Malaysia Equity Research Investment Strategy
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05 December 2013 Asia Pacific/Malaysia Equity Research Investment Strategy Malaysia Market Strategy Research Analysts STRATEGY Tan Ting Min 60 3 2723 2080 [email protected] Outlook 2014: A stock-picking market Danny Goh 60 3 2723 2083 [email protected] Figure 1: Top ideas in Malaysia (ranked by average daily value) Market P/E P/B Div ROE Foong Wai Loke 60 3 2723 2082 Price TP cap (x) (x) yld (%) (%) [email protected] Name Ticker (RM) Ratg (RM) (US$mn) t t+1 t+2 t+1 t+1 t+1 Beta Annuar Aziz Top OUTPERFORM ideas 60 3 2723 2084 Tenaga TNB MK 10.72 O 12.40 19,097 14.7 11.9 10.2 1.5 2.3 12.7 0.9 [email protected] Maxis MAXIS MK 7.04 O 9.00 16,674 28.4 27.2 26.5 8.8 5.7 32.4 0.7 Rachel Tan 3,363 603 2723 2081 Gamuda GAM MK 4.65 O 5.50 19.3 14.4 11.6 1.8 2.4 13.6 1.3 [email protected] RHB Cap RHBC MK 7.67 O 8.80 6,166 11.4 10.7 9.1 1.2 2.8 10.9 1.0 Nicholas Teh B.Armada BAB MK 3.93 O 4.40 3,637 29.9 21.9 17.5 2.7 0.8 12.5 0.7 603 2723 2085 Top UNDERPERFORM ideas [email protected] MAS MAS MK 0.31 U 0.25 1,635 NM NM NM 1.1 0.0% -14% 0.6 Santitarn Sathirathai MISC MISC MK 5.55 U 4.30 7,820 32.6 18.3 14.6 1.1 1.8% 6.0% 1.1 +65 6212 5675 [email protected] Note: O = Outperform, U = Underperform. Source: Company data, Credit Suisse estimates ■ Short-term pain for long-term gain. We believe 2014/2015 is about administering the bad medicine and tightening the belt. Cutting subsidies is a main theme. The 6% GST will kick start in April 2015, thus corporate margins could get squeezed. The high bond foreign ownership is a worry, as the ringgit is vulnerable to fund flow shocks. All this short-term pain is necessary to harness the long-term gain which stems from an improving budget deficit and trade surplus, thus stabilising the ringgit and avoiding the rating downgrade. ■ Macro looks healthy. CS is projecting for 2014 GDP to be 5.0%, improving from 4.2% in 2013, driven primarily by strong private investments and a recovery in the global economy. 9M 2013 private investments grew at 13% YoY. Corporate balance sheets remain robust, evident from corporate net gearing steadily falling from 67% in 1998 to 24% at present, but high household debt remains a concern in Malaysia. ■ Malaysia is a stock-picking market. Malaysia has always been a stock- picking market and our key OUTPERFORM ideas for 2014 include the following themes: tourism (Air Asia X, Genting), subsidy rationalisation (Tenaga), construction (Gamuda and IJM Corp), banks (RHB Cap), oil & gas (Bumi Armada) and telcos (Maxis and DiGi). Our short ideas include MAS, MISC, KL Kepong, YTL Power and IGB REIT. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 05 December 2013 Focus charts Figure 2: Malaysia is the best performing SEA market YTD Figure 3: Private investment for 9M 2013 has grown 13% (in USD) YoY 10.0% % yoy 50 Public inv Private inv 5.0% 40 0.0% 30 -5.0% 20 -10.0% 10 -15.0% 0 -20.0% -10 -25.0% -20 NJA India China Korea -30 Taiwan Thailand 2007 2008 2009 2010 2011 2012 2013 Malaysia Indonesia Singapore Philippines Hong Kong Hong Source: Bloomberg Source: Pemandu, BNM Figure 4: High foreign ownership in Malaysian bonds will Figure 5: Corporate debt (as a % of GDP) in Malaysia is mean that ringgit is vulnerable to fund flow shocks falling, suggesting corporate balance sheets are healthy Source: Various regulators Source: Various regulators Figure 6: Malaysia’s forward P/E band is hugging the Figure 7: The big cap P/E premium over the small cap is long-term average low relative to history 30 25.7x 24.0x Average = 15.6x 25 Current = 14.8x 19.2x 21.1x 20 15 12.8x 13.3x 10 12.3x 11.4x 5 7.3x - Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Source: Credit Suisse estimates Source: MSCI, Credit Suisse estimates Malaysia Market Strategy 2 05 December 2013 A stock-picking market An eventful 2013 2013 was an eventful year, where Malaysia saw Barisan Nasional, led by PM Najib BN returned to power in the returning to power after the most hotly fought General Elections in May, a UMNO party 2013 General Elections and