11th Malaysia Plan

Next Stop: 2020

May 22, 2015

ECONOMIC COMMENTARY AND ANALYSIS

The macro objectives look attainable, but may not be easily achieved if we continue to run

on the same engines and model. Growth in real GDP is expected to average at 5 to 6% per annum,

not much change from the pace which the economy is currently expanding. Nonetheless, if we consider

the sources of growth in the previous period and the changing economic structure, such growth targets

may not be easily achieved if we continue to run on the same engines and model - private consumption-

driven growth with ever rising high household debt; commodities; and low value-added manufacturing

sector that relies on cheap labour - even with greater amount of spending allocated (RM260b or 13%

higher than the 10MP level).

At the same time, the government is also targeting a balanced budget by 2020 with much

lower debt burden, implying that some tightening will have to take place to make way for higher

current account surplus to enable development spending be allocated the targeted amount annually over

the period. It is worth to note too, that despite the greater allocation, it is expected to yield only slightly

faster indicating a smaller multiplier effect. Should the total spending fall short of budgeted, there is a

risk that this growth target could not be met, just as in the case during the 10MP. Development

expenditure spent under the 2011-2014 turned out to be lower by 8.2% than what was budgeted.

Realizing this, the government has laid out various measures that would help raise economic

growth potential, mainly via MFP. Given the issues we presented above – the changing economic

structure amidst the relatively tighter fiscal policy, this implies greater need to raise the country’s

potential output. That used to be not as difficult to be achieved as we just needed to put in bigger “hard”

inputs, i.e. labour and capital. That is no longer sustainable if we want to be a high income nation in 5

years. The only way to do it is to have much faster total multi-factor productivity (MFP). Hence, the

11MP seeks to boost productivity- not only within the manufacturing industries and selective sub-sectors

of services as was in the past but to include agriculture, construction and the public sectors. It is

targeting the MFP to grow by a faster rate of 2.3% over the 11MP period (10MP: 1.6%) to boost its share

of contribution to GDP growth to 40% (10MP: 29.8%).

Table 1: 11MP vs 10MP – Key economic indicators

10MP 11MP

Average real GDP growth (%) 5.3 5 - 6

GNI per capita (RM) 36,937 54,100

Fiscal balance (end-period) -3.2 0

Federal government debt as % of GDP 53.5 <45

Current account as % of GNI 2.0 2.6

Multi- factor productivity (MFP) growth 1.6 2.3

MFP as a % of GDP growth 29.8 40.0

Unemployment rate (%) 2.9 2.8

Source: EPU

Chart 1: There is a possibility that spending would come in much lower than budgeted

Source: Treasury

6 game changers within the 6 strategic thrusts that make up the pillars of the 11MP to

underpin the transformation. The government has identified four of the six “game changers’ outlined

within the six thrusts that are critical to the development acceleration programme, namely 1) unlocking

productivity potential; 2)enabling industry-led technical and vocational education and training (TVET);

3)translating innovation to wealth by moving towards high-value and knowledge-based economy and

4)investing competitive cities as process of urbanization gains momentum. These would have to go hand-

in-hand with the other two game changers, i.e. elevating the bottom 40% household towards middle-

income class while at the same time, embarking on green growth. The 6 thrusts are 1)enhancing

inclusiveness towards an equitable society; 2)improving wellbeing of rakyat; 3)accelerating human capital

development; 4)green growth for sustainability and resilience; 5)strengthening infrastructure to support

economic expansion and 6)re-engineering all economic sectors into more knowledge-intensive and high

value-added activities.

The prudent spending plan is in line with the government’s objective but we think the

projection for Revenue is a tad too bullish. The Federal government aims to have a balanced

budget and much smaller debt burden by the end of the new 5-year plan. The government is looking at

paring down its debt burden to 43.5% by 2020 from 53.3% at present. However, this hinges on the

assumption that Revenue would rise by 46.4% to RM326.4b in 2020 from RM222.9 (which is lower than

the revised Budget numbers) while Operating Expenditure expected to rise by 36.4% over the same

period, leading to a big surplus in the Federal government’s current account that enables smaller

financing requirement sourced from the debt market.

At best, this plan may outline all the strategies needed to reach the “finishing line” but

execution is key for this multi-goals programme. Just like any other development programme, the

key factor to ensure its success is execution backed by strong political will. The more so for this 5-year

plan as it is hoped to be the last one needed to achieve the target by 2020. What is striking about the

new 5-year plan is that it is striving to deliver multi-goals – high-income generated by high productivity

with greater innovation and underpinned by inclusivity, with green technology put in place to ensure

sustainable development gains – within a 5-year period. It requires better coordination among

government agencies to enable smooth tracking of its progress; closer public-private cooperation and a

lot of political will to push the measures through.

