted in 2H18, potentially dragging into 2019 on the back of cancellation of major rail developments and potential review of other mega projects. . Focus will be on the government’s development expenditure allocation under Budget 2019 slated to be tabled on 2 Nov 2018. . CMS remains our only BUY call within the sector. 1H 2018. In a bid to limit further borrowings and contingent liabilities in the form of government guaranteed debt and to control Malaysia’s fiscal deficit position, the new Pakatan Harapan (PH) government has decided to cancel major rail infra projects (KL-SG HSR and KVMRT 3). The ECRL meanwhile will proceed with the cost currently being review. There will be cost review too for KVMRT 2, and we believe, Gemas-JB Double Track and Pan Borneo Highway projects in Sarawak and Sabah. YTD job wins have meanwhile tapered off after the strong replenishment in 2016/2017. Positively however, majority of the construction stocks within our universe reported YoY earnings growth from their construction division over the 1Q18 results season, signaling work progress acceleration. Outlook. With the cancellation of major rail projects and cost review of other mega projects, infrastructure job awards in 2H18 are likely to be muted, potentially dragging into 2019. The tabling of the National Budget 2019 slated for 2 Nov 2018 could be a key event in 2H18 for the sector, keeping an eye out for the gross development expenditure (GDE) allocation. We do not discount the possibility of a lower figure for 2019 (2018E: MYR46b). That said, the new PH government has also stated its intention to develop the 5 poorest States within Malaysia, namely Sabah, Sarawak, Kelantan, Terengganu and Perlis which could potentially focus allocation to public and rural infrastructure development. Sector top pick. With near-term sentiment expected to be negative to neutral at best, our NEUTRAL call on the sector is unchanged pending further developments on the implementation of key infrastructure projects. Also, overhang on toll concession reviews would cap sentiment. Our only BUY call is CMS (TP: MYR4.10) with earnings growth largely supported by contribution from its 25%-owned OM Materials (Sarawak). Its earnings overhang from the State road maintenance concession has been addressed with a 12 months extension till end-June 2019. Risks. (i) Lack of orderbook replenishment opportunities from major infra projects could hamper future earnings growth; (ii) Review of major projects could result in delay in job awards and job start; (iii) Rising raw material and wages (impending minimum wage hike) would cut into margins for jobs already secured; (iv) Toll concession reviews could be earnings and cash flow negative. Construction sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Cahya Mata Sarawak Buy 2.35 2,518.5 4.10 9.6 8.9 8.1 1.0 0.9 11.2 11.5 4.5 Eversendai Hold 1.01 788.8 1.05 11.2 11.3 11.0 0.8 0.8 7.3 7.1 0.7 Gamuda Hold 3.27 8,070.3 4.00 10.5 9.3 9.1 1.0 0.9 10.4 9.8 3.7 HSL Hold 1.40 769.3 1.40 16.5 12.3 9.3 1.0 0.9 8.0 9.7 1.7 IJM Corp Hold 1.79 6,499.3 2.10 15.8 14.3 12.9 0.7 0.6 4.7 5.0 3.8 Kimlun Corporation Hold 1.37 439.3 1.70 5.2 5.6 5.2 0.6 0.6 11.2 11.2 4.8 Litrak Hold 4.23 2,233.1 5.10 9.9 9.3 7.8 2.5 2.1 26.6 27.1 5.9 Sunway Construction Hold 1.81 2,339.0 2.30 16.9 14.3 11.9 3.4 2.8 24.9 24.9 2.5 Simple average 12.0 10.7 9.4 1.4 1.2 13.0 13.3 3.4 Source: Bloomberg, Maybank KE July 3, 2018 67 2H 2018 Outlook & Lookouts Outstanding orderbook (end-Mar 2018) Outstanding orderbook to construction revenue ratio 16.0 25.0 13.7 22.1 14.0 20.0 12.0 9.4 10.0 15.0 8.0 6.9 6.1 5.2 6.0 4.9 10.0 7.4 3.6 5.8 5.8 3.1 5.4 4.7 4.0 2.7 2.5 2.4 4.2 4.0 2.0 1.9 1.9 5.0 3.8 3.5 3.5 3.2 3.0 1.6 1.5 1.2 2.8 2.2 2.1 2.1 2.0 1.0 0.9 0.7 1.5 1.3 1.2 0.1 0.7 0.0 0.0 IJM IJM HSL HSL EKO MDJ KPG EKO MDJ KPG MHB GAM IJGB KICB WCT MHB PINT GAM IJGB KICB WCT PINT EVSD AZRB MUHI PRTA EVSD SCGB AQRS AZRB MUHI PRTA SCGB AQRS ECON MRCB ECON GADG MRCB GADG WENG WENG Source: Companies, Bursa announcements Source: Companies, Bursa announcements *EKO – As of end-Dec 2017; GAM – As of end-Jan 2018; GADG, WENG – As of end-Feb 2018, MUHI – As of end-May 2018 GDE unchanged at MYR46b for 2018 (2017E: MYR46b) Construction sector real output growth (MYR m) Gross GDE (YoY) Construction Macro GDP 60,000 25% 50,000 15% 40,000 5% 30,000 (5%) 20,000 10,000 (15%) 0 (25%) 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2004 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2006 2008 2010 2012 2014 2016 2018F 2018F Source: Economic Reports (Treasury), Maybank KE (chart) Source: Economic Reports (Treasury), Maybank KE (chart) Selected contractors with public infrastructure & amenities experience Government Affordable Company Hospitals Education Institutions Sports complex Airports Housing Projects Ahmad Zaki x x x Ekovest x Eversendai x x x Gabugan AQRS x Gadang x x Gamuda x x Hock Seng Lee x IJM x x x x Kimlun x x Mitrajaya x x x MRCB x x x Mudajaya x x x Muhibbah Eng. x Protasco x x x Sunway Construction x x x WCT x x x Source: Company websites, Maybank KE *List is non-exhaustive July 3, 2018 68 2H 2018 Outlook & Lookouts CONSUMER: Great but not cheap NEUTRAL (unchanged) . The new government’s GE14 manifesto contains measures to address cost of living issues which should be positive for consumer sentiment and spending. . We expect most companies to see continued growth or growth resumption. Ex-BAT, we project +6.6% sector topline growth in 2018 (+5.1% in 2017). . Our Top BUY is AEON. 1H 2018. While still below the neutral region, 1Q18 MIER Consumer Sentiment Index (CSI) improved 8.4 pts QoQ to 91 pts, continuing its uptrend since 4Q15. With the zero-rating of GST effective 1 June 2018, we believe that this would help further lift consumer sentiment. For our basket of consumer-based PLCs (ex- BAT), cumulative 1Q18 topline growth was quicker at 4.7% YoY (2.7% in 1Q17) largely driven by volumes, A&P and partly due to a lower base effect (earlier 2017 Chinese New Year sell-in which happened in 4Q16). MNCs such as NESZ, HEIM and CAB have been able to largely maintain their margins on continuous focus on cost efficiencies. Some retailers (eg. AEON and SEM) have seen 12-month rolling EBIT margins normalizing higher on (i) better product mix, (ii) control of opex and (iii) higher marketing income. Outlook. We project +6.6%/+8.2% growth in topline/bottom-line respectively, for our basket of consumer stocks (ex-BAT) in 2018. With GST being zero-rated effective 1 Jun 2018, we expect a boost to consumer spending in the near term and expect sales to be skewed towards 2Q/3Q18; SST will return from 3Q18. While the sales outlook seems positive, we do note that companies such as NESZ and PAD would look to remain competitive and keep up with A&P investments. Watch-outs in 2H18 also include the review of minimum wage. Among the companies under our coverage, we believe that the retailers could relatively be impacted more. We estimate that every MYR100 increase in monthly wage would negatively impact SEM/Mynews earnings by 22%/6% (using FY19E as a reference; full-year impact). Sector top pick. While the outlook is positive, we maintain our NEUTRAL call on the sector largely on lofty valuations; CY18/19 PER of 27.7x/25.8x, respectively. Our top BUY is AEON. We project +9.1%/+7.4% CY18/19 earnings growth largely on the back of a pick-up in topline growth and better cost controls. Elsewhere, AEON’s earnings are still largely supported by the Property Management Services segment’s resilient rental income. Consumer sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E AEON Co Buy 2.27 3,187.1 2.50 29.9 27.7 25.8 1.6 1.5 5.7 6.0 1.8 BAT (M) Hold 34.78 9,930.7 31.75 19.0 23.5 20.4 25.4 24.8 108.3 121.4 4.2 Berjaya Food Hold 1.53 576.0 1.70 28.5 25.2 21.2 1.5 1.5 5.9 7.0 2.7 Carlsberg Hold 19.30 5,937.1 18.00 25.0 23.0 21.4 21.0 20.1 91.5 93.7 4.3 Heineken Malaysia Hold 21.88 6,609.9 20.20 24.5 23.0 22.5 17.6 17.0 76.4 75.6 4.3 Nestle Sell 147.50 34,588.8 105.20 54.5 50.6 47.4 53.8 53.8 106.6 113.5 2.0 Padini Holdings Hold 5.97 3,927.7 5.00 24.5 22.6 21.3 5.5 4.7 24.4 22.1 1.7 QL Resources Sell 6.00 9,734.6 4.00 48.1 42.6 38.8 5.1 4.7 11.7 11.9 0.9 Mynews Holdings Hold 1.60 1,091.4 1.44 44.2 36.9 31.0 4.1 3.7 11.1 12.1 0.7 7 - Eleven Sell 1.48 1,670.8 1.24 35.2 37.9 32.2 18.5 14.8 48.7 44.8 1.3 Atlan Holdings Buy 4.49 1,138.9 6.60 27.0 25.7 24.8 3.2 3.6 12.6 14.5 4.0 Simple average 32.8 30.8 27.9 14.3 13.7 45.7 47.5 2.5 Source: Bloomberg, Maybank KE July 3, 2018 69 2H 2018 Outlook & Lookouts Other stock picks. We also have a BUY call on Atlan for its assets which are deep in value and its resilient duty free business. Among our HOLD calls, on a relative basis, our preferred stocks include BAT, CAB and HEIM. Upside risks for the sin- stocks include better enforcement efforts by the authorities, in line with the new government’s GE14 manifesto. Of note that illicit domestic market share for tobacco remains high in 1Q18 at 63%. Risks. (i) A spike in raw material prices, (ii) regulatory risks for the tobacco and brewery sectors. Consumer Sentiment & Business Condition Index, MYRUSD CPI growth MIERCSI MIERBSI MYRUSD (RHS) 6.0 130 0.34 5.4 5.0 120 0.32 110 4.0 0.30 3.7 100 0.28 3.0 3.2 3.1 90 0.26 80 2.0 2.0 2.1 2.1 2.1 2.0 70 0.24 1.7 1.6 1.5 60 0.22 1.0 0.6 50 0.20 0.0 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jun-09 Jun-12 Jun-15 Sep-17 Sep-08 Sep-11 Sep-14 Mar-10 Mar-07 Mar-13 Mar-16 Dec-13 Dec-07 Dec-10 Dec-16 2018F Source: MIER, Bloomberg Source: Department of Statistics, Maybank KE Bloomberg’s Commodity Index & MYRUSD FBMKLCI Index & KLCSU Index (RHS) Bloomberg Commodity Index (LHS) FBMKLCI KLCSU (RHS) MYRUSD (RHS) 260 0.38 2100 800 1900 210 0.33 700 1700 600 1500 500 160 0.28 1300 400 1100 110 0.23 900 300 700 200 60 0.18 500 100 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-01 Jan-04 Jan-09 Jan-14 Jan-00 Jan-02 Jan-03 Jan-05 Jan-06 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12 Jan-13 Jan-15 Jan-16 Jan-17 Jan-18 Source: Bloomberg Source: Bloomberg Rolling 12M EBIT Margins (AEON, Mynews, SEM) Illegal Cigarette Market Share Aeon Mynews (OCT YE) 7-Eleven MY Illegal volume share (without fake tax stamps) 11% Illegal volume share (with fake tax stamps %) 10% 9% 65% 60.0% 63.0%63.0% 8% 60% 7% 55% 1Q17: 58.9% 6% 50% 2Q17: 58.1% 5% 45% 3Q17: 57.3% 4% 40% 4Q17: 59.0% 3% 35% 2% 30% 1Q17 2Q17 3Q17 4Q17 1Q18 1Q14 2Q15 3Q17 4Q13 2Q14 3Q14 4Q14 1Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 4Q17 1Q18 Oct-16 Dec-16 Nov-15 May-16 Source: Company data, Maybank KE Source: TRACK R3M, Company July 3, 2018 70 2H 2018 Outlook & Lookouts GAMING: Doubling down on casinos Casinos: POSITIVE, NFOs: NEUTRAL (both unchanged) . We are POSITIVE on casinos on added capacity at Resorts World Genting and more Chinese and Malaysian gamblers at Resorts World Sentosa. . That said, we are NEUTRAL on NFOs due to competition from illegal sports bookkeepers during the FIFA World Cup and narrowing upside potential. . Our Top BUYs for 2H18 are GENT and GENM. MAG and BST may be BUYs if the GST’s zero-rating is not offset by the SST or a higher gaming tax rate. T’was a good 1H 2018. For the casinos, we estimate that (i) GENM’s Resorts World Genting (RWG) 1Q18 VIP GGR surged 25% YoY while its mass market GGR grew 15% YoY due to added gaming capacity (Fig 1); and (ii) GENS’s Resorts World Sentosa (RWS) 1Q18 VIP volume surged 35% YoY due to