Budget 2021 Review: We shall chart your Supersized financial course towards But Spread Too Thin a profitable future. 7 November 2020 7 November 2020 KLCI 1519.64 @ 6 November 2020 Budget 2021 “A something for everyone budget but not sufficient to tackle the Malaysia Macro & Strategy sectors badly hit by Covid-19” NEUTRAL (maintain) 2020 KLCI Target: 1,650 Up/Downside: +8.6% Previous Target: 1,650 KLCI vs MSCI World, MSCI AxJ Budget 2021: Supersized but spread too thin MSCI World MSCI AxJ FBMKLCI 10% MSCI AxJ: 4.6% 5% With a 10% growth in total expenditure, Budget 2021 addresses the needs 0% MSCI World: 11.9% -5% of everyone. Including a surprise cut in taxes and a reduction in employee -10% FBMKLCI: -4.4% EPF contribution, focus remains on domestic demand to support growth in -15% the coming year -20% -25% This expansionary budget will result in a budget deficit of 5.4% of GDP in -30% 2021E. However, in the event of a prolonged and widespread lockdown due -35% Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 to Covid-19, we think the government still has room to fiscal pump-prime Source: Bloomberg, Affin Hwang We expect the gloves to rally, as a key overhang is removed. Other sector Key market statistics beneficiaries are the Construction sector and Cellular operators. No 2020E 2021E additional taxes for the sin sector and BAT could also benefit from GDP growth (%) (5.0) 6.0 increased government focus to tackle the illicit cigarette market KLCI EPS growth (%) (21.0) 29.0 Source: Affin Hwang forecasts 2021 Economic Outlook and Fiscal Outlook – Government Financial Position Top calls for 2020 Based on the assessment and projection on the country’s economic prospects for 2021, the Ministry of Finance (MOF) expects real GDP growth to recover and expand Ticker Stock Rating Price TP by between 6.5% and 7.5% in 2021, rebounding from -4.5% estimated for (RM) (RM) Top buys: 2020. Notwithstanding the narrowing of the GDP growth forecast range from an TOPG MK TOP GLOVE BUY 8.50 15.45 earlier official estimate of between 5.5% and 8.5%, the Treasury’s projection at mid- HART MK HARTALEGA BUY 18.20 27.10 point of 7.0% in 2021 (calculated based on GDP absolute values at constant price), DLG MK DIALOG BUY 3.80 4.30 T MK TELEKOM BUY 4.20 5.00 signals an official view of continued improvement in domestic economic conditions QLG MK QL RESOURCES BUY 6.52 7.11 despite these challenging times with the COVID-19 pandemic. SIME MK SIME DARBY BUY 2.47 2.76 INRI MK INARI BUY 2.68 3.07 SCI MK SCIENTEX BUY 11.92 13.20 Tax and expenditure for 2021 Budget is expansionary ACSM MK AEON CREDIT BUY 9.65 13.00 Generous measures are introduced for the people and business in the 2021 Budget, HSS MK HSS ENGINEERING BUY 0.45 0.82 where the tax and expenditure programme of the Federal Government also takes Source: Affin Hwang, share prices as of 6 November 2020 more precedence in supporting economic growth than fiscal consolidation. Total expenditure allocation (including operating and development expenditures) of RM305.5bn is 10.4% higher than a decline of 12.8% estimated expenditure for 2020, where operating expenditure is projected to increase by 4.3% to RM236.5bn in 2021, while development expenditure is expected to increase by 38% to RM69bn in 2021 (RM50bn in 2020). Federal Government is projected to incur a budget deficit of RM84.8bn or -5.4% of GDP in 2021, compared with a deficit of RM86.5bn or -6.0% of GDP in 2020. Overhang for glove sector removed From an equity perspective, there were several pleasant surprises. First off, a Research Team speculated windfall tax for the glove sector had not materialised. Instead, the 4 large T (603) 2146 7516 glove players would contribute RM400m to the government for the procurement of a E [email protected] Covid-19 vaccine and medical equipment. The estimated impact to net profit for the respective companies is a mere 3-5%, which we believe is marginal, and hence likely to spur a sector rally in our view, post this major overhang. Construction and Cellular operators also to benefit Higher development expenditure at RM69bn (+38% yoy) should be a positive for the construction and infrastructure sector, although the sector may fail to outperform considering political uncertainty given the prospects of an early election going into 2021. The telco sector is also set to benefit from a RM1.5bn aid to the B40 segment to ensure access to broadband. This in our view should help preserve ARPUs particularly for the cellular operators, which are seeing intense competition. Meanwhile, the regulator, MCMC has also been allocated RM7.4bn to build and enhance broadband services over 2021-22, which ties in nicely with the broadband aid to the B40 segment. A relief