35000

37000

39000

41000

43000

45000

47000

49000

51000

53000

55000

2008 2009 2010 2011 2012 2013 2014 2015

RM mn Gross Development Expenditure - Budgeted

Gross Development Expenditure - Actual

EQUITY MARKET

In our opinion, the 11MP are mostly a reiteration of government’s broad commitments toward a

more (i) people-centric, (ii) balanced, (iii) inclusive, and (iv) sustainable growth. Recall that similar

strategic missions were also contained in earlier documents such as the National Transformation

Programme (NTP) and its sub-sets, namely the Government Transformation Programme (GTP) and

Economic Transformation Programme (ETP).

But with numerous tactical refinements. Having said the above, the 11MP does offer some notable

tactical refinements among others (i) private-public partnership to boost productivity – emphasis on

multi-factor productivity, (ii) National Wage Index, (iii) mobile healthcare services, (iv) transit housing,

(v) National Open Data initiative, (vi) globally competitive cities – Kuala Lumpur , Johor Bahru, Kuching &

Kota Kinabalu, (vii) Industry-driven research, (viii) Industry-led TVET, and (ix) Bottom 40% (B40)

households – special interest rate housing loans & preferential entry into higher learning institutes.

No surprises with regard to growth, income, fiscal and spending targets. Nevertheless, there

were no material surprises insofar as (i) headline annual growth & per capita income targets, (ii)

timetable for improvement of fiscal position, and (iii) aggregate development expenditures for the

duration of 11MP, up to year 2020.

Market Outlook

No positive surprises result in disappointment. It seemed that the market was hoping for some

positive surprises in the 11MP announcement. This was arguably attested by the abrupt recovery of FBM

KLCI back to above the psychological 1,800 points level in late last week and followed by another sharp

upward move earlier this week. However, under this circumstance, no positive news only equates to a

disappointment. Hence the lack of good surprises in 11MP announcement may have led to the selling

pressure post-announcement yesterday which saw the equity market benchmark again at below the

1,800 points level.

But market attention would quickly shift towards other more immediate issues. Nonetheless,

we do not expect the market undertone going forward to continue to be dictated by the above letdown.

Instead, we anticipate market attention would quickly shift towards the slew of 1QCY15 results

announcements over the next two weeks. In addition, other externally-driven factors such US

Dollar/Ringgit movements, crude oil prices, performance of major economies, and the resultant liquidity

flow may also regain centre stage.

The positive secular impact of 11MP, if properly executed, on equity pricing… It must however

be highlighted that the government’s broad commitments toward a more people-centric, balanced,

inclusive, and sustainable growth are of long-term strategic importance to the nation’s well-being. Tying

it to the financial market, the 11MP, if properly executed, would help to improve Malaysia’s risk/return

profile as mirrored by (i) the strength of its sovereign rating, and (ii) receipts of global investment. On

this score, it must also be noted that equity pricing is essentially the questions of not only earnings but

also that of valuation. And equity valuation, by definition, involves considerations with regard to the

measure of risks and its attendant required return.

…may only manifest in due course. Therefore, over the long-term, lessening sovereign and economic

risks which attract a lower required return would naturally drive market valuation higher. These valuation

drivers will be propelled by improved sovereign rating stability and higher investor confidence which in

turn are engendered by the nation’s improving economic structural underpinnings. In gist, the positive

impact of 11MP on the equity market may only manifest over an extended period.

We reiterate our FBM KLCI 2015 year-end target at 1,900 points, which is equivalent to (i) 5.8%

gain from current level, and (ii) 17.3x PER multiple of 2015 earnings. However, as highlighted in our

previous Strategy reports, we expect the 2015 earnings revisions going forward to be generally flat or

even upward-biased. Hence the resultant PER valuation of our 2015 year-end target may turn out to be

lower than 17.3x.

11th MALAYSIA PLAN SECTORAL REVIEW

CONSTRUCTION, maintain POSITIVE

An on-going infrastructure theme. As roads and rails infrastructure will remain a crucial driver to

economic growth under the 11th Malaysia Plan (11MP), this reaffirmed our view that construction sector

shall continue to be a boom story in the next five years. The main focus of development efforts is to

improve connectivity and traffic flow as well as to support economic expansion. The sector is estimated to

expand by GDP of 10.3% per annum during the 11MP period.