more Chinese VIPs (Fig 2) while its mass market GGR grew 10% YoY due to the recovering MYR/SGD exchange rate (Fig 3). Thanks to the above, GENT’s 1Q18 core EPS beat our expectations at 27% of our full year estimate. For the NFOs, MAG’s 1Q18 and BST’s 4QFY4/18 gross NFO revenue/draw both grew 2% YoY thanks to recovering consumer sentiment and more jackpot sales. Game innovation wise, MAG replaced 4D Powerball with Magnum Life on 25 Apr 2018 and DaMaCai (Unlisted) replaced DMC Jackpot with 3+3D Bonus on 28 Apr 2018. Regulatory wise, all else being equal, the GST zero-rating from 1 Jun 2018 will raise our GENM/MAG/BST EPS estimates by 10% and GENT EPS estimate by 5% on a full year basis. More +ve on casinos. For the casinos, we expect 2H18 to be seasonally better HoH. GENM’s RWG will continue to benefit from added gaming capacity coupled with more visitor arrivals drawn by the opening of 20th Century Fox World in 4Q18/1Q19. In 2H18, the Gambling Addiction and IR Implementations bills are likely to be passed in the Japanese Diet paving the way for RFPs for integrated resorts (IR) in Japan. GENS has expressed interest in securing a Japanese IR license. For the NFOs, the recovery in MAG’s and BST’s gross NFO revenue/draw may be stalled by the 2018 FIFA World Cup. BST may also face more competition from DaMaCai’s 3+3D Bonus which targets BST’s 6D (~10% of gross NFO revenue). One regulatory development to watch out for in 2H18 is the implementation of the Sales & Services Tax (SST) on 1 Sep 2018. We do not discount the possibility that the gaming operators may be subject to the SST going forward as the government seeks to narrow the tax revenue shortfall from zero-rating the GST. Prefer GENT and GENM. We recently downgraded the NFOs, MAG and BST to HOLD for narrowing upside potential. For MAG, the market appears to have discounted its MYR476.5m (MYR0.33/shr) tax penalty entirely even though a final verdict on it has yet to be reached. Our top BUY pick is GENT as it is trading at a whopping 40% discount to SOP/sh or nearly double the 20-year average. We continue to prefer GENT as a cheaper proxy to GENM and GENS. GENT’s share price also ought to react positively should GENS win a Japanese IR license. We also like GENM as we forecast 3-year forward EBITDA CAGR of 19% thanks to new gaming capacity added by the MYR10.4b Genting Integrated Tourism Plan. Gaming sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Genting Buy 8.41 32,224.7 12.35 15.2 14.3 12.2 0.9 0.9 7.0 7.8 2.1 Genting Malaysia Buy 4.88 27,604.3 5.70 19.6 15.7 12.2 1.4 1.3 8.7 10.4 2.3 Berjaya Sports Toto Hold 2.45 3,300.2 2.65 13.0 12.5 12.1 3.5 3.4 34.4 33.1 6.5 Magnum Hold 2.09 2,974.0 2.25 14.4 13.4 12.9 1.2 1.1 8.8 9.0 6.2 Simple average 15.6 14.0 12.3 1.7 1.7 14.7 15.1 4.3 Source: Bloomberg, Maybank KE July 3, 2018 71 2H 2018 Outlook & Lookouts MAG and BST may be BUYs if GST’s zero-rating is not offset by the SST or a higher gaming tax rate. We take the view that the zero-rating of the GST will be substituted with imposition of the SST and/or gaming tax rate hikes that will neutralize each other and leave our BST and MAG earnings estimates and TPs unchanged. That said, should the SST be not imposed on the gaming operators come 1 Sep 2018 and gaming tax rates are not hiked, our TPs for MAG and BST will be raised to MYR2.50 and MYR2.91 respectively, which would imply a BUY on MAG and BST based on their current share price levels. In that scenario, our TPs for GENM and GENT will also be raised to MYR6.15 and MYR12.55 respectively, further re-affirming our BUY calls on them. Risks. (i) GENM – further delays in the opening of 20th Century Fox World (ii) GENS – weakening of the MYR/SGD exchange rate may dampen RWS mass market GGR (iii) MAG – failure to quash or even discount the MYR476.5m (MYR0.33/sh) tax penalty that it was served (iv) MAG and BST – continued intense competition from illegal NFOs (v) GENM, GENT, MAG and BST – SST imposition and/or gaming tax rate hike, which more than offset the GST zero-rating. Estimated RWG VIP and mass market GGR (MYRm) Estimated Singapore VIP volume (SGDb) RWG VIP GGR RWG MM GGR Resorts World Sentosa Marina Bay Sands 1,800.0 50.0 1,600.0 45.0 1,400.0 40.0 1,200.0 35.0 30.0 1,000.0 25.0 800.0 20.0 600.0 15.0 400.0 10.0 200.0 5.0 - - 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 3Q12 2Q15 3Q15 4Q15 1Q16 2Q16 1Q10 3Q10 1Q11 3Q11 1Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 1Q15 Source: GENM, Maybank Kim Eng Source: Las Vegas Sands, GENS, Maybank Kim Eng RWS mass market share vs. MYR/SGD exchange rate Estimated gross NFO industry revenue (MYRb) MYRSGD exchange rate (LHS) 12.0 0.50 50% RWS share of mass market GGR (RHS) 10.0 8.8 9.0 9.1 9.0 8.9 8.9 0.45 8.3 8.6 8.6 8.5 8.3 8.3 7.9 45% 8.0 7.4 6.9 6.7 6.8 0.40 6.7 6.5 6.3 6.0 0.35 40% 4.0 0.30 35% 2.0 0.25 0.20 30% - 2012 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014 2015 2016 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 2017E Source: Las Vegas Sands, GENS, Maybank Kim Eng Source: BST, MAG, Pan Malaysian Pools, Maybank Kim Eng July 3, 2018 72 2H 2018 Outlook & Lookouts GLOVES: Safe haven NEUTRAL (unchanged) . We project EPS growth of 19% in 2018 on solid global demand growth and capacity expansion. Additionally, supply-demand dynamics is balanced, allowing higher costs to be passed through. . Given the sector’s defensive and apolitical earnings profile, we think the present high valuation would stay in 2H18 amid the market volatility. . Our BUYs in the sector are Top Glove and Kossan. 1H 2018. Global glove demand growth is solid in 2018 YTD and the gradual resumption of supply from China since end-2017 did not result in supply surplus. In fact, Malaysian glove players’ plant utilization rates are max-ed out at 85-92% currently. Additionally, nitrile glove ASPs were also raised by as high as 6-9% in 2018 YTD as manufacturers pass on their higher costs (NBR, gas, foreign worker levy), offsetting the weaker USD/MYR. Latex glove ASPs are stable in 2018 YTD as the lower latex cost offset the higher opex costs and weaker USD/MYR. Despite the MYR’s strength against the USD in Jan-Apr 2018 (+3%) and flattish QoQ combined core net profit in 1Q18 (+2% QoQ, +23% YoY), the sector’s weighted average 12M forward PER has expanded to 33x (from 30x in end-2017). We attribute the multiple expansion to fund flows, liquidity-enhancing corporate exercises (i.e. bonus issues, share split) and Hartalega and Top Glove’s inclusion into key indices (i.e. FBM KLCI, MSCI Global Standard). Outlook. We think the present high PER valuation could stay in 2H18 supported by capacity expansion-led earnings growth. For 2Q18, we think margins could be sequentially flattish to slightly better as the recent weakening in the MYR against USD (+3% from Mar 2018) could offset the higher NBR cost in USD. Additionally, we also expect margins to be stable in 2H18 given the present balanced demand- supply dynamics. We expect combined core net profit of the three glove stocks under our coverage to expand 19% in 2018. Sector top pick. We have BUYs on: (i) Top Glove – We like Top Glove for its acquisition-led earnings growth, rising EBITDA margin/ROE, balanced product mix and increasing market dominance. Our TP is MYR12.90, based on 30x 2019 PER, being a 10% discount to our target PER for Hartalega; (ii) Kossan – We like Kossan for its near-term capacity-led earnings growth and relatively undemanding 12M forward PER of 25x (sector’s weighted average: 33x). Our TP is MYR9.20, based on 26x 2019 PER, being a 20% discount to our target PER for Hartalega. Risks. Key downside risks include: (i) a sharp downturn in USD/MYR or sharp upturn in rubber prices would adversely affect glove players’ earnings as glove ASPs can only be adjusted on a gradual basis; (ii) supply overhang risk in 2019, especially in 2H, when bulk of the new capacity commences; (iii) a steep minimum wage hike would adversely affect earnings as ASP will only be raised gradually. Labour accounts for 10-12% of the glove-makers’ total costs. Gloves sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Hartalega Hldgs Sell 5.99 19,844.9 5.20 49.8 42.0 37.9 9.3 8.4 22.1 22.3 1.4 Top glove Buy 12.14 15,514.0 12.90 41.2 32.3 28.4 6.6 6.0 20.5 21.0 1.5 Kossan Rubber Buy 8.44 5,397.1 9.20 29.6 27.2 24.0 4.2 3.8 15.5 15.9 1.5 Simple average 40.2 33.8 30.1 6.7 6.1 19.4 19.8 1.5 Source: Bloomberg, Maybank KE July 3, 2018 73 2H 2018 Outlook & Lookouts New capacity: Stable addition in 2018 but a jump in 2019 Malaysia capacity vs. global demand: Capacity growth to outpace global demand growth in 2019 Riverstone Supermax Kossan Top Glove Hartalega Malaysia capacity: Top 4 + Riverstone Global demand b pieces b pieces +6% 25 220 +6% 2017: +7.6b pcs (-23% YoY) 200 20 2018: +11.4b pcs (+49% YoY) 180 +16% 2019: +22.9b pcs (+102% YoY) 160 +9% 15 140 120 10 100 80 5 60 40 0 20 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 0 2011 2012 2013 2014 2015 2016 2017 2018F 2019F -5 Source: Maybank Kim Eng, Companies Source: Maybank Kim Eng, Companies US: Top 4 suppliers of gloves (China’s export to US Rubber prices: Latex is benign while NBR is on an upward increased by 13% in 2017) trend 2015 2016 2017 Latex (LHS) NBR (LHS) Butadiene (RHS) b pcs USD/kg USD/kg 90 2.00 3.50 77 1.80 80 3.00 68 68 1.60 70 1.40 2.50 60 52 1.20 2.00 1.00 50 43 43 0.80 1.50 40 0.60 1.00 30 0.40 0.50 20 14 14 14 0.20 10 5 5 6 0.00 0.00 0 Jul-17 Jul-14 Jul-15 Jul-16 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Sep-16 Sep-14 Sep-15 Sep-17 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Nov-14 Nov-15 Nov-16 Nov-17 May-15 May-16 May-17 May-18 China Malaysia Thailand Indonesia May-14 Source: MREPC, GTA Source: Bloomberg, Maybank Kim Eng Glove sector’s quarterly net profit vs. USD/MYR: Earnings ASPs: On a gradual rise since Nov 2017 to reflect the growth in 2017-1Q18 despite lower USD/MYR weaker USD/MYR and higher cost Powdered latex Powder free latex Nitrile Sector net profit USDMYR USD '000 MYRm USD/MYR pieces 320 5.00 35 300 4.50 280 30 260 4.00 240 3.50 25 220 3.00 200 20 180 2.50 160 2.00 140 15 120 1.50 100 1.00 10 Jul-16 Jul-17 Jul-14 Jul-15 Jul-16 Jul-17 Apr-17 Jan-16 Jan-17 Jan-18 Oct-12 Jun-12 Sep-16 Sep-13 Sep-15 Sep-17 Mar-13 Mar-14 Mar-15 Aug-12 Nov-16 Nov-17 Apr-17 Apr-14 Apr-15 Apr-16 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 May-16 May-18 Oct-14 Oct-15 Oct-16 Oct-17 Note: Sector net profit is derived from Top Glove, Hartalega, Kossan and Source: Bloomberg, Maybank Kim Eng Supermax Source: Maybank Kim Eng July 3, 2018 74 2H 2018 Outlook & Lookouts Media: Awaiting a 2H kick-off NEUTRAL (unchanged) . The media industry’s focus on cost management is expected to continue in an attempt to combat declining adex revenue. . Adex outlook could improve driven by upcoming adex-friendly events and improving consumer sentiment. . Our sole BUY in the sector is STAR. 1H 2018 could have been better. 