election result which strengthened Najib's position and the Budget where fiscal discipline PM Najib strengthened his is a key theme. Malaysia started the year poorly due to General Election concerns, but position after UMNO with the political risk out of the way, the Malaysian market has emerged as one of the best elections performing markets in NJA and the best performing Southeast Asian market YTD. Short-term pain for long-term gain While we might see some short-term pain, arising from higher inflation (subsidy cuts in 2014 and 6% GST in 2015) and lower purchasing power, the long-term gain stems from an improving budget deficit and trade surplus, thus stabilising the ringgit and avoiding the rating downgrade. The good news: macro is healthy. CS is projecting 2014 GDP to be 5.0%, improving Macro is fine—GDP growth from 4.2% in 2013, driven primarily by strong private investments and a recovery in the of 5.0% in 2014E backed by global economy. strong private investments and a recovery in global Malaysia's macro looks good with 9M 2013 private investments growing at 13% YoY, economy helped by Malaysia's sixth position in the World Bank's "Ease of doing business" survey. High household debt remains a concern, but corporate balance sheets remain robust, as is evident from corporate net gearing steadily falling from 67% in 1998 to current 24%. The concerns - We believe 2014 is about administering the bad medicine and tightening 2014/2015 is about the belt. Cutting subsidies is a main theme in the Budget: gasoline, sugar and electricity administrating the bad tariff rates have increased significantly, potentially dampening purchasing power. medicine—subsidy cuts and 6% GST. 2015 could be challenging for the corporate world, which could be confronted with a potential slowdown in demand, and a potential increase in costs due to the 6% GST but without a corporate tax cut until FY2016; thus, corporate margins could get squeezed. Malaysia has also enjoyed strong foreign inflows in the last four years, both in equities and High foreign bond bonds. The high foreign ownership is now a worry, especially in bonds. While the 2014 ownership is now a worry as Budget measures have managed to calm the ringgit, the high foreign ownership in the ringgit is vulnerable to Malaysian bonds means that the ringgit is vulnerable to any major outflows. Large any major outflows domestic funds could absorb the foreign selling in bonds, but that could be at an expense to the domestic equity market. Market valuations Malaysian valuations are hugging long-term averages. We estimate that Malaysia trades Malaysian valuations are at 2013E and 2014E core P/Es of 16.3x and 14.3x with core earnings growth of 5.7% and hugging long-term averages 14.1%, respectively. Meanwhile, Malaysia trades at 2013E and 2014E P/Bs of 2.1x and 1.9x, respectively, which is around 7-17% above the long-term P/B average. We forecast that the KLCI will hit 1,918 by end-2014, a 5% upside. Malaysia: A stock-picking market Malaysia has always been a stock-picking market and our key OUTPERFORM ideas for Malaysia is a stock-picking 2014 include the following themes: tourism (Air Asia X, Genting), subsidy rationalisation market (Tenaga), construction (Gamuda and IJM Corp), banks (RHB Cap), oil & gas (Bumi Armada) and telcos (Maxi and DiGi). Our short ideas include MAS, MISC, KL Kepong, YTL Power and IGB REIT. We are OVERWEIGHT power, telcos, aviation, construction and consumer, and UNDERWEIGHT the M-REITs. We are MARKET WEIGHT on banks, agribusiness, oil & gas, healthcare and property. Malaysia Market Strategy 3 05 December 2013 Top picks in Malaysia Malaysia has always been a stock-picking market, and we list our key OUTPERFORM Key buys: tourism (AAX, ideas in Figure 8. Our main themes are as follows: GENT), TNB, construction (GAM, IJM), RHB, telcos Tourism: Air Asia X and Genting, due to Visit Malaysia Year 2014 and a weaker ringgit. (Maxis, DiGi) Subsidy rationalisation: Tenaga. Tenaga has just received a tariff hike, so what's next? The Incentive-Based Regulation which will ensure an automatic pass-through in fuel cost.