January 6, 2020 MY Credit Outlook 2020 – Chartbook & Views Late Cycle, Not End of Cycle FIXED INCOME FIXED Malaysia Winson Phoon|+65 6812 8807|[email protected] Se Tho Mun Yi|+603 2074 7606|[email protected] THIS REPORT HAS BEEN PREPARED BY MAYBANK KIM ENG RESEARCH SEE PAGE 61-66 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Contents Supply Review: 2019 3 Bumitama Agri Ltd 33 DRB-HICOM Bhd 35 Supply Outlook: 2020 8 Eco World Capital Assets Bhd 37 Eco World International Bhd 39 Demand Profile 10 First Resources Ltd 41 Fortune Premiere Sdn Bhd 43 GG Bonds 15 Gamuda Bhd 45 Genting Malaysia Bhd 47 Credit Condition & Spreads 17 IJM Corporation Bhd 49 Kuala Lumpur Kepong Bhd 51 Sector Outlook Mah Sing Group Bhd 53 Banking Sector 25 Press Metal Aluminium Hldgs Bhd 55 Construction Sector 26 UEM Sunrise Bhd 57 Plantation Sector 27 Power Sector 28 Appendix Property Sector 29 List of Outstanding GG bonds 60 Solar Sector 30 PDS maturity in 2019: Toll Road Sector 31 Corporates 61 FI (Bank) 64 Credit Views: Selected Issuers FI (Non-bank FI & Others) 65 Strictly Private & Confidential Page 1 MYR Credit: Supply Review, Supply Outlook and Demand Profile Strictly Private & Confidential Page 2 Supply Review 2019: Gross PDS supply was little changed at MYR105b (2018: MYR104b) Gross PDS Issuance by Rating: Lower high-grade supply Gross/Net PDS Issuance, 2015–2020F was offset by an increase in unrated bond issuances *2019: Urusharta Jamaah’s MYR27.55b issuance related to the restructuring of non-performing assets under LTH is excluded Sources: Bloomberg, BPAM, CEIC, Maybank KE Page 3 Supply Review 2019: By Sector Infrastructure bond supply plunged, but higher issuance from Property & REIT sector Sources: Bloomberg, BPAM, CEIC, Maybank KE Page 4 Infrastructure Sector: Issuances down due to downsizing of major projects and no large debt-funded IPP on high energy reserve margins Infra Bond: Credit enhancements through GG remain Infra Bond : Rail sector the main driver as power and toll- crucial, accounting for 63% of total infra bond supply road bond supply plunged Sources: Bloomberg, BPAM, CEIC, Maybank KE Page 5 Financial Institutions: Steady supply of bank capital debts partly driven by refinancing FI Debt: Supply by Type of FI Bank Debt: Supply by Type of Bank Capital DFI = Development Financial Institution Sources: Bloomberg, BPAM, CEIC, Maybank KE Page 6 Property & REIT: Total supply jumped to MYR16.4b in 2019 (2018: MYR10.8b) on robust issuances through unrated route Property & REIT: Top 10 Issuers in 2019 Property & REIT: Issuance by Rating (MYR’b) Issuer Name Rating MYR’b PNB Merdeka Ventures Sdn Berhad No rating 1.72 Sunway Treasury Sukuk Sdn Berhad No rating 1.32 Ara Bintang Berhad No rating 1.11 SunREIT Unrated Bond Berhad No rating 1.07 IJM Land Berhad A2 0.85 Sunway Berhad No rating 0.75 Damansara Uptown Retail Centre Sdn Berhad No rating 0.69 Tradewinds Hotels & Resorts Sdn Berhad No rating 0.60 Midciti Sukuk Berhad AAA 0.50 Notable Vision Sdn Berhad Multiple 0.48 Sources: Bloomberg, BPAM, CEIC, Maybank KE Page 7 Supply Outlook 2020: Gross PDS supply forecast MYR110b Forecast: Gross PDS supply of MYR110b in 2020 (2019: MYR105b) Key rationales: Infrastructure bond supply is underpinned by rail, power and water segments albeit down from the peak. Refinancing for some bond maturities or those become callable in 2020. Robust supply in unrated segment, funding need from property & REIT companies. 1) Infrastructure sector: Forecast MYR25-27b gross supply. This is expected to come primarily from rail/public transport and power sector. The MRT2 and Pan Borneo Highway (Sarawak) are under construction, while LRT3 and ECRL have been given the green light to proceed albeit at lower costs. It was reported in November that Penang state government is looking to issue bonds to finance the Bayan Lepas LRT project which may begin in 2020. On issuing vehicle, MRTs and Pan Borneo Highway are funded via Danainfra and LRT via Prasarana. There could be two new financing SPVs, for 1) ECRL and 2) Penang LRT. On power sector, we forecast MYR8.0-8.5b of supply to fund pipeline IPP and solar power plants under the large scale solar (LSS3). See details on report Malaysia Infrastructure Bond. 2) Banks/FI sector: Forecast MYR25-30b gross supply. Domestic banks’ capital ratios are strong. Given tepid loan growth in the banking system, there seems to be no urgency to raise bank capitals. As of Nov 2019, the CET1, Tier-1 and Total Capital ratios were 13.7% (Dec 2018: 13.9%), 14.2% (Dec 2018: 14.6%) and 17.6% (Dec 2018: 18.1%) respectively. While the banking system is well capitalised, there could be funding requirement from individual banks and we think the general appetite is to maintain strong capital buffers against the risk of higher