Healthy jobs flow ahead. It is likely to be another excitement period for the construction companies as

we expect more jobs order inflow that should lead construction businesses to report healthy growth.

Nonetheless, many of the details of potential new projects in the 11MP are still not known to the

industry. But as highlighted in the announcement, the Government is prioritising several key areas such

as listed below:

Measures Allocation Remarks

Rail-lines

1. KVMRT Line 2 RM23.0b

Only local contractor qualified to tender for

underground works package, which MMC (non-

related) - Gamuda (TP: RM4.83) JV will be

strong contender for the aforesaid job worth

approximately RM8-9b. Meanwhile, we expect the

existing contractors for MRT line 1 are likely to be

the frontrunners for the second line.

2. LRT 3 RM9.0b

We opine all seven candidates may have

competitive edge to win PDP for the project. The

seven are a joint venture between MMC-

Gamuda, a tie-up between MRCB and George

kent, UEM Group Bhd, Naza TTDI Sdn Bhd,

Sunway Bhd, a joint effort involving WCT

Holdings Bhd (TP: RM1.84) and Alloy MTD

Group and IJM Corp (TP: RM7.35) with AZRB.

Roads and Highways

1. 1,663-km Pan-Borneo Highway RM27.0b

Beneficiaries: Cahya Mata Sarawak (non-

rated) is in strong position to secure some

packages and will boost its building-material

products as well. Sarawak backed companies such

as Hock Seng Lee (TP: RM2.06) and Naim

Holdings (TP: RM4.42) will also be clear

beneficiaries.

2. 276-km West Coast Expressway RM5.0b

Beneficiaries: WCT Holdings (TP: RM1.84),

Mudajya (non-rated), Bina Puri (non-rated)

and Muhibbah Engineering (TP: RM2.85).

3. Kota Bharu-Kuala Krai Highway N.A.

We opine small-to-mid cap construction companies

such as WCT Holdings, Mudajya, Mitrajaya, Pesona

Metro and Melati Ehsan could be interested to

participate in the project.

4. Next package of Central Spine

Road N.A.

Pesona Metro (non-rated) was awarded

package 3 of the project; therefore, we expect the

Company is front-runner to win the next package

based on its experience and track record

established over there. However, we do not rule

out other local private and listed small-cap

construction companies to win the remaining

packages.

5. Next phase of Lebuh Raya Pantai

Timur N.A.

We opine existing contractor, MTD capital or ANIH

Bhd would undertake next package of the project.

6. 3,000 kilometres of paved roads N.A.

Beneficiaries: Local private and listed small-cap

construction companies such as Mitrajaya (non-

rated), Fajarbaru (non-rated), Melati Ehsan

(non-rated) and Protasco (TP: RM2.45)

Strengthening corridors to fuel regional development. Apart from people-centric public transport

projects, regional economic corridors will continue to be a key enabler to ensure a more balanced

geographic development across Malaysia. It is targeted that realised investment will reach RM236b across

all corridors. With this on-going implementation, more construction-related job will flow down to local

construction companies. Key initiatives for regional economic corridors are as follow:

Measures Remarks

1. East Coast Economic Region

- Oil, gas and petrochemical, manufacturing,

tourism

- Entrepreneurship and skill training

programmes

- Central Spine Road* and Kota Bharu-Kuala

Krai Highway*

2. Northern Corridor Economic Region

- Agriculture, manufacturing, tourism, logistics

and education

- Developing the nutraceutical industry

- Strengthening automotive and aeronautics

industries

3. Iskandar Malaysia

- Education and creative cluster

- Tourism and logistics hub

- Manufacturing focus on E&E, food and

oleochemicals

4. Sarawak Corridor of Renewable Energy

- Pan-Borneo Highway*

- Energy-intensive industries including

aluminium, steel and glass

- Growth nodes in Baram and Tunoh for

tourism and resource-based industries

5. Sabah Development Corridor

- Key focus areas include tourism and palm oil

downstream processing

- Logistics infrastructure development

- Creative content programme

Other subsectors offer a flurry of construction activities. Another angle to look at is the

development of major projects such as the RM26b Tun Razak Exchange, RM5b PNB Warisan Merdeka

Tower, RM60b Refinery and Petrochemicals Integrated Development and RM40b KL-Singapore High

Speed Rail. These projects will provide another window of construction job opportunities for both large

and small cap construction companies to replenish their orderbook and keep their earnings visible over

the next five years.