for the sin sector, and measures to address the illicit cigarette market On the sin sector, we are encouraged that no further taxes were imposed. Measures introduced to tackle the illicit cigarette are also welcoming, considering that the legit market share has shrunk to c. 30% and hence should be a positive booster to government loss in tax revenue, which has estimated to be in the region of RM5bn. But Covid-19 badly hit sectors, not well addressed However, we were taken a little aback that there were few measures to address badly impacted sectors hit by Covid-19 largely surrounding the tourism-related industry (airlines, airports, hotels, retailers and related services). The tourism sector employs nearly a third of the working population and could be a near term concern. While the provision allows such EPF contributors to draw down their pension funds from their main Account 1, we think that this is a short term measure that could eventually return to haunt, considering that most savers already do not have sufficient funds in this account for retirement. Elsewhere, targeted loan repayment assistance may also provide some short term relief. The government has nevertheless projected that unemployment will improve to 3.5% from 4.2% in 2020. Maintain Neutral on the KLCI and year-end target of 1,650 Budget 2021 has not prompted us to make any revisions to our market EPS projections. We retain our 1,650 year-end target for the KLCI (based on 19x on CY20E market EPS) which is largely underpinned by our strong conviction on the glove stocks. For the broader market, we are of the view that the earnings recovery and valuations lack excitement. Our other sector Overweights are in the Autos & Autoparts, Building Materials and Utilities. Key risk for the market lies in an earlier- than-expected vaccine for Covid-19 which could result in a collapse in glove stock prices and the KLCI, a sovereign rating downgrade, further weakness of the US$ and possibly aiding fund inflows, sharp decline in oil prices and geopolitical risk. 2 Budget 2021 – An expansionary budget 2021 Economic Outlook and Fiscal Outlook – Government Financial Position Based on the assessment and projection on the country’s economic prospects for 2021, Ministry of Finance (MOF) expects real GDP growth to recover and expand by between 6.5% and 7.5% in 2021, rebounding from -4.5% estimated for 2020. Notwithstanding the narrowing of the GDP growth forecast range from an earlier official estimate of between 5.5% and 8.5%, the Treasury’s projection at mid-point of 7.0% in 2021 (calculated based on GDP absolute values at constant price), signalling an official view of continued improvement in domestic economic conditions despite these challenging times with the COVID-19 pandemic. Real GDP growth in absolute value is projected to recover from RM1.36trillion in 2020 to RM1.45trillion in 2021, bringing output above its pre-crisis level by end 2021 (RM1.42 trillion in 2019). Fig 1: MOF’s GDP projection Source: MOF Economic Report 2020/2021 Our GDP growth forecast of 6% for 2021 is lower than the official forecast of between 6.5% and 7.5%, where the main difference lies in higher growth forecast on real exports by Treasury, which is projected to expand by 8.7% in 2021 (-13.4% in 2020), against Affin Hwang’s 7.0%. The other difference in forecast lies in Affin Hwang’s growth outlook on domestic demand, which we project at 6.2% in 2021, against Treasury’s higher projection of 6.9%. Nevertheless, MOF’s GDP growth projection is based on a set of reasonable assumptions for 2021, with Brent crude oil price of about US$42 per barrel next year (US$40 per barrel in 2020), as well as a global GDP growth forecast of 5.2%. The country’s headline inflation is projected to trend higher to 2.5% in 2021, with budget deficit target of -5.4% of GDP. Fig 2: GDP growth projections comparison MOF Affin MOF Affin 2018 2019 2020 2021 Private consumption 8.0 7.6 -0.7 -4.5 7.1 5.5 Private investment 4.3 1.6 -11.7 -10.0 6.7 7.5 Public consumption 3.2 2.0 1.6 5.0 2.0 6.0 Public investment -5.0 -10.8 -9.3 -15.0 16.9 10.0 Domestic demand -5.5 4.3 -3.0 -5.0 6.9 6.2 Real exports of goods and services 1.9 -1.3 -13.4 -9.8 8.7 7.0 Real imports of goods and services 1.5 -2.5 -11.9 -10.0 9.2 7.3 GDP 4.8 4.3 -4.5 -5.0 6.5 - 7.5 6.0 Agriculture 0.1 2.0 -1.2 -2.0 4.7 3.0 Mining and Quarrying -2.2 -2.0 -7.8 -6.0 4.1 5.0 Manufacturing 5.0 3.8 -3.0 -7.0 7.0 7.5 Construction 4.2 0.1 -18.7 -15.0 13.9 9.0 Services 6.8 6.1 -3.7 -3.8 7.0 5.5 GDP 4.8 4.3 -4.5 -5.0 6.5 - 7.5 6.0 Source: MOF Economic Report 2020/2021, Affin Hwang estimates We believe uncertainty surrounding the development of the pandemic will continue to be a downside risk to the growth outlook.