March 10, 2020

Malaysia Politics

PN Coalition Government Cabinet unveiled

Analysts PM Tan Sri unveiled his Cabinet with no DPM post and replaced by Senior Ministers, and appointed a banker as Finance Minister. Suhaimi Ilias UMNO and PAS Presidents are not in the lineup. Cabinet formation (603) 2297 8682 reduces implementation risk to stimulus package. Immediate challenges suhaimi_ilias@-ib.com are navigating politics and managing economy amid risk of a no Dr Zamros Dzulkafli confidence motion at Parliament sitting on 18 May-23 June 2020 and (603) 2082 6818 economic downsides as crude oil price slump adds to the COVID-19 [email protected] outbreak. Ramesh Lankanathan

No DPM but Senior Ministers instead; larger Cabinet (603) 2297 8685 reflecting coalition makeup; and a banker as [email protected] Finance Minister William Poh Chee Keong Against the long-standing tradition, there is no Deputy PM post in this (603) 2297 8683

Cabinet. The Constitution also makes no provision on DPM appointment. [email protected] ECONOMICS Instead, Senior Minister status are assigned to the Cabinet posts in

charge of 1) International Trade & Industry, 2) Defence, 3) Works, and 4)

Education portfolios. These Senior Minister posts are distributed between what we see as key representations in the (PN) coalition i.e. former PKR Deputy President turned independent Datuk Seri Azmin Ali (International Trade & Industry), UMNO Vice President Datuk Seri (Defence), Gabungan Parti (GPS)

Chief Whip Datuk Seri (Works) and PM’s party Parti Pribumi Bersatu Malaysia (Bersatu) Supreme Council member Dr (Education). They will coordinate Cabinet agendas on economy, infrastructure development, education, security – underscoring areas of policy priorities - as well as chair Cabinet meetings in the PM absence. UMNO President Dato’ Seri and PAS President Dato’ Seri are not in the new Cabinet lineup.

Another notable Cabinet announcement by the PM is the appointment of Tengku Dato’ Sri Zafrul Tengku Abdul Aziz, the now former Group CEO of CIMB Group Holdings Bhd and CEO of CIMB Bank Bhd as Finance Minister. He will be appointed as Senator. He is not the first banker to be appointed Senator and Finance Minister. Former central banker Tan Sri was appointed as Senator and Second Finance Minister (Finance Minister back then was PM Tun ) in Mar 2004. In addition, two other former bankers turned Senator and Cabinent members were Maybank’s top executives Tan Sri Amirsham Aziz and Tan Sri as Ministers at PM’s Department.

The Cabinet size now is larger at 32 vs 28 previously, reflecting the current Government that is a coalition of more parties, resulting in a Cabinet that is made up of Bersatu (8), (11 i.e. 9 UMNO, 1 MCA, 1 MIC), PAS (3), Sarawak-based GPS (4), -based party (1), Independent (3 – essentially former PKR MPs) and Senators (2). Previous (PH) Government’s Cabinet of 28 was made up of PKR (7), Bersatu (6), DAP (6), Amanah (5), Warisan (3) and MAP (1).

In addition, the four additional Cabinet posts is due to splitting the (i) Education portfolio into two - Education and Higher Education; and (ii) Energy, Science, Technology, Environment & Climate Change portfolio into two - Science, Technology & Innovation and Environment; as well as (iii) increasing the number of Minister at PM’s Department posts to 5 from 3. Details on the Cabinet are in Fig 1-2.

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Economics Research

Immediate challenges: Navigating the politics, managing the economy

This year’s first Parliament session was rescheduled from 9 Mar – 16 Apr 2020 to 18 May – 23 June 2020, where there is the prospect of PH putting in a no confidence motion on PM. According to an online news report, PM briefed 115 MPs under his PN coalition on his Cabinet lineup, suggesting the numbers to survive any no confidence vote. Politics is also about perception, and the Government/Cabinet has to manage and deal with the general views that the PN coalition is “Malay/Bumiputera-centric” in terms of composition and policies.