5M18 total gross adex fell 8% YoY. Amongst the major mediums, FTA TV gross adex was flat YoY while both newspaper and radio gross adex fell 16% YoY and 5% YoY respectively. Newspapers have borne the brunt of the slowdown in ad spend given its declining circulation compared with FTA TV and radio’s larger audience reach. With still subdued consumer sentiment coupled with rising operating costs, the media sector has undergone extensive cost management efforts (i.e. VSS, printing plant shut downs, reduction in newsprint consumption, etc) in the past 4 years to insulate their earnings from further decline in adex revenue. Hence, the substantial operating cost savings led to better 1Q18 earnings YoY for MPR, STAR and MCIL. ASTRO continued to churn Pay-TV subscribers and its ARPU continued to slide (1QFY1/19: MYR99.6 or – MYR1.2 YoY) but lower content cost led to stable 1QFY1/19 earnings YoY. Expect a little more spring from Jun 2018. Our 2018 total gross adex growth forecast of +5% YoY, which is premised on ~1.0x real GDP growth, is cautiously maintained. We expect consumer sentiment to rebound during the 3-month GST- SST tax holiday (1 Jun-1 Sep) and are hopeful for a pick-up in ad spend driven by adex-friendly events like FIFA World Cup (14 Jun-15 Jul) and Hari Raya Aidilfitri (15 Jun). That said, we are less sanguine on ASTRO. Going into 2QFY1/19, we expect its TV subscription revenue and adex to grow QoQ thanks to the FIFA World Cup. But, we expect 2QFY1/19 earnings to be lower QoQ due to the high 2018 World Cup content cost. STAR is sector top pick. We are maintaining our NEUTRAL call on the sector with a sole BUY on STAR (TP: MYR1.29) given its attractive valuations (trading at 0.9x FY18E P/B) and 6.4% dividend yield. We also do not discount the possibility that STAR may be a take-over target due to its low valuation. We have HOLD calls on all other media companies under our coverage (ASTRO, MPR, MCIL). While ASTRO is not invulnerable, it is the most resilient given that ~75% of its group revenue is derived from its stable subscriber base versus ~15% from adex revenues. We also see limited downside risk to MPR and MCIL as their share prices are trading below their BVPS’s of 0.7x CY18E P/BV and 0.6x CY18E P/B respectively. Media sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18A CY19E CY18E Astro Malaysia Holdings Hold 1.59 8,290.1 2.00 12.3 13.6 11.3 8.1 95.4 86.5 91.8 6.7 Star Buy 1.09 804.3 1.29 13.3 16.3 14.7 0.9 0.9 5.7 6.2 6.4 Media Prima Hold 0.48 532.4 0.50 n.a. n.a. 53.3 0.7 0.7 (2.1) 1.3 0.0 MCIL Hold 0.30 497.7 0.33 8.7 10.4 9.1 0.6 0.6 6.1 6.8 6.5 Simple average 11.4 13.4 22.1 2.6 24.4 24.1 26.5 4.9 Source: Bloomberg, Maybank KE July 3, 2018 75 2H 2018 Outlook & Lookouts Risks. In the near-term, key downside risks to our earnings forecasts are: (i) lower-than-expected adex growth from adex-friendly events, (ii) continuous rise in newsprint spot prices (spot price: c.USD600/tonne, MKE 2018 assumption: USD530-580/tonne), and (iii) a stronger USD/MYR exchange (spot: MYR4.00/USD1.00, MKE 2018 assumption: MYR4.00/USD1.00). YTD gross adex by medium (MYRm) 5M18 5M17 % YoY FTA TV 1,100.5 1,080.8 1.8 Newspapers 1,000.4 1,193.6 (16.2) Magazines 23.9 33.5 (28.7) Radio 176.0 184.3 (4.5) Cinema 68.5 44.8 52.9 In-Store Media 36.8 63.6 (42.2) Total 2,406.0 2,600.6 (7.5) Source: Nielsen Media Research Gross FTA TV, newspaper and total adex change YoY Total gross adex (MYRm) Television Newspapers Total adex 900.0 60.0% 50.0% 800.0 40.0% 30.0% 700.0 20.0% 600.0 10.0% 0.0% 500.0 -10.0% -20.0% 400.0 -30.0% -40.0% 300.0 Jul-10 Jul-15 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Apr-09 Apr-14 Jan-08 Jan-13 Jan-18 Oct-11 Oct-16 Jun-08 Jun-13 Sep-09 Sep-14 Mar-12 Mar-17 Feb-10 Feb-15 Aug-12 Aug-17 Dec-10 Dec-15 Nov-08 Nov-13 Jan-10 Jan-11 Jan-08 Jan-09 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 May-16 May-11 Source: Nielsen Media Research Source: Nielsen Media Research ASTRO number of viewers (Pay-TV and NJOI) (‘000) ASTRO ARPU (MYR) 6,000 102.0 99.9 99.9 99.6 99.3 99.3 99.3 99.2 100.4 100.8 100.8 100.7 99.1 99.0 99.0 99.0 100.0 98.5 5,000 98.0 97.1 98.0 96.0 4,000 95.6 94.9 96.0 94.2 3,000 93.2 94.0 92.3 91.8 2,000 92.0 90.3 89.0 1,000 90.0 88.0 - 4QFY12 2QFY13 4QFY13 2QFY14 4QFY14 2QFY15 4QFY15 2QFY16 4QFY16 2QFY17 4QFY17 2QFY18 4QFY18 2QFY17 2QFY13 4QFY13 2QFY14 4QFY14 2QFY15 4QFY15 2QFY16 4QFY16 4QFY17 2QFY18 4QFY18 4QFY12 Source: ASTRO Source: ASTRO July 3, 2018 76 2H 2018 Outlook & Lookouts OIL & GAS: Recovering yet volatile POSITIVE (unchanged) . The sector’s fundamentals have improved and are on a cyclical recovery, albeit protracted, on the back of rising oil price. . Our crude oil price estimate for 2018-19 is USD70-75/bbl. That said, volatility will persist in the market. OPEC-non OPEC members’ crude oil supply management and geopolitics are KEY to oil price direction. . Our Top BUY for 2H18 is Yinson, for it offers growth visibility, steady financials and sound management/ business sense. 1H 2018. Crude oil price (dated Brent) has averaged USD71/bbl YTD, ranging from USD63/bbl-USD80/bbl, in line with our USD70/bbl (average) estimate for 2018. The sector’s fundamentals have improved. Global net crude demand-supply gap is narrowing, while global crude oil inventories are falling and offshore storage is on the downtrend. These events have trumped the potential impact of increased shale supply. In addition, the strong compliance rate on output cut from OPEC (1.2m bpd)-non OPEC (0.6m bpd) key oil producers, totaling 1.8m bpd has also played a role in the recovery in oil price since Nov 2016. Outlook. Overall, we sense a rise in confidence. The higher capex trend globally is a new positive. We expect more projects to be sanctioned. In Malaysia, PETRONAS is committed to spend a higher MYR55m (+22% YoY) in capex for 2018. Its RAPID PIC is near completion and is scheduled to meet the 2019 delivery timeline. The Integrated Logistics Control Tower OSV contracts will be out soon. Our crude oil price estimate for 2018-19 is USD70-75/bbl respectively. That said, volatility will persist in the market, with two main events to watch out for. Firstly, the latest decision by OPEC and its Russia-led non OPEC oil producing allies (on 22 June 2018) to tackle over-compliance, relax production cut and moderately lift output from Jul 2018 is vague. It lacks clarity over: (i) quantum and (ii) timeline. However, the target to return to 100% compliance is better than initial expectation, which would see oil price supported at a floor price of USD70/bbl. On the other hand, heightened geopolitical supply risk (further instability in Middle East) could trigger further volatility in the oil market. Sector top pick. We continue to like O&G players with resilient earnings/ balance sheet profiles and niche expertise. Yinson is our fundamental key BUY pick. We like Yinson for its growth visibility, business sense and its constant ability to add value to shareholders. Our estimates have not incorporated the conservative impact from FEP FPSO (as we await contract clarity), which could add MYR80- 120m p.a. in net profit and 30-52sen in TP, based on firm charter basis. Oil and gas sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Dialog Hold 3.09 17,422.4 3.58 43.5 36.8 32.7 4.7 4.3 12.7 13.2 1.2 Yinson Buy 4.58 4,970.9 4.60 15.0 16.8 17.9 1.8 1.7 10.6 9.4 2.2 Bumi Armada Buy 0.72 4,227.1 1.02 19.5 8.8 8.8 0.7 0.7 8.0 7.5 0.0 Sapura Energy Buy 0.64 3,835.0 1.20 n.a. n.a. 16.3 0.4 0.4 (3.1) 2.5 1.6 Velesto Energy Buy 0.28 2,300.4 0.33 n.a. 140.0 93.3 0.8 0.8 0.5 0.8 0.0 MMHE Buy 0.66 1,056.0 1.00 n.a. n.a. 330.0 0.4 0.4 (2.5) 0.1 0.0 Wah Seong Buy 1.27 981.1 1.86 10.4 8.6 8.5 1.0 0.9 11.3 10.3 0.0 KNM Group Hold 0.18 422.3 0.25 n.a. 9.5 5.5 0.2 0.2 1.9 3.2 0.0 Icon Offshore Buy 0.13 153.0 0.22 n.a. n.a. 13.0 0.3 0.3 (0.5) 2.2 0.0 Alam Maritim Buy 0.14 129.4 0.30 n.a. n.a. n.a. 0.2 0.2 (4.4) (3.4) 0.0 Barakah Offshore Hold 0.13 107.4 0.09 n.a. n.a. 43.3 0.9 0.9 (93.4) 2.6 0.0 Simple average 22.1 36.7 56.9 1.0 1.0 (5.4) 4.4 0.4 Source: Bloomberg, Maybank KE July 3, 2018 77 2H 2018 Outlook & Lookouts Other sector BUYs. Similar to Yinson, we are also positive on Bumi Armada, on improving risk-reward opportunity, as it rides on the booming FPSO tenders and rising oil price / sentiment. We posit there is a possibility of Bumi Armada winning one new FPSO job in 2018, a positive. SAPE is one of our other key pick, as a direct proxy, beta play to the cyclical uptrend. Monetising its gas assets is a catalyst not fully priced in yet. Risks. (i) Over-relaxation of the global supply commitment by OPEC-non OPEC pact would result in persistent volatility in oil prices and affect the recovery in tenders/projects pipeline. Discipline and compliance are key; (ii) Cost overruns and delays from poor execution. Malaysia: Oil-related Government revenue Malaysia: Oil-related Government revenue breakdown 80,000 45 39.7 40.3 Petronas Dividend Petroleum Income Tax (PIT) 36.8 37.0 35.4 35.8 Petroleum Royalty Crude Oil Export Duty 70,000 33.7 40 b 80 Income From Exploration Of Oil & Gas in MTJA 31.2 30.0 35 R 60,000 Y 30 M 50,000 20.9 25 60 40,000 18.8 14.6 14.9 15.7 20 30,000 24.2 27.2 27.7 33.9 29.8 27.0 15 40 18.7 20.5 11.6 2 0 8 9 5 1 5 6 6 5 7 2 3 20,000 9 20.7 0 3 5 5 4 0 0 5 9 2 6 3 6 5 10 11.4 9 5 7 3 9 4 3 1 5 0 8 9 6 7 , , , , , , , , , , , , , , 20 8.4 10.9 5 1 3 3 6 6 0 6 6 5 0 3 7 10,000 9 5 4 5 6 6 5 6 7 6 6 4 3 3 3 1 24.0 30.0 30.0 30.0 30.0 26.3 27.0 29.0 26.0 0 0 18.0 16.0 16.0 19.0 14.6 5 6 7 8 9 0 1 2 3 4 5 6 7 E 0 0 0 0 0 1 1 1 1 1 1 1 1 8 0 0.0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 E 5 7 8 9 1 5 7 6 0 2 3 4 6 2 2 2 2 2 2 2 2 2 2 2 2 2 0 8 0 0 0 0 1 1 1 0 1 1 1 1 1 2 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 MYRm (LHS) % of Total Revenues 2 2 Source: PETRONAS, Maybank Kim Eng Source: PETRONAS, Maybank Kim Eng PETRONAS’ quarterly capex PETRONAS’ yearly capex Capex (LHS) M&A Crude oil (RHS) (MYR'b) Overseas (LHS) Malaysia (LHS) (%) (MYR m) Acquisition of unconventional resources Acquisition of 15.5% stake in Shah Deniz at USD2.25b (USD/bbl) 75 80.00 32,000 120 108 110 102 60.00 28,000 100 60 25 24,000 76 30 40.00 80 45 10 67 24 62 8 20,000 17,862 61 14 20.00 54 54 16,341 50 50 50 52 60 11 39 40 49 30 37 22,037 43 46 18 11 35 16,000 13,909 14,427 13 31 32 - 12,89213,378 34 11,757 14 12,05411,591 14,984 11,928 40 28 12,000 11,253 10,776 10,691 15 14 10 22 9,419 4 8 20 (20.00) 15 18 8,000 12461 20 11 12 0 10 10 (40.00) 4,000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Source: PETRONAS, Maybank Kim Eng Source: PETRONAS, Maybank Kim Eng OPEC’s production (RHS) & global market share (LHS) OPEC YoY changes in May 2018’s production volume (m bpd) Source: OPEC, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng July 3, 2018 78 2H 2018 Outlook & Lookouts OPEC’s crude oil contribution by nation (%) OPEC’s monthly crude oil production (‘000 bpd) Source: OPEC, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng Global demand-supply Global demand-supply net Source: EIA, Maybank Kim Eng Source: EIA, Maybank Kim Eng Cumulative net oil supply (1997-2018 YTD) Cumulative net oil supply (2007-2018 YTD) Source: EIA, Maybank Kim Eng Source: EIA, Maybank Kim Eng July 3, 2018 79 2H 2018 Outlook & Lookouts Crude oil price volatility index Offshore floating storage Global group oil product supply Source: Bloomberg, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng Source: EIA, Maybank Kim Eng Global group oil product demand Global group oil product supply Source: EIA, Maybank Kim Eng Source: EIA, Maybank Kim Eng Crude oil total inventory (ex-strategic reserves) Source: Bloomberg, Maybank Kim Eng July 3, 2018 80 2H 2018 Outlook & Lookouts PETROCHEMICALS: All eyes on input cost volatility NEUTRAL (unchanged) . Mixed fortunes among the natural gas players (good) and naphtha based players (bad). . USA-China trade war supports for regional based supply chain. . We have a BUY on LCT on attractive valuations. 