Valuation. KL Construstion (KLCON) Index’s forward PER of 12x is still trading at a discount to its

historical 5 years rolling 4-quarter PER of 17x. This implies that the market has yet to fully price-in

construction sector’s earnings prospect due to uncertainties over the actual roll-out of the various mega

projects. Therefore, we expect construction stocks still can offer decent upside potential in anticipation of

the award jobs for major projects in the coming quarters.

Maintain POSITIVE. Premised on above, we maintain our POSITIVE stance on the Construction

sector. Our top picks for the sector at this juncture are IJM Corp (NEUTRAL, TP: RM7.35) and

Protasco (BUY, TP: RM2.45). Meanwhile, we expect strong potential candidates for the upcoming

implementation of aforesaid mega projects are Gamuda (TP: RM4.83), WCT Holdings (TP:

RM1.84), Muhibbah Engineering (TP: RM2.85), Hock Seng Lee (TP: RM2.06), soon to be listed

Sunway Construction (non-rated), Mitrajaya (non-rated), Econpile (non-rated), Gadang

(non-rated), Fajarbaru (non-rated), Cahya Mata Sarawak (non-rated) and KKB Engineering

(TP: RM1.96).

AVIATION, maintain POSITIVE

Measures Remarks

New Kuala Lumpur Air Traffic Control Centre at

KLIA

Replaces the existing facility in Subang.

Increases aircraft movements from 68

movements per hour to 108 movements and

strengthen KLIA as the main gateway.

Incorporation of the Malaysian Aviation

Commission in July 2015

Serves as oversight over economic and

regulatory aspects of the aviation industry.

For the aviation sector, the 11MP will see the establishment of the Malaysian Aviation Commission

(“MAC”) which will have purview over economic and licensing aspects of the commercial aviation

industry. The MAC will have oversight over a plethora of vital regulations within the industry such as

airline licensing, traffic rights allocation, airport operator licensing, airport charges, slot allocation, ground

handling, consumer protection and competition. Overall, we are positive on the newly formed

commission’s role and are pleased to understand that major aviation players such as AirAsia were invited

by the Government to share their inputs on the commission. We are also optimistic of the increased

oversight to improve public and international perception toward the Malaysian aviation standards that

could prevent the occurrence of a travel ban imposed on local airlines which would be disruptive for the

entire industry.

We maintain POSITIVE on the aviation sector. Within our coverage, we have BUY calls on AirAsia (TP:

RM3.70) and AAX (ex-rights TP: RM0.49) while we are NEUTRAL on MAHB (TP: RM7.26). We believe the

latest beat down of aviation stocks presents a buying opportunity for the sector in view of the lower jet

fuel price environment and returning travel sentiment after the incidences in 2014.

HEALTHCARE, maintain POSITIVE

Measures Remarks

Access to quality healthcare, particularly in

underserved urban and rural areas and

communities will be expanded.

Healthcare services will need to be amped up

to be able to serve the population. There will

be a need for continuous contribution from

the private healthcare providers to support

the public healthcare.

Measures will include the deployment of more

specialists and skilled personnel, establishment

of additional healthcare facilities in areas of

greatest need, and the expansion of outreach

programmes.

The deployment will enable expansion of the

reach of quality healthcare resources to the

rural areas. Currently, less than 30% of

specialist doctors are in the public sector.

Healthcare services will adopt lean management

practices to streamline work processes and

procedures in order to enhance effectiveness

and efficiency.

This will allow a more efficient delivery of

service to patients while fully utilising

healthcare assets.

Productivity improvements will allow

healthcare providers to provide better service

while improving patient turnover. For private

healthcare providers, they will be able to

increase its revenues per bed.

Implementation of hospital cluster concept in

selected locations.

Hospitals within the same geographical location

will work as one unit, sharing resources such as

assets, amenities, and human resource.

The country is facing a rapidly changing

operating environment that includes

increasing expectations on the quality of

healthcare and lack of resources to meet the

demands. Sharing of resources between

hospitals will tackle this issue, while

benefitting from expansion of services and

the cost-saving element.

Upgrade existing healthcare facilities and assets,

while the development of new facilities will take

into account functionality, cost-effectiveness,

and the needs of local communities.

Construction of new hospital facilities such as

Hospital Dungun in Terengganu and Hospital

Seri Iskandar in Perak is strategically located.

Although private healthcare providers are the

preferred option, a large segment of the

nation population is still dependent on

government healthcare facilities.

In further promoting the healthcare travel

services industry, focus will be given to attract

healthcare travelers.