At the very least, Cabinet formation reduces implementation risk of the MYR20b Economic Stimulus Package announced on 27 Feb 2020 (Responding to COVID-19’s Downsides Despite Political Limbo, 27 Feb 2020) by former PM Tun Dr Mahathir to deal with the economic downsides of the COVID-19 outbreak that has turned global in recent weeks from what was initially a -centric outbreak. Consequently, with the Federal Government’s MYR3.5b portion of the Economic Stimulus Package and the downward revision to this year’s economic growth forecast to 3.2%-4.2% from 4.8% on 27 Feb, 2020 budget deficit to GDP ratio is now expected at 3.4% (2019: 3.4%) vs the original 3.2% target which was based on USD62/bbl assumption (2020YTD: USD58/bbl; 2019: USD64/bbl).

However, fresh economic challenge and risk have emerged following the slump in crude oil price in recent days. Brent crude tumbled to USD32/bbl yesterday from this year’s high of USD69/bbl on 6 Jan 2020 following the apparent collapse of OPEC+ grouping that has been in place since 2016 to support crude oil price via crude oil production cuts as the two key producers, Saudi Arabia and Russia, could not agree on the proposal to cut output by 1.5m bpd next month until end- 2020. Our sensitivity analysis showed a USD10/bbl drop in crude oil annual average price will:

 reduce Government’s oil-related annual revenue by MYR7b (i.e. MYR4b in tax revenues and petroleum royalties, and MYR3b in normal dividend);

 raise budget deficit to GDP ratio by 0.45ppt; and

 cut current account surplus by 0.15ppt.

To recap, Budget 2016 (when Brent crude slumped to USD26/bbl on 20 Jan 2016) was recalibrated via MYR8.0b-MYR9.5b spending cuts to keep budget deficit to GDP ratio target at 3.1% (Budget 2016 Recalibrated_29 Jan 2016) as revenues were estimated to fall by MYR7.8b-MYR9.4b on the back of downward revisions in 2016 real GDP growth forecast to 4.0%-4.5% from 4.0%-4.5%, and in average crude oil price assumption to USD30-35/bbl from USD48/bbl. Actual economic growth, average crude oil price and budget deficit to GDP ratio that year were 4.4%, USD44/bbl (-15.7% YoY) and 3.1% respectively.

In addition, the Cabinet/Government needs to address and provide clarity on the policy uncertainties and regulatory overhangs facing a number of key sectors/industries in the economy “inherited” from previous PH Government (Fig 3).