1H 2018. The petrochemical sector’s earnings underperformed in 1Q18 largely due to cost fluctuations. In the case of PCHEM, there was an accounting under-accrual of past manpower related cost. Otherwise, operations and cost management were flawless. LCT suffered from naphtha price volatility as product prices was slow to catch-up with the escalating naphtha prices. Furthermore, LCT had curtailed its Indonesian operations for five weeks due to negative product margin. We are NEUTRAL on the sector with a BUY for LCT on cheap valuation on a relative basis to Asian peers. PCHEM is a HOLD as there is limited upside to our TP and there is no new re-rating catalyst in sight. Global uncertainty supports regionalism. Global demand for petrochemicals is forecasted to grow by 4.4% in 2018, which is above the historical growth rate of 4.0%. There is sufficient global supply but the ever increasing risk for a trade war between US and China might disrupt global supply. Already, China is avoiding petrochemical imports from the US, instead preferring to source from regional suppliers and member countries in support for its One-Belt-One-Road (OBOR) initiatives. This could potentially create an artificial supply crunch and push-up petrochemical prices, in our view. Both PCHEM and LCT will benefit from this situation as China is a big export market to both companies. Stock picks. We have a BUY call on LCT with a TP of MYR7.10 (6.5x 2018 EV/EBITDA — 10% discount to peer group average). LCT had its major factory turnaround in 2017 and utilization rate is expected to pick-up in 2018 and boost product volumes. As for PCHEM, we rate it as a HOLD with a TP of MYR8.70 (9x 2018 EV/EBITDA; 10% premium to peer average for its superior balance sheet and cash flow, despite projecting a flat EPS growth in 2018 for major turnarounds that will reduce factory utilization rate). Risks to our call. (i) Sharp movement in naphtha cost which could undermine LCT as it holds three weeks’ worth of inventories; (ii) weaker-than-expected global economic growth due to the escalating trade war threat between USA and the rest of the world; and (ii) China’s increasingly unclear petrochemical import pattern that distorts pricing. Petrochemicals sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Petronas Chemicals Hold 8.41 67,280.0 8.60 16.0 16.3 14.3 2.2 2.1 13.7 14.4 3.1 Lotte Chemical Titan Buy 4.95 11,251.3 7.10 9.0 8.6 7.4 0.9 0.8 10.7 0.0 3.8 Simple average 12.5 12.5 10.8 1.6 1.5 12.2 7.2 3.5 Source: Bloomberg, Maybank KE July 3, 2018 81 2H 2018 Outlook & Lookouts Olefins price trend Polyolefin price trend Ethylene Propylene Polyethylene USD / ton USD / ton 1,700 1,600 1,500 1,400 1,300 1,100 1,200 900 1,000 700 500 800 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Derivatives price trend Aromatics price trend MEG Ethylene Oxide Butanol Benzene Toluene Paraxylene USD / ton USD / ton 2,000 2,000 1,750 1,750 1,500 1,500 1,250 1,250 1,000 1,000 750 750 500 500 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Fertiliser price trend Methanol and MTBE price trend Urea Ammonia Methanol MTBE USD / ton USD / ton 700 1,200 600 1,000 500 800 400 600 300 400 200 100 200 0 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Source: Bloomberg July 3, 2018 82 2H 2018 Outlook & Lookouts PLANTATION: Still muted 2H18 outlook NEUTRAL (unchanged) . Recent high fossil fuel price has provided a good floor price to CPO as it has reignited discretionary palm biodiesel demand especially from EU. . But given the still ample palm oil supply ahead of peak production months in 2H18, we expect muted near term price outlook. Our 2018-20F CPO ASP forecasts are MYR2,450/2,500/2,600/t respectively. . Our BUYs are GENP and SOP, premised on their LT growth prospects. 1H 2018. 1Q18 results season largely disappointed on lower-than-expected CPO (and PK) ASP achieved. 1Q18’s MPOB CPO ASP (spot) of MYR2,466/t fell 21% YoY. In comparison, it was down a lower 11% YoY in USD terms to USD628/t as Ringgit strengthened against US Dollar by 13% over the same period. Besides the Ringgit factor, the sharp decline in CPO price since 4Q17 also coincided with the timing of FFB output normalization post El Nino which came unusually late in Oct-Dec 2017 (vs historical peaks in Aug-Oct); this led to high brought forward inventories of 2.73m MT at the start of the year for Malaysia. In 1H18, MPOB CPO ASP was MYR2,422/t, down 18% YoY; 5M 2018 Malaysian estates CPO output was up 5% YoY. Outlook. The Malaysian palm oil inventories remain relatively ample even before the industry enters into its higher production months in 2H18. According to Oil World estimates, the palm oil stock-to-usage (SUR) ratio in Oct/Sept 2017/18F marketing year is expected to climb to 18.6% (from 16.9% in 2016/17) but still way below the peak of 22.1% recorded in 2014/15. According to Oil World’s latest estimates (published on 15 June 2018), barring any unexpected weather surprises especially in the USA which seems to have a good start to its new planting season now, the incremental global 17 oils and fats supply (+9.0m MT) in Oct/Sept 2017/18F marketing year is expected to exceed the demand growth (+6.8m MT) by 2.2m MT, leading to a small build-up in inventory for the second consecutive year. Under the lead of palm oil, Oil World forecasts the 17 global oils & fats SUR to climb 0.9-ppts to 13.4% in the 2017/18F marketing year, but still way below the peak of 15.7% in 2014/15. Global edible oil supply is still moderately ample. Sector top pick. Our top-down sector weight remains a NEUTRAL given the lack of immediate catalyst to drive CPO price amidst ample palm oil supply. Nonetheless, the outlook for CPO price beyond 2018 is brighter as we believe the region’s FFB production growth will decelerate by 2020. In the meanwhile, we advocate accumulating GENP and SOP as both provide good medium-term growth prospects (supported by relatively younger tree age profile) and they remain undervalued. Plantation sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Sime Darby Plantation Hold 5.33 36,248.5 5.40 30.8 30.3 29.7 2.5 2.4 8.3 0.0 1.7 IOI Corp Hold 4.54 27,723.3 5.13 26.2 24.7 24.0 3.0 2.8 12.0 11.8 3.5 KL Kepong Hold 24.16 25,729.6 25.00 24.4 24.4 21.8 2.1 2.0 8.7 9.4 2.5 Genting Plantations Buy 9.45 7,605.8 10.40 22.7 23.6 19.6 1.7 1.6 7.1 8.1 1.7 Boustead Plantations Hold 1.25 2,800.0 1.22 20.8 39.1 30.5 1.1 1.1 2.8 3.7 3.5 Sarawak Oil Palms Buy 3.15 1,798.3 4.62 7.5 9.5 7.5 0.8 0.7 8.4 9.9 2.1 TSH Resources Hold 1.15 1,587.8 1.14 15.5 19.2 15.3 1.4 1.3 5.8 6.8 1.2 Ta Ann Hold 2.63 1,169.4 2.70 9.8 12.6 9.8 0.8 0.8 6.4 7.8 3.2 TH Plantations Hold 0.66 578.9 0.89 12.6 16.8 12.1 0.4 0.4 2.5 3.4 1.8 Simple Average 18.9 22.2 18.9 1.5 1.5 6.9 6.8 2.4 Source: Bloomberg, Maybank KE July 3, 2018 83 2H 2018 Outlook & Lookouts Immediate key concern – Malaysia’s minimum wage hike. Malaysia’s new government’s pledge to raise the minimum wage level to MYR1,500 per month for Peninsular (+50% from MYR1,000 p.m.) and East Malaysia (+63%, from MYR920 p.m.) over the next 5 years will be earnings negative for the plantation players as the industry is highly labour intensive and employs mostly foreign workers who are paid near or slightly above the current minimum wage. Earnings sensitivity: By our estimate, every MYR100 p.m. increase in minimum wage (without any government’s share in the cost) will reduce bottom lines for companies under our coverage by 1-9% (using FY19 as reference). Companies which operate solely in Malaysia and with relatively higher cost of production (such as BPLANT and THP) will be most impacted by the proposed minimum wage hike, while the least impacted will be TSH, KLK, IOI and GENP. Nonetheless, as the proposed minimum wage increase would be staggered over a period of 5 years, this will allow companies to improve workers’ productivity. A point to note is the higher cost of minimum wage is to be shared on a 50:50 basis between the government and employers in the first three years (under the new government’s GE14 manifesto) – this may provide some relief on the additional cost impact to the plantation companies. Upside risks: (i) Production recovery turns out worse-than-expected; (ii) Crude oil prices (i.e. Brent) continue to punch higher at above USD80/barrel, pulling up CPO price along with it; (iii) Weather anomalies at major palm oil and oilseeds producing regions; and (iv) Weaker Ringgit against Dollar. Downside risks: (i) Reversal of crude oil prices to sharply below USD70/barrel (i.e. Brent); (ii) Changes in government policies of importing or producing nations (e.g. revision or imposition of import duties); (iii) Production recovery turns out better-than- expected; (iv) Global demand turns out to be weaker than expected; and (v) Ringgit strengthens against Dollar. Stock-to-usage ratio (SUR) of 17 global oils & fats SUR of Palm Oil, Soybean Oil and Rapeseed Oil Source: Oil World (updated as at15 June 2018) Source: Oil World (updated as at15 June 2018) CPO price in Malaysian Ringgit (MYR) and US Dollar CAGR of FFB output for companies under our universe Source: Bloomberg, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng July 3, 2018 84 2H 2018 Outlook & Lookouts Property: Certainly uncertain NEUTRAL (unchanged) . All eyes will be on PH’s manifesto on housing and upcoming Budget 2019. Uncertainties continue with the potential new ruling on housing and the implementation of SST from Sep 2018. . Overhang units are at record high. A slower GDP growth could further drag the demand for properties. . Valuations are undemanding but the sector lacks of re-rating catalysts. We prefer stocks with strong balance sheet and product flexibility as well as diversified income stream. Top BUY is Sunway, followed by SDPR. 1H 2018. The KL Property index continued to underperform KLCI by -11% in 1H 2018 on subdued property market outlook due to record high unsold stocks and cautious buying pre-GE14. Developers have been delaying their new launches and aggressively clearing their unsold stocks by offering more discounts/freebies. Elsewhere, there were a few major developments under the new government which have impacted the property sector, including the zero-rating of the 6% GST to be replaced with the SST, cancellation of KVMRT 3 and KL-SG HSR projects, potential investigation of controversial land transfer (64 plots) under DBKL and review of bank loan terms for first-time homebuyers. We sense that developers are getting careful in their finances and putting priority on cash flow than sales. Outlook. The property sector outlook is likely to remain just as challenging into 2H18. Focus will be on (i) Pakatan Harapan (PH) government’s GE14 manifesto on affordable housing quota and rent-to-own schemes; (ii) Budget 2019 on 2 Nov 2018; (iii) Sales & Services Tax (SST) implementation from Sep 2018 onwards which will impact the profitability of developers. For affordable housing, the price point and timeline of the additional 1m units over the next ten years as well as the release of the Ministry of Transport lands remain unknown. Coordinated planning and control may ease the current overhang situation. Overhang stocks (completed residential properties including SoHo and serviced apartments) have increased to 34,526 units (+9% QoQ, +56% YoY) and MYR22.3b (+9% QoQ, +68% YoY) in 1Q18 - a record