Malaysia’s medical tourism achieved

RM697m in revenue and 770,000 patients

last year. Major private healthcare players

like KPJ and IHH continue to contribute to

the growth by strategically expanding its

capacities and services.

The government will continue its effort to provide quality healthcare and medical services for the nation,

ensuring all Malaysians will be able to benefit from good healthcare services.

We reiterate our POSITIVE view on the sector given our view of ample growth potential for the sector

due to the country’s changing demographic, increase in lifestyle-related illness, expanding middle class,

and greater insurance penetration.

POWER, maintain POSITIVE

Measures Remarks

Increasing share of renewable energy(RE) in

generation mix

Focus will be on promoting new RE sources,

enhancing RE personnel and implementing net

energy metering to further intensify the

development of RE.

- New RE sources to be explored and studied

include wind, geothermal and ocean energy.

The RE industry will diversify Malaysia’s

energy mix in a more sustainable

manner, create employment, and

enhancing skills.

The industry is expected to create about

15,300 jobs, comprising of skilled and

semi-skilled jobs.

- To complement the current FiT mechanism

in encouraging the takeoff of RE, a new

instrument termed as net energy metering

(NEM) will be implemented.

To promote and encourage more RE

generation, by prioritising internal

consumption before any excess power

generated is fed to the grid.

NEM is anticipated to encourage

manufacturing facilities and the public to

generate power without any restriction on

their generation capacity.

NEM will be executed by KeTTHA and

utility companies, and regulated by

Suruhanjaya Tenaga based on amended

legal provisions.

We are positive on this as the strategy being

planned would intensify the development of RE

in Malaysia.

This would also be a good strategy in order to

diversify our fuel mix and ensure the long-term

security of our electricity supply.

RE capacity is expected to reach 2,080MW by

2020, contributing to 7.8% of total installed

capacity in Peninsular Malaysia and Sabah.

We also believe that companies with exposure

in RE market will benefit the most due to an

expected more tender award by EC to

construct new RE plant, building up to 2020 as

the Government is expecting RE’s installed

capacity to increase by an approximately 8 fold

to 2080MW.

Enhancing demand side management (DSM)

The main goal of DSM is to encourage

consumers to use less energy during peak hours

and to move the time of energy use to off-peak

hours.

We believe the measure would ensure better

management of the country’s energy

resources.

- DSM is a vital tool to reduce peak electricity

demand impacting the overall load on an

electricity network.

- It will also result in less dependence on

expensive imports of fuel, reducing peak

power demand and minimising harmful

emissions to the environment.

Managing supply diversity for security of the

electricity subsector.

- Ensuring electricity supply security through

better management of resources.

The optimisation of fuel mix and

exploration of alternative fuels will be

given priority to reduce the nation’s

dependency on fossil fuels for electricity

generation.

The Government will ensure that future

power planting up must incorporate

more stringent emission control

technologies to ensure a progressive

reduction of the energy industry’s carbon

footprint.

- Enhancing alternative energy sources

- Augmenting rural electrification

Rural electrification programmes,

especially in Sabah and Sarawak, will be

enhanced to improve national coverage

to 99% by 2020.

Electricity supply would be provided

through off-grid generation for areas

which are too far from the grid. The

development of alternative systems such

as solar hybrid, mini and pico-hydro will

be supported by off-grid networks to

ensure wider coverage.

Supply diversity will help to ensure the security

of the electricity supply as it will reduce the

dependency on one particular fuel.

This would subsequently help to mitigate the

impact of future fuel price fluctuation on

generation cost.

Coal generation will be increased to 53% of

the total generation mix. Having said that we

are positive on the stringent action that being

plan to ensure the industry carbon print will be

at optimum level i.e more efficient plants

moving forward.

The Government will continue to invest on the

transmission grid which would benefit

construction players with experience in

construction transmission grid.

Improving the sustainability, efficiency, and

reliability of the electricity subsector

- Creating a sustainable tariff frameworks

In line with the Government’s policy to

We are highly positive with Government’s

reaffirmation to proceed with the

implementation of IBR.

gradually remove energy subsidies,

subsidy rationalisation for electricity

tariffs will continue.

The Special Industrial Tariff will be

abolished by 2020. In addition, future

tariff increases will take into

consideration the availability of safety

nets for low-income households.

The implementation of IBR will be

continued to ensure utility companies

provide efficient services.

- Improving efficiency and reliability of

electricity supply

Construction of new power plants to

produce 7,626 MW will be initiated to

replace retiring plants and meet the

growing peak demand.

A number of 500 kV and 275 kV

transmission projects to reinforce the

grid systems will be completed to

enhance the security of supply to major

load demand centres.