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Figure 1: Malaysian Government Cabinet Portfolio Ministers & Their Parties under Perikatan Previous Ministers & Their Parties under Nasional (PN) Government Pakatan Harapan (PH) Government 1. Prime Minister Tan Sri Muhyiddin Yassin (Bersatu) Tun Dr (Bersatu) Deputy Prime Minister Replaced by Senior Ministers in charge of Dato’ Seri Dr (PKR) Finance, International Trade & Industry, Defence, Works & Education portfolios 2. International Trade & Industry (Senior Dato’ Seri (Independent) Datuk Ignatius (Warisan) Minister) 3. Defence (Senior Minister) Dato’ Sri Ismail Sabri Yaakob (UMNO) (Amanah) 4. Works (Senior Minister) Dato’ Sri Fadillah Yusof (GPS) (PKR) 5. Education (Senior Minister) Dr. Mohd Radzi Md Jidin (Bersatu) Dr (Bersatu) / Tun Dr Mahathir (Bersatu) * 6. Finance Tengku Dato’ Sri Zafrul Tengku Abdul Aziz (CIMB (DAP) Group CEO, to be appointed as Senator) 7. Minister at PM’s Department (Economy) – Dato’ Sri (Bersatu) Dato’ Seri Mohamed Azmin Ali (PKR) - Economic replace Economic Affairs portfolio Affairs 8 Minister at PM’s Department (Special Dato’ Seri (Bersatu) NA Functions) 9. Minister at PM’s Department (Law & Dato’ (PAS) Datuk (Warisan) - Judicial Affairs Parliament) 10. Minister at PM’s Department (Religious Dato’ Seri Dr Zulkifli Mohamad Al-Bakri (to be Mujahid (Amanah) Affairs) appointed as Senator) 11. Minister at PM’s Department (Sabah & Datuk Seri Panglima Maximus Johnity Ongkili NA Sarawak Affairs) (PBS) 12. Transport Datuk Seri Ir. Dr (MCA) (DAP) 13. Science, Technology & Innovation (UMNO) (DAP) - Energy, Science, Technology, 14. Environment Dato’ Tuan Man (PAS) Environment & Climate Change 15. Human Resources Datuk Seri M. Saravanan (MIC) M. Kula Segaran (DAP) 16. Federal Territories Tan Sri (UMNO) (Amanah) 17. Women & Family Datuk Seri Rina Mohd Harun (Bersatu) Datuk Seri Dr Wan Azizah Wan Ismail (PKR) - Women, Family & Community Development 18. Higher Education Dato’ Dr (UMNO) NA (previously under Education portfolio) 19. Energy & Natural Resources Dato’ Dr (UMNO) Dato’ Dr Xavier Jayakumar (PKR) - Water, Land & Natural Resources; Yeo Bee Yin (DAP) - Energy, Science, Technology, Environment & Climate Change 20. Home Datuk Seri Hamzah Zainuddin (Bersatu) Tan Sri Muhyiddin Yassin (Bersatu) 21. Health Dato’ Sri Dr (UMNO) Datuk Seri Dr (Amanah) 22. Agriculture & Food Industry Datuk Seri Dr. (Bersatu) Datuk Seri (Amanah) 23. Rural Development Datuk Dr (Bersatu) Datuk Seri Rina Mohd Harun (Bersatu) 24. Foreign Dato’ Seri Hishammuddin Tun Hussein (UMNO) Dato’ (PKR) 25. Domestic Trade & Consumer Affairs Datuk (GPS) Datuk Seri Saifuddin Nasution Ismail (PKR) 26. Communications & Multimedia Dato’ Seri Saifuddin Abdullah (Independent) (DAP) 27. Housing & Local Government (Independent) Zuraida Kamaruddin (PKR) 28. Entrepreneur Development & Cooperatives Dato’ Sri Dr Tuanku Jaafar (GPS) Datuk Seri Mohd Redzuan Md Yusof (Bersatu) - Entrepreneur Development 29. Plantations Industry & Commodity Dato’ Dr Mohd Khairuddin Aman Razali (PAS) (DAP) - Primary Industries 30. Tourism, Arts & Culture Dato’ Sri (GPS) Datuk Mohammadin Ketapi (Warisan) 31. National Unity Datuk (UMNO) Senator P. Waytha Moorthy (MAP) - Minister at PM’s Department (National Unity & Social Well- Being) 32. Youth & Sports Dato’ Sri Reezal Merican Naina Merican (UMNO) Syed Saddiq Syed Abd Rahman (Bersatu)

* Dr Maszlee Malik was Education Minister from 21 May 2018 to 2 Jan 2020. Tun Dr Mahathir as Acting Education Minister Source: PM Speech on Cabinet Announcement (9 Mar 2020)

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Economics Research

Figure 2: Malaysia – Government Cabinet by Parties PN Government Number of Cabinet Members PH Government Number of Cabinet Members Barisan Nasional (BN) 11 PKR 7 UMNO 9 DAP 6 MCA 1 Bersatu 6 MIC 1 Amanah 5 Bersatu 8 Warisan (Sabah-based Party) 3 GPS (Coalition of Sarawak-based parties) 4 Malaysia Advancement Party (MAP) 1 PAS 3 Parti Bersatu Sabah 1 Independents 2 Senators 3 TOTAL 32 TOTAL 28

Source: Maybank Kim Eng

March 10, 2020 4

Economics Research

Figure 3: Malaysia sector-specific regulatory lookouts Sector Lookouts Comments The Malaysian Aviation Commission (MAVCOM) had a meeting with sell-side analysts on 31 Oct when it Regulated Asset Base (RAB) reiterated its commitment to start the new aeronautical charge framework on 1 Jan 2020. Nothing Aviation model has come to pass since, and further delays and potential revisions to the framework appear likely.