high. Elsewhere, margin compression is expected to continue as developers offer more rebates/discounts to clear their unsold stocks. Sector top pick. While downside risks are waning supported by undemanding sector valuation at 56% discount to our RNAV estimates (45-50% previously), sector fundamentals remain weak. The sector lacks of re-rating catalysts. As the broad property sector outlook remains challenging, we stay defensive in stock picking. Our top BUY pick is Sunway. We like Sunway for its more diversified income stream and the potential listing of its healthcare business by 2022. Property sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E SP Setia Hold 3.10 12,060.1 3.24 13.9 23.5 22.8 1.1 1.8 7.5 4.4 2.2 Sime Darby Property Buy 1.20 8,161.0 1.53 12.8 11.8 9.1 1.0 0.8 9.9 8.2 3.2 Sunway Berhad Buy 1.55 7,540.8 1.99 13.1 12.9 11.7 0.9 0.9 7.2 7.0 3.5 Ecoworld Buy 1.23 3,621.6 1.42 29.5 19.0 9.8 0.8 0.8 2.8 4.2 0.1 UEM Sunrise Buy 0.71 3,221.6 1.25 13.1 16.5 13.1 0.4 0.4 3.9 3.1 1.4 Mah Sing Hold 1.07 2,597.6 1.31 8.8 8.2 8.2 0.9 0.8 8.5 10.5 4.9 Ecoworld International Buy 0.92 2,208.0 1.11 n.a. 14.8 5.2 0.8 0.7 (2.2) 5.6 0.7 Tambun Indah Land Hold 0.82 353.1 0.91 4.2 6.5 6.4 0.6 0.5 14.4 8.9 6.1 Glomac Hold 0.45 352.8 0.56 18.3 15.5 10.7 0.3 0.3 0.2 0.5 2.8 Simple average 14.2 14.3 10.8 0.7 0.8 5.8 5.8 2.8 Source: Bloomberg, Maybank KE July 3, 2018 85 2H 2018 Outlook & Lookouts Other sector BUYs. We also like Sime Darby Property (SDPR MK) for its strong balance sheet, huge landbank in the Klang Valley (the main property market) at low land cost which provides it pricing and product flexibility and high involvement in townships (which provides more steady sales) and industrial products (which will benefit from the growing e-commerce industry). Elsewhere, we maintain our BUY on UEMS. We believe the negatives on the oversupply situation in Iskandar Malaysia and the cancellation of a KL-SG HSR station in Gerbang Nusajaya have been largely priced in. The stocks is trading at an undemanding 0.47x P/BV. Risks. (i) Potential relaxation of bank loan terms for first-time homebuyers could boost the demand for properties; (ii) Policy easing; (iii) Stronger-than-expected economic growth. KL Property Index underperformed KLCI by 11% Property sales in units and value were up +4% and +0.6% YoY but down -7% and -12% QoQ in 1Q18, respectively 2,000 Units MYRm 1,800 80,000 25,000 1,600 2018 KLPI: -17% 70,000 1,400 KLCI: -6% 20,000 60,000 1,200 2013 1,000 KLPI: +23% 50,000 2014 15,000 KLCI: +11% 2012 KLPI: -1% 40,000 800 KLPI: +5% KLCI: -6% 2011 KLCI: +10% 2015 10,000 600 KLPI: -2% 2017 30,000 KLCI: +1% KLPI: -8% KLCI: -4% KLPI: +8.8% 400 KLCI: +9.4% 20,000 2016 5,000 200 KLPI: -5% KLCI: -3% 10,000 0 - - Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 FBMKLCI Index KLPRP Index Unit (RHS) Property transaction (value) (MYRm) (LHS) Source: Bloomberg, Maybank Kim Eng Source: NAPIC, Maybank Kim Eng House price index (HPI) in 4Q17 : HPI grew by 5.8% YoY, - 1Q 2018: Total overhang (in value; completed stocks 0.1% QoQ including SoHo and serviced apartment) increased by 9% QoQ and 68% YoY (units) (MYRm) 40,000 25,000 250 35,000 20,000 30,000 200 25,000 15,000 20,000 150 15,000 10,000 10,000 100 5,000 5,000 0 0 50 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Jul-12 Jul-17 Apr-16 Apr-11 Jan-10 Jan-15 Oct-13 Jun-10 Jun-15 Sep-11 Sep-16 Mar-09 Mar-14 Feb-12 Feb-17 Aug-09 Aug-14 Dec-12 Dec-17 Nov-10 Nov-15 May-13 Malaysia KL Selangor Johor Penang Total Unit (LHS) Total Value (RHS) Source: NAPIC, Maybank Kim Eng Source: NAPIC, Maybank Kim Eng July 3, 2018 86 2H 2018 Outlook & Lookouts REITs: Focus on defensive assets NEUTRAL (unchanged) . Amid the oversupply of retail and office space, we are selectively positive on REITs with prime malls and office assets with long-term tenants. . Near to-mid-term earnings growth would be mainly driven by sustained high occupancy rates and positive rental reversions. Recovery in consumer sentiment would also benefit retail REITs. . Our top retail pick is IGBREIT and our other top BUY is YTLREIT. 1H 2018. Unit prices of most M-REITs under our coverage eased significantly around late-Mar 2018 to early-Apr 2018, leading to an average loss (in unit prices) of -14.5% from early-2018 until 8 May (pre-GE14 polling day). We believe this was largely due to ongoing concerns of the oversupply of retail and office space in the Klang Valley, and expectation of another OPR hike in 2H18 (first 2018 OPR hike was on 25 Jan, by +25bps to 3.25%). Unit prices rebound post-GE14 by an average +3.7%. As at end-Jun 2018, the sector offers 5.5%/5.7% CY18/19E net DPU yields vs. 10-year MGS yield of 4.20% - thus, yield spreads of 126bps/149bps. Outlook. We expect the broad property sector’s oversupply situation to continue to build especially in the Klang Valley; this has also been flagged by Bank Negara. This would, in turn, impact the REITs’ sector outlook. However, we are still selectively positive on REITs with: i) prime malls with prominent locations which will entail strong footfall and demand for their retail space, ii) office assets with tenants on long-term leases which will have relatively lower occupancy risks. For the REITs under our coverage, we estimate their near to mid-term earnings growth to be mainly organic – driven by sustained high occupancy rates and positive rental reversions. Elsewhere, a recovery in consumer spending post-GE14 would support malls’ occupancy and rental rates, and potentially enhance retail REITs’ turnover rent (generally about 3-5% of total rental income). Sector top pick. We continue to favour IGBREIT as our retail top pick. We expect IGBREIT’s organic growth to be mainly supported by its malls’ prominent location which will continue to support strong footfall coming from a wide catchment area. This would, in turn, sustain occupancy rates (end-FY17: 99.9% and 98.0% at Mid Valley Megamall and The Gardens Mall respectively) and positive rental reversions. Elsewhere, IGBREIT’s earnings could also be enhanced by higher turnover rent (generally about 12-13% of total rental income) from an expected improvement in consumer sentiment post-GE14. REITs sector – Peer valuation summary Net yield Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (%) (MYR) (MYR m) (MYR) CY18E CY19E CY18E CY19E CY18E CY19E CY18E CY19E KLCC Prop Hold 8.00 14,442.7 8.00 19.7 19.1 1.1 1.0 5.4 5.3 4.2 4.4 IGB REIT Buy 1.74 6,132.8 1.85 20.0 19.3 1.6 1.6 8.2 8.4 5.1 5.2 Pavilion REIT Hold 1.78 5,401.4 1.55 20.7 20.0 1.4 1.3 6.6 6.6 4.7 4.8 Sunway REIT Buy 1.77 5,212.8 1.85 17.7 17.1 1.3 1.3 7.1 7.3 5.1 5.3 CMMT Hold 1.20 2,448.8 1.15 16.0 16.0 0.9 0.9 5.7 5.8 5.9 5.9 YTL REIT Buy 1.17 1,994.1 1.40 14.2 13.1 0.8 0.8 5.7 0.0 6.5 7.0 Axis REIT Hold 1.46 1,799.2 1.55 16.2 14.2 1.1 1.1 7.0 8.0 5.5 6.4 MRCB-Quill REIT Buy 1.14 1,221.8 1.30 13.9 13.9 0.9 0.9 6.4 6.4 6.6 6.6 Al-Salam REIT Hold 0.83 481.4 0.90 14.6 14.1 0.7 0.7 4.3 4.9 5.9 6.1 Simple average 17.3 16.6 1.1 1.1 6.5 6.0 5.4 5.7 Source: Bloomberg, Maybank KE July 3, 2018 87 2H 2018 Outlook & Lookouts Other sector BUYs. i) YTLREIT - favourable CY18/19E net DPU yields of 6.1%/6.5%, resilient rental income from its Malaysian and Japanese properties (on master leases) and earnings growth from its Australian hotels post completion of major refurbishments, ii) Sunway REIT - inorganic growth opportunities via acquisitions of matured, quality assets from its parent, Sunway Bhd, iii) MRCB- Quill REIT - strong CY18-19E net DPU yields of 6.6% p.a. and resilient earnings which are largely backed by long-term tenants (i.e. at Menara Shell). Risks. We remain cautious on the oversupply of retail and office space, namely in the Klang Valley, which could increase occupancy risks and reduce rental rates/limit positive rental reversions. We believe such risks are more pronounced for neighbourhood malls and multi-tenanted office properties. Elsewhere, future OPR hike(s) could reduce REITs’ earnings via higher borrowing cost and discourage acquisition activities. However, our Economics Team believes that there will be no OPR hike for the remaining of 2018 to support near to mid-term economic growth. Based on our scenario analysis, a +25bps interest rate hike to 3.50% would only lower the sector’s CY18-19E earnings by -0.5% p.a.. Average M-REITs’ net DPU yield (1-year forward) vs. 10-year Yield spread (average M-REITs’ net DPU yield and 10-year MGS yield MGS yield) (bps) Average M-REIT yield 10-year MGS yield (%) 350 7.00 6.50 300 +1SD, 5.9 6.00 250 Mean, 5.5 5.50 +1SD, 218 200 5.00 -1SD, 5.1 Mean, 169 4.50 150 4.00 -1SD, 119 3.50 100 3.00 50 2.50 2.00 0 Jun-17 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Dec-14 Dec-11 Dec-12 Dec-13 Dec-15 Dec-16 Dec-17 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-11 Source: Bloomberg, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng Bursa Malaysia REIT Index M-REITs price and KLCI YTD movement REIT Index (%) M-REIT Simple Average KLCI 12 1,100 10 8 1,050 6 4 1,000 2 +1SD, 997 0 -2 950 Mean, 950 -4 -6% -6 Jul-17 Apr-17 Apr-18 Jan-17 Jan-18 Oct-17 Jun-17 Jun-18 Sep-17 Mar-17 Mar-18 Feb-17 Feb-18 Aug-17 Dec-17 Nov-17 May-18 900 -1SD, 902 -8 May-17 -10 -9% -12 850 -14 -16 800 -18 -20 -22 Apr-18 Jan-18 Oct-17 Jun-18 Mar-18 Feb-18 Dec-17 Nov-17 May-18 Note: Index commenced on 2 Oct 2017 Source: Bloomberg Source: Bloomberg July 3, 2018 88 2H 2018 Outlook & Lookouts Shipping & Ports: To stay lukewarm NEUTRAL (unchanged) . We project both MISC and Westports to post weaker YoY earnings in 2018 due to weaker petroleum tanker rates (for MISC) and higher tax rate (for Westports). . We expect MISC’s petroleum tanker rates to recover from 4Q18 onwards and container volume for Westports to resume its growth from 3Q18. . Both MISC and Westports are HOLDs. 