To conclude, we believe that the stability and security of the electricity supply is one of the important

elements to drive the nation in achieving its developed nation status by 2020 as an interrupted or

unstable supply of electricity would dampen the potential growth of an industry. To tackle this, the

Government had planned out strategy encompasses (i) exploring alternative fuel for a diversified

generation mix; (ii) promoting green energy as commercial fuel for generation mix; (iii) expanding its

power grid to ensure better access to electricity and (iv) ensuring greater transparency in the sector. On

this note, we are maintaining our POSITIVE view on the sector.

OIL & GAS, maintain POSITIVE

Measures Remarks

The mining sector is expected to rebound with a

1.3% growth rate per annum from 2015-2020.

The production of crude oil and condensates is

expected to be at a sustainable level of 612,000

barrels per day, while the production of LNG will

increase to 29.3 mtpa with the operation of Train

9 in PETRONAS LNG Complex in Bintulu,

Sarawak beginning 2016.

With the step-up in production from deepwater

fields such as the Gumusut-Kakap, Kikeh and

Malikai, we believe that sustaining a 612kbpd

production rate is attainable. In 2014, the

average Malaysian oil production rate was

approximately 580kbpd. In 1Q15, the

production rate was in excess of 650kbpd. To

sustain the increase in production rate,

offshore vessels, maintenance activities and

fabrication works will need to be carried out

regularly. Hence, local service providers,

especially offshore service contractors will

continue to benefit from this.

The current account balance of the BOP is

projected to remain in surplus and expected to

record RM46.5 billion or 2.6% of GNI by 2020.

This is contributed by a higher surplus in the

goods account while recording a lower deficit in

the services account and primary income,

particularly in investment income account. The

deficit reduction in the services account will be

supported by the increase in tourism receipts

and increased activities related to the storage

and trading hub at the Pengerang Integrated

Petroleum Complex (PIPC).

The PIPC is expected to be in full swing by

2020. This project will benefit downstream oil

and gas service providers including storage

providers (Dialog Group), refinery services and

chemical products producers (Petronas

Chemicals). In addition, the PIPC will spur and

encourage both local and foreign companies to

invest in the region.

Third party gas players will be able to utilise gas

supply infrastructure through the enforcement of

the amended Gas Supply Act, 1993 (Act 501) in

2016. This will create a level playing field for

new entrants to the domestic gas supply market

complementing PETRONAS, which is currently

the sole player. In addition, fair competition will

be encouraged and a vibrant gas supply market

will be created while local industries will be

weaned off subsidies. The expected future gas

industry growth is estimated to be worth RM2.86

Third party gas supply providers will create

healthy competition within the industry and

will encourage all participants to focus on

process efficiencies. Undoubtedly, Petronas

Gas and Gas Malaysia will face competition

should third party gas suppliers be allowed to

compete in Peninsular Malaysia.

billion.

We remain POSITIVE on the oil and gas sector pinning our optimism on supported global crude oil

prices, sustained local oil output and sustained activities to support oil output levels. Despite the cautious

sentiments reverberating throughout the sector, contracts continued to flow. In addition to the award of

contracts, activity levels remain robust in Malaysian waters as can be seen from the huge increase in

national crude oil production.

RUBBER GLOVES, maintain POSITIVE

Measures Remarks

Border Economic Transformation Programme

(BETP)

- A range of large-scale economic growth

projects and local income-generating

opportunities will be developed including the

development of rubber-based downstream

processing in Rubber City in Kedah.

The Rubber City in Kedah would be able to

increase the regional market exposure for

rubber glove players as it is planned to have a

designated hub for rubber gloves.

This gateway is expected to act as a catalyst for

the movement of labour and goods between

Malaysia and Thailand.

This would accommodate for a more feasible

interaction in obtaining natural rubber as

Thailand is the world’s largest producer of

natural rubber.

Enhancing productivity through automation

- Greater automation especially in labour-

intensive activities, encouraged in all sectors

of the economy, particularly in the

agriculture, manufacturing, and construction

sectors, which currently employ more than

30% of foreign workers

- The proportion of foreign workers in the

workforce is capped at 15% of total

workforce in 2020

As rubber glove manufacturers have already

started moving towards automation with their

new plant expansions, most glove players will

be able to adhere to this move.

This will also decrease the staff cost as fewer

workers are needed to maneuver the machines.

We maintain POSITIVE on the sector, as we believe that the demand for rubber gloves is still strong.

