September 9, 2019

Malaysia Strategy

This Mouse Deer has options

Room to weather, benefit from trade tension fallout Analyst A popular Malaysian adage goes “When elephants fight each other, the Anand Pathmakanthan mouse deer dies in the middle”. While the KLCI’s YTD relative (603) 2297 8783 underperformance vs. regional peers may appear to lend this saying [email protected] credence, we believe the Malaysian mouse deer is well-positioned, not just to weather US-China trade war fallout, but to actually benefit.

Fiscal and monetary leeway is available to cushion GDP growth drag,

while gains from trade and investment diversion are tangible at the macro level, and potentially to be expanded with supportive policy Current KLCI: 1,604 (06 Sep 2019) action. An uninspiring 2Q19 reporting season and uncertain earnings YE KLCI target: growth outlook has us retaining a defensive market strategy that 2019E 1,620 (vs.1,680 previously) emphasizes stock picking (Fig 18, bottom right for top BUYs) and high-

STRATEGY Malaysia equities growth & valuation conviction yield stocks (Fig 19 for top 10 picks). Overlapping picks are RHB Bank, AMMB, MBM and YTL REIT. 2018A 2019E 2020E KLCI @ 1,604 PE (x) 16.6 16.7 15.8

Fiscal: leveraging stimulus, investment diversion Earnings Growth (%) (2.8) (0.4) 5.4

While acknowledging downside risks to MKE’s 2019 GDP growth forecast Research Universe PE (x) 17.3 17.4 16.1 of 4.4% (2018: +4.7%), MKE Chief Economist Suhaimi, in his 2Q19 GDP report update (“Stay “cautiously constructive” as growth in line”, dated Earnings Growth (%) (2.6) (0.9) 8.2

19 Aug), highlights fiscal support via a 1H19 18% YoY jump in net

Malaysia development expenditure (Fig 6), as well as continuation of infrastructure projects (Fig 8). In reversing the private sector’s worrying post-GE14 investment funk, policy clarity for key economic sectors (Fig Top BUY picks 9, transport, telco, auto, utilities) would be a significant economic Stock BB Ticker Price TP Upside (%) stimulus, especially as related investments are high-multipliers, Large Caps leveraging mainly domestic labour and capital inputs. BNM has Tenaga TNB MK 13.82 15.50 12.2 highlighted (Figs 10 & 11) trade diversion sector benefits for PChem PCHEM MK 7.00 8.40 20.0 semiconductor (top pick: Greatech) and petrochemicals/oil (top pick: MISC MISC MK 7.75 7.70 -0.6 RHB RHBBANK MK 5.66 6.50 14.8 PChem), and we believe greater structural benefits from investment Dialog DLG MK 3.52 4.90 39.2 diversion (Fig 12) could be optimized via appropriate fiscal incentives. Sime Darby SIME MK 2.30 2.35 2.2 AMMB AMM MK 4.16 4.75 14.2 BIMB BIMB MK 4.03 5.00 24.1 Monetary: rate cuts, capital inflow growth supports Sime Prop SDPR MK 0.85 1.18 38.8 With the global monetary easing trend expected to continue, a lack of Kossan KRI MK 4.26 4.70 10.3

excess credit growth (we note the opposite, in fact, with July loan Mid-small Caps growth slipping below 4% YoY; Fig 13) and real interest rates high (Fig Yinson YNS MK 6.78 9.45 39.4 15), BNM is expected to reduce the OPR by another 25bps by end-2019. YTL REIT YTLREIT MK 1.36 1.50 10.3 Potentially reinforcing BNM’s monetary stimulus is diversion of China’s MBM MBM MK 4.15 6.35 53.0 MFCB MFCB MK 3.87 4.35 12.4 surplus savings away from US Treasuries into regional bond markets, of Ta Ann TAH MK 2.23 2.65 18.8 which Malaysia is among the larger and more liquid. Foreign ownership of MyNews MNHB MK 1.41 1.58 12.1 MGS has been recovering from the May low (Fig 16), with rising interest Greatech GREATEC MK 1.38 1.55 12.3

Source: Maybank KE, Bloomberg stock price buffering for two pending overhangs, i.e. FTSE Russell decision (decision expected in late-Sept) and weighting dilution re the GBI-EM Global Diversified index (to be phased in from Feb 2020).

Staying defensive; focus on stock picking, yield A weaker earnings outlook post-2Q19 reporting, as articulated in 2Q19 Results Roundup report (“Growth erased for 2019E”, dated 4 Se