1H 2018. MISC’s share price has underperformed the KLCI owing to its weak 1Q18 results, dragged by softer petroleum tanker rates. On the other hand, Westports’ share price has been relatively stable as its weaker 1Q18 earnings were already within expectation. The weaker earnings were due to the residual impact from the movements of its 2 key clients i.e. CMA CGM and UASC, which moved substantial volume to PSA in 2Q17. Westports’ 1Q18 throughput was down 7% YoY (transhipment: -19%, local: +26%). Outlook. For MISC, 2Q18 earnings will likely be weaker QoQ and YoY as the petroleum tanker rate slide continues. We expect the recovery in petroleum tanker rates to only materialize from 4Q18 onwards when global tanker supply rebalances on higher scrapping and lower newbuild activities. Additionally, there is also limited demand pull factor as the incremental oil production volume from OPEC might be small. For Westports, we expect flattish-to-weaker YoY container volume in 2Q18 and to grow YoY from 3Q18 onwards driven by global trade growth and potential rechanneling of services from Northport to Westports. The impact of a US-China trade war to Westports may not be significant because China/US may still need to source for cheaper supplies elsewhere and the vessels would still need to pass through the Strait of Malacca. Presently, Asia-America trade accounts for 9% of Westports’ total volume. However, if the trade war escalates, global trade could soften on uncertainties surrounding businesses, hence affecting Westports’ volume. Sector top pick. We have HOLDs on both MISC and Westports: (i) MISC – We think the lower share price has priced-in the weaker upcoming 2Q18 results. The stock now trades at 15x 2019E PER, being its historical mean. Also, MISC is committed in maintaining its DPS payout, indicating DY of 5.1%; (ii) Westports – Trading at 19x 2019E PER, the stock trades slightly below its mean of 21x. DY of 4.1% is also decent. Risks. For MISC: (i) a sudden surge/drop in oil price could cause storage demand using petroleum tankers to fall/increase thereby impacting tanker rates; and (ii) a substantial weakening of USD will lead to weaker MYR-translated earnings. Key risks for Westports include: (i) substantial slowdown in the global economy/escalation of the present trade war which could see its throughput fall correspondingly; and (ii) positive outcome of its detailed studies on its proposed CT10-19 may provide further upside to our fair value. Shipping & Ports sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E MISC Hold 5.92 26,425.7 6.30 13.0 16.9 15.0 0.8 0.7 4.5 5.0 5.1 Westports Hold 3.39 11,559.9 3.70 17.1 21.2 18.6 4.8 4.5 22.6 24.2 3.5 Harbour-Link Buy 0.71 284.3 0.78 9.2 7.6 6.7 0.7 0.7 9.7 10.1 3.0 Simple average 13.1 15.2 13.4 2.1 2.0 12.2 13.1 3.9 Source: Bloomberg, Maybank KE July 3, 2018 89 2H 2018 Outlook & Lookouts MISC: LNG vessel charter rates MISC: Petroleum tanker spot rates TC (3-year) Spot USD/day VLCC Suezmax Aframax USD/day 80,000 160,000 70,000 140,000 120,000 60,000 100,000 50,000 80,000 40,000 60,000 30,000 40,000 20,000 20,000 10,000 0 0 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Jul-16 Jul-17 Jan-16 Jan-17 Jan-18 Sep-17 Sep-16 Mar-18 Mar-16 Mar-17 Nov-16 Nov-17 May-17 May-18 May-16 Source: MISC Source: MISC Ports: Monthly container throughput of key ports Westports: Container volume by trade lanes (1Q18) '000 TEUs PSA Port Klang PTP 3,000 2,500 Asia-Europe 14% 2,000 Intra-Asia Asia- 61% 1,500 Australasia 10% 1,000 Asia- America 500 9% 0 Asia-Africa 3% Others Jul-14 Jul-15 Jul-16 Jul-17 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Jan-15 Jan-14 Jan-16 Jan-17 Jan-18 Oct-15 Oct-16 Oct-17 Oct-14 3% Source: CEIC, Companies, Maybank Kim Eng Source: Westports July 3, 2018 90 2H 2018 Outlook & Lookouts Technology: Pick and roll POSITIVE (from Neutral) . Following a super-normal 21%/39% YoY growth in 2017 global semi sales (GSS) and equipment billings, 4M18 GSS grew another 21% YoY despite the higher base, supported by 22% YoY growth in 5M18 equipment billing. . We turn bullish on the sector as the developed markets transition into 5G cellular next, in the coming years. For this, we expect component players (i.e. semiconductors and OSATs) to start benefitting in 2019. . Our Top BUY pick is Inari Amertron. 1H 2018. The KLTEC Index is down 16% YTD as technology hardware players in Malaysia have not been spared the sell-down on concerns over potential US tariffs on semiconductor imports from China. Alongside MYR’s recovery against USD (USD/MYR: -0.2% YTD) and decelerating growth, share prices of technology stocks under our coverage (except Inari) have contracted by 10-36%. Putting aside the possibility of the e.USD50b US tariff on China, global demand for semiconductor products have remained strong YTD (4M18 GSS: +21% YoY to USD149b). World Semiconductor Trade Statistics (WSTS) have revised their 2018 GSS growth expectation to 12.4% (7% as at mid-Nov 2017), to be led by the Asia Pacific region in the integrated circuits (ICs), mainly memory and logic ICs. Outlook. Concerns on an inventory rationalization by key smartphone players in 2Q18 have passed while MYR’s strength against USD is slowly dissipating; our average USD/MYR forex assumption of 3.95 (4.00 currently) is unchanged. With growth still intact for the sector, we are now POSITIVE from a bottom up approach; technology hardware earnings should gain momentum in 2H18 as they enter a seasonally stronger period boosted by major smart devices launches. Also, sector rotation from those affected by the change in government in Malaysia should draw interest back into technology names, potentially erasing their value losses in 1H18. On the global picture, while 2018’s expected growth for global smartphone shipment remains at a low single-digit, dollar content growth is projected to outweigh the former due to the proliferation of latest technologies (i.e. OLED displays, dual-camera, iris/facial biometric verification) into medium- range smart devices from just premium devices currently. Beyond that, the race for 5G cellular network adoption would continue to encourage investments into data servers and kick start 5G components adoption into smart devices in 2019. Against this backdrop, we are bullish on equipment and OSAT players with growth riding on exposure to smart devices. Sector top pick. We are positive on Inari’s aggressive floor space expansion to 1.35m sq ft (+34%) by end-2018 and further to 1.68m sq ft by mid-2019, partly driven by three new component wins (i.e. VSCEL, mini LEDs and health sensor for OSRAM). Recent win from OSRAM will also diversify Inari’s earnings base going forward. Amongst the technology names in Malaysia, Inari, as the sector bellwether, is the first to erase its YTD share price loss (+4% YTD). At 18x CY19 PER currently, valuations are still undemanding for a growth stock. Technology sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Inari Amertron Buy 2.26 7,098.8 2.80 28.8 21.7 17.7 7.4 6.6 33.7 36.8 3.4 Globetronics Tech Hold 2.21 1,474.1 2.30 29.5 24.0 17.3 4.9 4.5 20.6 26.3 2.9 Vitrox Corp Hold 5.58 2,623.6 5.00 32.1 28.8 21.2 6.6 5.4 23.0 25.2 0.9 V.S. Industry Buy 1.55 2,601.1 1.95 18.4 16.7 12.6 2.6 2.3 15.5 18.6 3.0 Simple average 30.1 24.8 18.7 6.3 5.5 25.8 29.4 2.4 Source: Bloomberg, Maybank KE July 3, 2018 91 2H 2018 Outlook & Lookouts Other sector BUYs. For the automation equipment space, we are positive on MMSV, a specialist in the design and manufacture of customised semiconductor automation equipment with exposure to prominent clientele locally and globally; it is part of the supply chain for a prominent North American smartphone brand via its largest customer (~25% of revenue), a global lighting MNC based in the Netherlands. Against local automation equipment peers’ average 18x CY19E PER, MMSV’s valuation at just 9x CY19E PER (8x CY19E PER ex-cash) is attractive. Risks. (i) A full-blown trade war causing a sharp fall in the overall smart devices demand; (ii) another larger-than-expected channel inventory rationalisation; (iii) a stronger MYR and (iv) minimum wage hike are key risks to profitability. Global yearly semiconductor revenue trend Global: Yearly semiconductor revenue breakdown Integrated Circuits Sensors USD m Asia Pacific Japan China Europe America Optoelectronics Discrete Semiconductors USD b 450,000 500.0 400,000 350,000 450.0 300,000 400.0 250,000 350.0 200,000 300.0 150,000 250.0 100,000 200.0 50,000 150.0 0 100.0 2015A 2016A 2017A 2018E 2019E 1987 2009 1979 1981 1983 1985 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2011 2013 2015 2017 1977 Source: WSTS Source: WSTS Global monthly semiconductor revenue trend Monthly North American semiconductor equipment billing China Asia Pacific Japan Europe Americas USD m 3,000.0 USD b 40 2,500.0 36 32 2,000.0 28 24 1,500.0 20 16 1,000.0 12 8 500.0 4 0 0.0 Jul-14 Jul-15 Jul-16 Jul-17 Jul-14 Jul-15 Jul-16 Jul-17 Jan-18 Jan-15 Jan-16 Jan-17 Jan-15 Jan-16 Jan-17 Jan-18 Sep-14 Sep-15 Sep-16 Sep-17 Sep-14 Sep-15 Sep-16 Sep-17 Mar-15 Mar-16 Mar-17 Mar-18 Mar-15 Mar-16 Mar-17 Mar-18 Nov-14 Nov-15 Nov-16 Nov-17 Nov-14 Nov-15 Nov-16 Nov-17 May-15 May-16 May-17 May-18 May-16 May-17 May-15 Source: WSTS Source: SEMI July 3, 2018 92 2H 2018 Outlook & Lookouts TELECOM: Awaiting regulatory clarity NEUTRAL (unchanged) . Concerns over heightened regulatory risks have emerged with the government pledging to halve charges and double speeds for broadband. . We believe the eventual impact to telcos from the government’s initiatives could turn out to be less severe than expected. . Our preferred sector pick is Axiata, we also have a BUY rating on TM. 1H 2018. TM and Axiata bore the brunt of the selldown in telecom stocks due to a combination of poor 1Q18 results and heightened regulatory concerns. The new government’s pledge to halve charges and double broadband speeds created a regulatory overhang, with the overall sentiment not aided by the accompanying lack of details over execution. This was further exacerbated by poor 1Q18 results from Axiata and TM. While Axiata had previously warned of a slow start to 2018 due to currency headwinds (Ringgit strengthening) and pricing pressure at Indonesia and Cambodia, there were incremental negative surprises at Bangladesh. TM meanwhile demonstrated unexpected revenue softness in 1Q18, with management noting of weakness in the enterprise cluster. Outlook. We believe the eventual outcome from the government’s pledge of halving charges and doubling speeds could turn out to be less severe than expected. Our base case is for 1) the initiatives to be confined to fixed broadband (mobile operators are thus unaffected) and, 2) the regulator would not directly regulate retail broadband prices (thus a blanket 25%-50% price reduction of fibre broadband plans across the board is unlikely, in our view). To satisfy the government’s wishes, we expect TM to introduce new floor plans (priced closer to MYR100/month) while raising speeds for existing plans, thus culminating in a more manageable revenue erosion (we assume 10%). Under this relatively benign outcome, we believe risk-reward profiles for TM and Axiata have turned favourable following their sharp 1H18 share price declines. Sector top pick. Our preferred pick for the sector is Axiata (BUY, TP: MYR4.80), with its share price decline in 1H18 seemingly overdone. The regulatory threat (arising from the government’s broadband pledge) faced by Axiata would not apply if our view of the initiatives being confined to just fixed broadband is valid. In addition, we believe Axiata’s quarterly results have likely bottomed in 1Q18. With operating conditions improving (weaker Ringgit, improved pricing environment in Indonesia), the likelihood of sequential earnings decline in upcoming quarters is low. Telecom sector – Peer valuation summary Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) EV/EBITDA EV/EBITDA ROE (%) ROE (%) Net yield (x) (x) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Maxis Hold 5.46 42,678.8 5.90 19.9 21.2 21.0 12.3 12.1 26.3 25.1 3.7 Axiata Buy 3.80 34,389.0 4.80 28.4 31.7 22.8 5.3 5.0 4.4 6.0 2.7 DiGi.Com Hold 4.15 32,266.3 4.80 21.8 21.6 20.8 11.7 11.3 288.3 299.9 4.6 Telekom Buy 3.11 11,687.2 3.70 13.5 18.3 21.3 5.4 5.3 8.2 7.0 6.0 TIME dotCom Hold 7.64 4,442.3 8.50 25.3 19.5 16.9 11.6 10.4 11.3 11.8 1.3 Simple average 21.8 22.5 20.5 9.3 8.8 67.7 70.0 3.6 Source: Bloomberg, Maybank KE July 3, 2018 93 2H 2018 Outlook & Lookouts Other sector BUYs. We are also positive on TM (BUY, TP: MYR3.70) as we believe the eventual erosion of Unifi revenue (we assume 10%) could be substantially less severe than expected (25%-50%). We estimate every 5% loss of Unifi revenue would lower TM’s 2019 net profit by c.11%, thus a 25% blanket reduction of Unifi ARPU is simply not feasible with the impact on TM’s earnings being too severe. The regulator not directly regulating retail broadband prices would allow TM to still have flexibility with its product design. Note however that with the lower earnings run-rate, we