The demand for rubber gloves is expected to remain resilient at 7%-8% p.a. The improving rubber price

also presents an opportunity for rubber glove manufacturers to increase their ASPs. As such, we are still

sanguine on prospects of the local glove industry.

TELECOMMUNICATION, maintain NEUTRAL

Measures Remarks

Expanding and upgrading broadband

infrastructure through deploying broadband as

an essential service, improving international to

last-mile connections and integrating digital

infrastructure planning

- Eight states, namely Johor, Kelantan,

Melaka, Pahang, Perak Perlis, Selangor and

Terengganu will be fibre-ready by 2018 to

meet the new Uniform Building By-Laws

(UBBL) requirements. The remaining states

will be encouraged to comply with the UBBL

requirements.

- To improve the international to last-mile

bandwidth capacity to meet the expected

demand of 41 Tbps.

- Focusing on sharing of infrastructure and

smooth deployment of broadband at

standard and reduced cost.

This is in-line with the High-Speed Broadband 2

(HSBB2) and Suburban Broadband (SUBB)

worth RM1.8b and RM1.6b which were awarded

to Telekom Malaysia Bhd (TM) in February

2015.

The deployment will cover all state capitals,

selected high-impact growth areas, suburban

and rural areas.

This will enhance internet connectivity which

will increase the broadband penetration rate in

state capitals, suburban and rural areas.

Telecommunication companies have been

moving towards a lighter balance sheet

through the sharing of common

telecommunication infrastructure, such as

the telecommunication towers, to bring down

operation cost.

Increasing affordability and protection for

consumers through an Improved Access Pricing

Framework (APF) and setting standards for

consumer protection

- The APF will foster competition and

infrastructure sharing among service

providers. This is expected to reduce the

fixed broadband cost from 2.42% of GNI per

capital in 2013 to 1% in 2020.

- The decision on specific service pricing will

be determined as a result of the review and

public inquiry.

This will increase affordability and improve

broadband outreach to the underserved areas.

Local telecommunication companies have

agreed to the Malaysian Communications and

Multimedia Commission (MCMC) directives to

lower the prices of their broadband packages.

This applies to both fixed line and mobile

broadband packages.

For mobile broadband, the new price is around

14% lower than current prices. Celcom, Digi,

Maxis and U Mobile have expressed their

commitment to the new price.

For fixed line broadband, Telekom Malaysia

will offer a new package which is around

57% lower than the company’s most current

basic broadband package.

We remain NEUTRAL on the sector. There are healthy developments within the telecommunication

industry. This includes: i) further deployment of broadband, ii) availability of more affordable

broadband packages; and iii) cost saving initiatives through infrastructure sharing. Despite this, we

view that competition in the industry is expected to remain intense in the foreseeable term as

telecommunication companies continue to rollout attractive packages.

MEDIA, maintain NEUTRAL

Measures Remarks

Migrating to Digital Terrestrial Television (DTT)

by implementing the second phase of Malaysia’s

DTT and introducing valued added services

- DTT allows broadcasting of high quality

video over digitized land-based signals. It

offers a higher quality broadcast than

analogue.

- In addition to providing television (TV) and

radio services, DTT also enables the

provision of valued added services through

televisions.

Service options include connected services

such as Catch-up TV, video and application

on-demand; potential for TV-based

commerce including e-shopping, transaction

and payment gateways, and delivery

tracking; and other services such as social

media TV, ratings research and analytics,

and e-learning.

The usage of digitized land-based signals as

opposed to satellite signals would lead to lower

operating costs as compared to satellite

television. It also offers a higher quality of

broadcast then analogue.

For broadcasters and consumers, this means

better affordability and better quality viewing on

regular television without the need for satellite

antennas

The availability of value-added services through

DTT would stimulate further the development of

content and applications, leading to growth of

the content and software solutions industry.

The move is also in-line with the industry

player’s vision such as Media Prima and Star

Publications to reduce dependency on print

media and focus more on the digital platform.

The availability of DTT could also pose a

threat to Astro which offer Pay-TV services

as there will be more TV content for

consumers to choose.

Niche areas such as digital content will be

further promoted and export capabilities

enhanced to ensure that Malaysia captures a

bigger export market for ICT products and

services.

- Three main initiatives are: i) attracting

anchor companies to serve as industry

drivers; ii) building local capacity and

capability; and iii) raising global market

access through a better understanding of

global technology trends towards greater

adoption of digital distribution and new

business models.

Media companies have been on a continuous

drive to improve its digital offering due to the

slump in print media.

The three initiatives will enable local media

companies to further develop and improve

their digital content offerings to the public.