non-performing loans in a late cycle. Refinancing need is moderate, given bond maturity/those become callable amounting to MYR16.35b for banks and MYR5.3b for non-bank FI. Strictly Private & Confidential Page 8 Supply Outlook 2020 (continued) 3) Mortgage/loans financing vehicles: Forecast MYR12-15b gross supply for LPPSA, Cagamas and PTPTN. We expect continued funding need for PTPTN, given its socially and to a certain extent politically important role in providing student loans for higher education (majority B40 group). Default rate was high at 51%. For the 51% defaulters, 32% are paying inconsistently; for the remaining 49% responsible borrowers, 26% has completed repayment while 23% are paying consistently, according to a TheEdge report on 25 Nov 2019. The government targets to improve recoveries and limit PTPTN loan access to B40. This may gradually reduce its funding need over the medium term. On another loan vehicle LPPSA, i.e. the Public Sector Home Financing Board, it is left with MYR2.55b debt capacity under its MYR25b GG programme, although the limit may be revised. The MYR2.7b SPK bond maturity on 19 Aug 2020 may be refinanced under LPPSA. For Cagamas, it has been a regular issuer and is expected to continue tapping Ringgit bonds. 4) Corporates and others: Forecast MYR35-40b gross supply. From a top-down perspective, domestic economy is expected to remain resilient therefore the overall environment should remain conducive to fund raising activities. The relaxation of rules and ongoing efforts by the regulator to broaden the credit spectrum and investor base in the PDS market should support the growth of PDS market, in our view. Property & REIT companies are expected to continue tapping the bond market as alternative funding source to the banking system. Strictly Private & Confidential Page 9 PDS Demand Profile: Healthy asset growth and reinvestment demand by major investor groups underpin the demand for PDS PDS Market: Predominantly local-driven with low foreign Assets/AUM Growth: Major Domestic Investor (YoY) participation Sources: BNM, CEIC, EPF, SC Page 10 Demand Profile: Pension Fund - Underpinned by still robust growth in net contributions EPF: Rising Net Contributions EPF: Total Investment Assets and Growth Sources: EPF, Maybank KE Page 11 Demand Profile: PNB - Continue to raise its allocation to fixed income PNB: Shifting low-yielding cash holdings into higher- PNB: AUM surpassed MYR300b on healthy pace of growth yielding fixed income investments, by MYR3-4b p.a. Sources: PNB, Maybank KE’s compilations Page 12 Demand Profile: Life Insurance Funds – Moderate growth Life Insurance Funds: Total Investment and Growth Life Insurers: Investment Composition Sources: BNM, CEIC, Maybank KE Page 13 Demand Profile: Fund Management Fund Management: Higher allocation to foreign assets, but Fund Management: Domestic AUM and Fixed Income Share driven by equities, not fixed income Sources: SC, Maybank KE Page 14 GG Bond: Lower but still reasonably sizeable issuance given the funding need of ongoing public infrastructure projects GG Bond: Top 10 Issuer by Outstanding Amount (MYR’b) GG Bond: Yearly Issuance and Its Share of PDS Supply Sources: Bloomberg, BPAM, Maybank KE Page 15 GG Bond: Moderate maturities in 2020 GG Bond Maturities: Moderate in 2020, only gets heavy in 2022 but mostly well spread out at the back end GG Bond and Contingent Liability, 3Q2019 *As of 31 Dec 2019 Sources: Bloomberg, BPAM, Maybank KE Page 16 Credit Condition and Spreads Strictly Private & Confidential Page 17 Credit Condition in Rated Universe: No default for second consecutive year, slightly positive credit trend with more upgrade/outlook increase in 4Q19 Rating Change: Upgrade vs Downgrade Rating Outlook Revision: Increase vs. Decrease Sources: RAM, MARC, Maybank KE Page 18 Credit Spreads: GG, AAA, AA2 and AA3 Credit Spread (bp): GG Credit Spread (bp): AAA Credit Spread (bp): AA2 Credit Spread (bp): AA3 *Credit spreads at end of period Sources: BPAM, Maybank KE Page 19 Credit Condition: Macroeconomic environment remain supportive, but external uncertainties linger Malaysia: Key Macroeconomic Indicators and Prices 2016 2017 2018 2019E 2020F Real GDP growth (YoY) 4.2% 5.9% 4.7% 4.5% 4.4% Current account balance (MYR'b/% of GDP) 29.0/2.4% 40.3/3.0% 30.6/2.1% 52.1/3.5% 51.2/3.3% Inflation rate (CPI) 2.1% 3.9% 1.0% 0.7% 2.0% Overnight policy rate 3.00% 3.00% 3.25% 3.00% 2.75% USDMYR (end-period) 4.49 4.10 4.13 4.15 4.08 Brent crude price (USD, average) 44 54 71 63 60 Crude palm oil (MYR/MT, average) 2,652 2,791 2,235 2,100 2,300 Unemployment rate 3.5% 3.4% 3.3% 3.4% 3.4% • Resilient macro environment underpin stable domestic credit conditions. GDP growth is expected to stay flattish in 2020 and inflation to remain benign, albeit higher.