expect TM to discontinue with its minimum MYR700m dividend policy. Risks. We see downside risk to our sector view should the eventual outcome of the government’s broadband initiatives turn out to be more punitive than expected (both in terms of scope and quantum). In the mobile space, the main downside risk continues to revolve around the emergence of a serious price war, particularly if one of the Big 3 starts to drop price points significantly. Currency is also a risk factor for Axiata, with c.40% of earnings being derived from outside Malaysia. Share price performance (annual reset) 50% Digi Maxis TM Axiata 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Source: Maybank KE Quarterly service revenue YoY growth Internet penetration 8% Fixed broadband penetration Mobile internet penetration 6% Celcom Digi Maxis Industry 100% 83% 4% 90% 78% 80% 2% 80% 71% 63% 63% 64% 62% 64% 65% 0% 70% 56% -2% 60% 46% -4% 50% 44% -6% 40% -8% 30% 39%42% 40% 40% 41% 36% 36% 36% -10% 20% 33% 33% 32% 32% 33% -12% 10% -14% 0% Jun-15 Jun-13 Jun-14 Jun-16 Jun-17 Mar-17 Mar-13 Mar-14 Mar-15 Mar-16 Mar-18 Sep-13 Dec-13 Sep-14 Dec-14 Sep-15 Dec-15 Sep-16 Dec-16 Sep-17 Dec-17 Jun-16 Jun-15 Jun-17 Mar-15 Mar-16 Mar-17 Dec-14 Sep-15 Dec-15 Sep-16 Dec-16 Sep-17 Dec-17 Source: Companies Source: MCMC July 3, 2018 94 2H 2018 Outlook & Lookouts UTILITY: Regulatory concerns taper POSITIVE (unchanged) . The imposition of 2H18 tariff surcharges for both Tenaga and Gas Malaysia has alleviated concerns over the integrity of the pass-through mechanism. . Regulatory risk has diminished for Tenaga, although we caution the market has not yet digested the likely earnings step-down in RP2. . Our preferred sector pick is Malakoff, we also have a BUY rating on Petronas Gas. 1H 2018. Tenaga transitioned smoothly into its RP2, having obtained a positive WACC outcome (from 7.5% to 7.3%) and been allowed to retain its “excess” RP1 earnings (effective tariff being c.1sen/kWh higher than base from an improved mix). Gas Malaysia obtained its required tariff surcharge to cover previous under- recoveries. Petronas Gas meanwhile announced an extension to its regulatory negotiations (completion in end-2018). The IPPs however ran into operational issues. Malakoff endured missed capacity payment at its newest coal plant, Tj Bin Energy (TBE) due to outage. YTL Power could not obtain financial close for its Indonesia coal plant venture Tj Jati A. Elsewhere, there were renewed concerns over the integrity of Tenaga’s pass-through mechanism following the change in government. These concerns were subsequently alleviated when Tenaga announced a 1.35sen/kWh surcharge for 2H18. Outlook. Our longstanding view of the IBR framework (with its pass-through mechanism) being retained is unchanged. The imposition of 2H18 tariff surcharges for both Tenaga and Gas Malaysia has validated our view. Longer- term, as doubts over a functional pass-through mechanism fully dissipates, we see scope for a possible expansion of Tenaga’s valuation multiple. In the near term however, we caution that the market appears to have not fully digested Tenaga’s likely earnings step-down in RP2. For Petronas Gas, while regulatory clarity has yet to emerge, we continue to believe that it would not be substantially worse-off when it migrates to IBR possibly in 2019. Meanwhile, the operational challenges faced by both Malakoff and YTL Power appear to have played out through their respective share prices. We do not expect incremental negatives for both in 2H18. Sector top pick. Our preferred pick for the sector is Malakoff (BUY, TP: MYR1.15), given its attractive dividend yield. Sentiment on the stock was previously affected by missed capacity payments at TBE (due to an unscheduled outage), but this has since been resolved with TBE having resumed normal operations in Feb 2018. There have also been no unscheduled outages at its other domestic power plants to date. On dividends, management has consistently reiterated their intention to push for a 100% payout ratio in FY18. This would translate to a dividend yield in excess of 6.5%. Utilities sector – Peer valuation summary Net yield Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) PBV (x) PBV (x) ROE (%) ROE (%) (%) (MYR) (MYR m) (MYR) CY17A CY18E CY19E CY18E CY19E CY18E CY19E CY18E Tenaga Hold 14.64 83,128.6 16.00 11.9 12.6 12.4 1.4 1.3 10.9 10.5 4.0 Petronas Gas Buy 17.30 34,232.1 19.50 19.3 18.4 18.1 2.6 2.5 14.2 13.9 3.8 YTL Power Hold 1.03 8,084.5 0.85 13.2 14.2 12.8 0.6 0.6 4.2 4.6 4.9 Malakoff Corporation Buy 0.83 4,059.9 1.15 13.3 14.7 11.5 0.6 0.6 4.2 5.4 6.8 Gas Malaysia Hold 2.87 3,685.1 3.00 18.9 21.3 20.1 3.5 3.5 16.5 17.5 4.7 Simple average 15.3 16.2 15.0 1.7 1.7 10.0 10.4 4.8 Source: Bloomberg, Maybank KE July 3, 2018 95 2H 2018 Outlook & Lookouts Other sector BUYs. We are also positive on Petronas Gas (BUY, TP: MYR3.70) as we view risk-reward as being attractive. With clarity on its future profitability under Third Party Access (TPA) not forthcoming until end-2018, we expect investors to continue trading on expected TPA outcomes. The regulator’s generally non-punitive stance towards Tenaga and Gas Malaysia in the past makes us believe that Petronas Gas would not be substantially worse-off. Presently, our fair value for the stock, assuming a 50% probability of an adverse TPA outcome, still implies an upside in excess of 10%. Risks. The key risk with both Tenaga and Gas Malaysia revolves around the pass- through mechanism hypothetically not functioning, particularly in an environment of rising input prices (next tariff review in Dec 2018). For Petronas Gas, a non- favourable regulatory outcome would limit upside for the stock. For Malakoff, any major plant outages could potentially lead to missed capacity payments, resulting in lower profitability. YTL Power’s earnings is largely overseas-derived (with Wessex in UK being the main earnings contributor), and is thus vulnerable to currency fluctuations. Tenaga’s quarterly generation cost imbalance Coal prices (Over-recovery) 120 (US$/t) Newcastle active contract 1,200 (MYR m) Newcastle average 1,000 856 110 TNB average 800 682 713 538 605 100 600 90 400 191 175 200 34 80 0 70 (200) -62 -124 60 (400) (600) -507 50 (Under-recovery) -634 (800) 40 1Q18 Dec17* Feb-15 Feb-14 Feb-16 Feb-17 Feb-18 Nov-14 Nov-15 Aug-13 Nov-13 Aug-14 Aug-15 Aug-16 Nov-16 Aug-17 Nov-17 4QFY17 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 May-14 May-15 May-16 May-17 May-18 1QFY17* FYE changed to Dec from Aug in 2017; Source: Company Source: Bloomberg, Company Petronas Gas’ 2018E EBIT split Tj Bin Energy daily availability Processing 100% 27% Regasification 50% 25% Utilities Transportation 0% 6% 42% Apr-18 Jan-18 Feb-18 Mar-18 Dec-17 Source: Maybank KE Source: MCMC July 3, 2018 96 2H 2018 Outlook & Lookouts Research Offices REGIONAL MALAYSIA HONG KONG / CHINA THAILAND Sadiq CURRIMBHOY WONG Chew Hann, CA Head of Research Mitchell KIM Head of Research Maria LAPIZ Head of Institutional Research Regional Head, Research & Economics (603) 2297 8686 [email protected] (852) 2268 0634 [email protected] Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 (65) 6231 5836 • Strategy • Internet & Telcos [email protected] [email protected] • Strategy • Consumer • Materials • Services Desmond CH’NG, ACA Christopher WONG Tanawat RUENBANTERNG (603) 2297 8680 (852) 2268 0652 WONG Chew Hann, CA (66) 2658 6300 ext 1394 [email protected] [email protected] Regional Head of Institutional Research [email protected] • Banking & Finance • HK & China Properties (603) 2297 8686 • Banks & Diversified Financials [email protected] LIAW Thong Jung Jacqueline KO, CFA Ornmongkol TANTITANATORN (852) 2268 0633 [email protected] ONG Seng Yeow (603) 2297 8688 [email protected] (66) 2658 6300 ext 1395 • Oil & Gas Services- Regional • Consumer Staples & Durables [email protected] Regional Head of Retail Research • Power & Utilities • Infrastructure (65) 6231 5839 ONG Chee Ting, CA Ricky NG, CFA [email protected] (852) 2268 0689 [email protected] Surachai PRAMUALCHAROENKIT (603) 2297 8678 [email protected] Head of Retail Research • Plantations - Regional • Regional Renewables TAN Sin Mui • HK & China Properties (66) 2658 5000 ext 1470 [email protected] Director of Research Mohshin AZIZ Sonija LI, CFA, FRM • Auto • Conmat • Contractor • Steel (65) 6231 5849 (603) 2297 8692 [email protected] (852) 2268 0641 [email protected] [email protected] • Aviation - Regional • Petrochem Ekachai TARAPORNTIP Deputy Head • Gaming 66) 2658 5000 ext 1530 YIN Shao Yang, CPA [email protected] ECONOMICS Stefan CHANG, CFA (603) 2297 8916 [email protected] (852) 2268 0675 [email protected] Sutthichai KUMWORACHAI Deputy Head Suhaimi ILIAS • Gaming – Regional • Media • Technology – Regional (66) 2658 5000 ext 1400 Chief Economist [email protected] Malaysia | Philippines | China TAN Chi Wei, CFA Tony REN, CFA • Energy • Petrochem (603) 2297 8682 (603) 2297 8690 [email protected] (852) 2268 0640 [email protected] Suttatip PEERASUB [email protected] • Power • Telcos • Healthcare & Pharmaceutical (66) 2658 5000 ext 1430 [email protected] CHUA Hak Bin WONG Wei Sum, CFA Wendy LI • Media • Commerce Regional Thematic Macroeconomist (603) 2297 8679 [email protected] (852) 2268 0647 [email protected] Termporn TANTIVIVAT (65) 6231 5830 • Property • Consumer & Auto [email protected] (66) 2658 5000 ext 1520 [email protected] LEE Yen Ling INDIA LEE Ju Ye (603) 2297 8691 [email protected] • Property Singapore • Building Materials • Glove • Ports • Shipping Jigar SHAH Head of Research Jaroonpan WATTANAWONG (65) 6231 5844 (91) 22 6623 2632 [email protected] (66) 2658 5000 ext 1404 [email protected] Ivan YAP • Strategy • Oil & Gas • Automobile • Cement [email protected] (603) 2297 8612 [email protected] • Transportation • Small cap Dr Zamros DZULKAFLI • Automotive • Semiconductor • Technology Vishal MODI Sorrabhol VIRAMETEEKUL (603) 2082 6818 (91) 22 6623 2607 [email protected] Head of Digital Research [email protected] Kevin WONG • Banking & Financials (66) 2658 5000 ext 1550 (603) 2082 6824 [email protected] [email protected] Ramesh LANKANATHAN • REITs • Consumer Discretionary • Food, Transportation (603) 2297 8685 Neerav DALAL [email protected] LIEW Wei Han (91) 22 6623 2606 [email protected] Wijit ARAYAPISIT (603) 2297 8676 [email protected] • Software Technology • Telcos (66) 2658 5000 ext 1450 FX • Consumer Staples [email protected] Vishal PERIWAL • Strategist Saktiandi SUPAAT Adrian WONG (91) 22 6623 2605 vishalperiwa@maybank- Head, FX Research (603) 2297 8675 [email protected] ke.co.in VIETNAM (65) 6320 1379 • Constructions • Healthcare • Infrastructure [email protected] LE Hong Lien, ACCA Head of Institutional Research Jade TAM INDONESIA Christopher WONG (84 28) 44 555 888 x 8181 (603) 2297 8687 [email protected] [email protected] (65) 6320 1347 Isnaputra ISKANDAR Head of Research • Media • Building Materials • Strategy • Consumer • Diversified [email protected] (62) 21 8066 8680 [email protected] Mohd Hafiz Hassan THAI Quang Trung, CFA, Leslie TANG • Strategy • Metals & Mining • Cement (65) 6320 1378 (603) 2082 6819 [email protected] Deputy Head, Institutional Research • Small & Mid Caps [email protected] Rahmi MARINA (84 28) 44 555 888 x 8180 (62) 21 8066 8689 [email protected] TEE Sze Chiah Head of Retail Research Fiona LIM [email protected] • Real Estate • Construction • Materials (65) 6320 1374 (603) 2082 6858 [email