In our view, the one issue to watch out for in the guidelines would be whether Bank Negara imposes capital requirements on Virtual Banks, and whether existing brick & mortar banks can participate in Banking Virtual Banking Guidelines securing such licenses. The imposition of such a requirement would curtail the number of players in the virtual banking space and work to the advantage of the existing banks that are already investing heavily in digital banking. The construction sector has seen few new contracts / jobs since GE14 as the focus has been on Mega-infrastructure projects revamping bidding processes and cutting costs; among key projects awaiting approvals are the Construction approvals pending Transport Masterplan (PTMP; RM8bn for Phase 1 LRT), Sing-KL High Speed Rail (HSR; RM110bn, with decision needed by May 2020 per two year moratorium) and MRT3 (RM45bn). The government is in the midst of drafting a new Tobacco Control and Smoking Act to regulate all Tobacco Control and Smoking Consumer smoking products, including e-cigarettes and vape. The new Act is expected to be tabled in Act Parliament in early 2020. Potential restructuring of ownership structure of Malaysian mainstream media companies by limiting the shareholding of political parties and other entities to 10%. MCA’s stake in STAR is 42.8% (MCA Media Shareholding in Media coys President said MCA will not sell, on 5 Jan 2019), while UMNO’s stake in MPR is 8.0% via Altima Inc. (but this is already lower than the 10% cap). The government had exempted CPO export taxes to Dec 2019 (from 1 May 19) to reduce stockpile and boost prices. And in Budget 2020, the GoM lowered the CPO export taxes to 3%-8% (from 4.5%-8.5%) Reinstatement of CPO export when CPO price hit above MYR2,250/t. Come 1 Jan 2020, an export tax of 5% will be imposed on Plantation taxes and B20 exports in Jan 2020. implementation B20 is projected to raise annual palm oil demand to 1.26mt in 2021. The present B10 for the

transport sector and B7 for the industrial sector are projected to utilise 0.76mt of palm oil annually in 2019. We understand that the Penang State Government has issued a circular on the lower threshold pricing for foreign buyers but the threshold pricing is fixed at MYR800k/unit (instead of the MYR600k/unit as Implementation of new proposed by the Federal Government). As for , the media has reported that the Johor State Property property measures announced Government will follow the proposed threshold pricing announced during the Budget 2020. Elsewhere, during the Budget 2020 REHDA is lobbying for the extension of Homeownership Campaign (HOC) into 2020. HOC 2019 will be ended by 31 Dec 2019. Potential regulator moves Possible regulatory moves in the sector include 1) finalizing the re-farming of the 700/2300/2600MHz Telco relating to spectrum, rural spectrum, 2) getting mobile telcos to bear the cost of rural infrastructure development (an increment infra and 5G deployment to the USP payment) and 3) deciding on the 5G-deployment model (whether to pursue a 5G infraco).

The Minister of Finance (Incorporated) made a MYR6.2b cash offer to Gamuda and its associate, Government’s take-over of LITRAK, on 21 Jun 2019, which is fair, based on our estimates. Toll highways Gamuda’s 4 tolled highways The final Cabinet approval was obtained during Budget 2020. The takeover exercise is expected to be completed in 1H20.

Review/disclosure of Regulatory details for gas utilities remain undisclosed despite the impending arrival of a new Utility regulatory terms for regulatory period (2020-2022) and the start of TPA. Negotiations for Tenaga's RP3 (2021-2023) terms electricity and gas sectors to take place over 2020. Source: Maybank Kim Eng

March 10, 2020 5

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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 10 March 2020, 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 10 March 2020, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.

India: As of 10 March 2020, 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 (including dividends) HOLD Return is expected to be between 0% to 10% in the next 12 months (including dividends) SELL Return is expected to be below 0% in the next 12 months (including 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.

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Economics Research

 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 , London EC4V 4AY, UK U.S.A. 50050 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 1101, 11th floor, A Wing, Kanakia 59000 Kuala Lumpur 1 Sunning Road, Causeway Bay, Jl. Asia Afrika No. 8 Wall Street, Chakala, Andheri - Tel: (603) 2297 8888 Hong Kong Gelora Bung Karno, Senayan Kurla Road, Andheri East, Fax: (603) 2282 5136 Jakarta 10270, Indonesia Mumbai City - 400 093, 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 Ground Floor, KANOO Building Makati City, Philippines 1200 20th - 21st Floor, Ho Chi Minh City, Vietnam No.1 - Al-Faisaliyah,Madina Road, Rama 1 Road Pathumwan, P.O.Box 126575 Jeddah 21352 Tel: (63) 2 8849 8888 Bangkok 10330, Thailand Tel : (84) 844 555 888 Kingdom of Saudi Arabia Fax: (63) 2 8848 5738 Fax : (84) 8 38 271 030 Tel: (66) 2 658 6817 (sales) Tel: (966) 920023423 Tel: (66) 2 658 6801 (research)

 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

Indonesia London Iwan Atmadjaja Greg Smith [email protected] [email protected] (62) 21 8066 8555 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

Philippines Keith Roy [email protected] Tel: (63) 2 848-5288

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