protected] • Banking & Finance LE Nguyen Nhat Chuyen [email protected] Aurellia SETIABUDI Nik Ihsan Raja Abdullah, MSTA, CFTe (84 28) 44 555 888 x 8082 (62) 21 8066 8691 (603) 2297 8694 [email protected] STRATEGY [email protected] [email protected] • Oil & Gas • Property Sadiq CURRIMBHOY Global Strategist SINGAPORE Janni ASMAN NGUYEN Thi Ngan Tuyen, (62) 21 8066 8687 Head of Retail Research (65) 6231 5836 Neel SINHA Head of Research [email protected] (84 28) 44 555 888 x 8081 [email protected] (65) 6231 5838 [email protected] • Cigarette • Healthcare • Retail [email protected] • Strategy • Industrials • Food & Beverage • Oil&Gas • Banking Willie CHAN • SMID Caps – Regional Hong Kong / Regional PHILIPPINES TRUONG Quang Binh, (852) 2268 0631 CHUA Su Tye Minda OLONAN Head of Research Deputy Head, Retail Research [email protected] (65) 6231 5842 [email protected] (63) 2 849 8840 (84 28) 44 555 888 x 8087 • REITs FIXED INCOME [email protected] [email protected] Derrick HENG, CFA • Strategy • Rubber Plantation • Tyres & Tubes • Oil & Gas Winson Phoon, ACA (65) 6231 5843 [email protected] Katherine TAN TRINH Thi Ngoc Diep (65) 6231 5831 • Property • REITs (Office) (63) 2 849 8843 (84 28) 44 555 888 x 8208 [email protected] [email protected] [email protected] Luis HILADO • Banks • Construction Se Tho Mun Yi (65) 6231 5848 [email protected] • Technology • Utilities • Construction (603) 2074 7606 • Telcos Luis HILADO [email protected] (65) 6231 5848 [email protected] NGUYEN Thi Sony Tra Mi John CHEONG, CFA • Telcos (84 28) 44 555 888 x 8084 (65) 6231 5845 [email protected] [email protected] • Small & Mid Caps • Healthcare • Transport Romel LIBO-ON • Port Operation • Pharmaceutical (63) 2 849 8844 • Food & Beverage NG Li Hiang [email protected] (65) 6231 5840 [email protected] • Property NGUYEN Thanh Lam • Banks (84 28) 44 555 888 x 8086 [email protected] LAI Gene Lih • Technical Analysis (65) 6231 5832 [email protected] • Technology July 3, 2018 97 2H 2018 Outlook & Lookouts APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES DISCLAIMERS This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness o f this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives”) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contai ned herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances af ter the date of this publication or to reflect the occurrence of unanticipated events. MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. One or more directors, officers and/or employees of MKE may be a director of the issue rs of the securities mentioned in this report to the extent permitted by law. This report is prepared for the use of MKE’s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Without prejudice t o the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report. Malaysia Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Singapore This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Research Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to cont act Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or i nstitutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law. Thailand Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of Maybank Kim Eng Securities (Thailand) Public Company Limited. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) accepts no liability whatsoeve r for the actions of third parties in this respect. Due to different characteristics, objectives and strategies of institutional and retail investors, the research reports of MB KET Institutional and Retail Research Department may differ in either recommendation or target price, or both. MBKET Retail Research is intended for retail investors (http://kelive.maybank-ke.co.th) while Maybank Kim Eng Institutional Research is intended only for institutional investors based outside Thailand only. The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the p olicy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. MBKET does not confirm nor certify the accuracy of such survey result. The disclosure of the Anti-Corruption Progress Indicators of a listed company on the Stock Exchange of Thailand, which is assessed by Thaipat Institute, is made in order to comply with the policy and sustainable development plan for the listed companies of the Office of the Securities and Exchange Commission. Thaipat Institute made this assessment based on the information received from the listed company, as stipulated in the form for the assessment of Anti-corruption which refers to the Annual Registration Statement (Form 56-1), Annual Report (Form 56-2), or other relevant documents or reports of such listed company. The assessment result is therefore made from the perspective of Thaipat Institute that is a third party. It is not an assessment of operation and is not based on any inside information. Since this assessment is only the assessment result as of the date a ppearing in the assessment result, it may be changed after that date or when there is any change to the relevant information. Nevertheless, MBKET does not confirm, verify, or certify the accuracy and completeness of the assessment result. US This third-party research report is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a -6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations. All U.S. persons receiving and/or accessing this re port and wishing to effect transactions in any security mentioned within must do so with: Maybank Kim Eng Securities USA Inc. 400 Park Avenue, 11th Floor, New York, New York 10022, 1-(212) 688-8886 and not with, the issuer of this report. July 3, 2018 98 2H 2018 Outlook & Lookouts UK This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Conduct Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility fo r its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that f or accurate guidance recipients should consult with their own independent tax advisers. DISCLOSURES Legal Entities Disclosures Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938- H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This report is distributed in Singapore by Maybank KERPL (Co. Reg No 198700034E) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Maybank Kim Eng Securities (“PTMKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the Financial Services Authority (Indonesia). Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities Limited (License Number: 117/GP-UBCK) is licensed under the State Securities Commission of Vietnam. Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited and the Bombay Stock Exchange and is regulated by Securities and Exchange Board of India (“SEBI”) (Reg. No. INZ000010538). KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) and as Research Analyst (Reg No: INH000000057) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Conduct Authority. Disclosure of Interest Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to he rein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Singapore: As of 3 July 2018, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report. Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report. Hong Kong: As of 3 July 2018, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report. India: As of 3 July 2018, and at the end of the month immediately preceding the date of publication of the research report, KESI, authoring analyst or their associate / relative does not hold any financial interest or any actual or beneficial ownership in any shares or having any conflict of interest in the subject companies except as otherwise disclosed in the research report. In the past twelve months KESI and authoring analyst or their associate did not receive any compensation or other benefits fr om the subject companies or third party in connection with the research report on any account what so ever except as otherwise disclosed in the research report. MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report. OTHERS Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the re port. Reminder Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors wh o are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE. Definition of Ratings Maybank Kim Eng Research uses the following rating system BUY Return is expected to be above 10% in the next 12 months (excluding dividends) HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends) SELL Return is expected to be below -10% in the next 12 months (excluding dividends) Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. July 3, 2018 99 2H 2018 Outlook & Lookouts Malaysia Singapore London New York Maybank Investment Bank Berhad Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Securities Maybank Kim Eng Securities USA (A Participating Organisation of Maybank Kim Eng Research Pte Ltd (London) Ltd Inc Bursa Malaysia Securities Berhad) 50 North Canal Road PNB House 400 Park Avenue, 11th Floor 33rd Floor, Menara Maybank, Singapore 059304 77 Queen Victoria Street New York, New York 10022, 100 Jalan Tun Perak, London EC4V 4AY, UK U.S.A. 50050 Kuala Lumpur Tel: (65) 6336 9090 Tel: (603) 2059 1888; Tel: (44) 20 7332 0221 Tel: (212) 688 8886 Fax: (603) 2078 4194 Fax: (44) 20 7332 0302 Fax: (212) 688 3500 Stockbroking Business: Hong Kong Indonesia India Level 8, Tower C, Dataran Maybank, Kim Eng Securities (HK) Ltd PT Maybank Kim Eng Securities Kim Eng Securities India Pvt Ltd No.1, Jalan Maarof 28/F, Lee Garden Three, Sentral Senayan III, 22nd Floor 2nd Floor, The International, 59000 Kuala Lumpur 1 Sunning Road, Causeway Bay, Jl. Asia Afrika No. 8 16, Maharishi Karve Road, Tel: (603) 2297 8888 Hong Kong Gelora Bung Karno, Senayan Churchgate Station, Fax: (603) 2282 5136 Jakarta 10270, Indonesia Mumbai City - 400 020, India Tel: (852) 2268 0800 Fax: (852) 2877 0104 Tel: (62) 21 2557 1188 Tel: (91) 22 6623 2600 Fax: (62) 21 2557 1189 Fax: (91) 22 6623 2604 Philippines Thailand Vietnam Saudi Arabia Maybank ATR Kim Eng Securities Inc. Maybank Kim Eng Securities Maybank Kim Eng Securities Limited In association with 17/F, Tower One & Exchange Plaza (Thailand) Public Company Limited 4A-15+16 Floor Vincom Center Dong Anfaal Capital Ayala Triangle, Ayala Avenue 999/9 The Offices at Central World, Khoi, 72 Le Thanh Ton St. District 1 Villa 47, Tujjar Jeddah Makati City, Philippines 1200 20th - 21st Floor, Ho Chi Minh City, Vietnam Prince Mohammed bin Abdulaziz Rama 1 Road Pathumwan, Street P.O. Box 126575 Tel: (63) 2 849 8888 Bangkok 10330, Thailand Tel : (84) 844 555 888 Jeddah 21352 Fax: (63) 2 848 5738 Fax : (84) 8 38 271 030 Tel: (66) 2 658 6817 (sales) Tel: (966) 2 6068686 Tel: (66) 2 658 6801 (research) Fax: (966) 26068787 South Asia Sales Trading North Asia Sales Trading Kevin Foy Andrew Lee Regional Head Sales Trading [email protected] [email protected] Tel: (852) 2268 0283 Tel: (65) 6636-3620 US Toll Free: 1 877 837 7635 US Toll Free: 1-866-406-7447 Malaysia Thailand Joann Lim Tanasak Krishnasreni [email protected] [email protected] Tel: (603) 2717 5166 Tel: (66)2 658 6820 Indonesia London Harianto Liong Mark Howe [email protected] [email protected] Tel: (62) 21 2557 1177 Tel: (44) 207-332-0221 New York India James Lynch Sanjay Makhija [email protected] [email protected] Tel: (212) 688 8886 Tel: (91)-22-6623-2629 Vietnam Philippines Patrick Mitchell Keith Roy [email protected] [email protected] Tel: (84)-8-44-555-888 x8080 Tel: (63) 2 848-5288 www.maybank-ke.com | www.maybank-keresearch.com July 3, 2018 100