We could expect to see mutually benefit

cooperation between media companies,

locally and abroad.

We remain NEUTRAL on the sector. The print segment, which is predominantly the main cash

generating business, has been reporting lower contribution due to the shift in consumer preference to the

digital platform. To move in-tandem with the demand of the consumer, industry players have been

focusing on developing the non-print segment. However, contributions from the non-print segment have

yet overtaken the contribution from the print segment. Such as, we do not see much rerating catalyst at

this juncture.

AUTOMOTIVE, maintain NEUTRAL

Measures Remarks

Strategic review of regional economic corridor

master plans.

To ensure the direction, strategies and initiatives

are in line with national socio-economic

development goals while remaining responsive to

international challenges.

Priority sectors include automotive and

aeronautics industries in Northern Corridor

Economic Region (NCER).

It aims to accelerate investment, improve

infrastructure and review regional economic

corridor master plans.

- To realize the full potential of RM236b

invested in regional economic corridors.

- To ensure job creation of 470,000 by 2020.

We are optimistic as it would be able to further

the development of automotive industry in

Malaysia in line with the National Automotive

Policy 2014 (NAP14).

This ensures automakers in Malaysia would be

able to compete with its regional and

international peers, especially in view of

competition from Indonesian and Thai

automotive industries.

This would also create a pool of skilled

employees who are able to meet the rigorous

requirements of the job.

A full realization of the economic corridor

master plans would attract foreign direct

investments to the automotive industry in

Malaysia.

Improving effectiveness of programmes to meet

learning needs.

To strengthen industry-based upskilling

programmes in order to upgrade the skills of

existing employees.

Initiatives include:

- Malaysian Automotive Institute (MAI) to

initiate industry-based training in the

automotive industry.

- The Malaysian Meister Programme (MMP),

which is adapted from the German-Meister

Programme, will be introduced to provide

skills enhancement training for experienced

employees.

This would enlarge a pool of highly skilled and

impactful hands on employees with

internationally recognized standards in order to

meet the needs of a developing automotive

industry.

Encouraging low carbon mobility.

To encourage the use of public transport as this

will lead to a reduction in congestion and

environmental pollution.

Increasing use of energy efficient vehicles (EEVs)

An increased use of EEVs would be in line with

the objectives of the NAP14.

This would encourage the development of eco-

friendly vehicles sub-sector in the automotive

industry.

for public transportation will lead to:

- A reduction in the impact to the environment

in terms of reducing dependency on fossil

fuel and fuel wastage.

- A reduction in emission of harmful gases and

black smoke.

We believe initiatives introduced in the 11th Malaysia Plan such as a refocus on the Northern Region

Economic Corridor would provide an automotive hub for the country through which the Malaysian

industry could thrive and compete with its regional peers. Proposals for skill enhancement programmes

amongst existing employees would fulfill needs for more technical-based workforces, which in turn would

enable the industry to move forward with the objectives listed in NAP14.

Aside from the aforementioned, we do not foresee any strong catalysts for upward sales movement from

the Plan, especially in a climate of economic uncertainties and weakening consumer sentiment for big-

ticket items. As such, we maintain NEUTRAL on the sector.

PROPERTY, maintain NEUTRAL

Measures Remarks

Clawback funding mechanism to build

affordable houses

Implement clawback funding mechanism. Which

collects contributions from property developers

when they are unable to comply with the

Bumiputera quota policy in their property

development. The funds will be used to develop

more affordable houses.

Neutral to property developers. We believe

that most public listed developers have already

complied with the Bumiputera quota policy.

Special loans

Special interest rate loans, with a 10-year

moratorium on sale of the property, will be

provided to B40 households to enable them to

own houses.

Slightly positive to the sector as it encourage

more demand from the B40 segment. This is

expected to increase the overall house

ownership rate for Malaysian in the long run.

Malaysia Vision Valley

To build Malaysia Vision Valley in western Negeri

Sembilan covering Nilai, Seremban and Port

Dickson. The proposed area is 108,000 hectares.

We expect more landbanking and property

development activity to take place in Nilai,

Seremban and Port Dickson.

Among developers under our coverage, we

expect MAHSING to benefit as their recently

purchased land in Seremban is likely to

appreciate. Recall that MAHSING acquired 960

acres of freehold land in Mukim Rantau,

Seremban for RM359.6m in Aug-2014. The

land is earmarked for township development

with GDV of RM7.5b.

Lastly, we do not discount the possibility of

more incentives to attract other property

developers in West Negeri Sembilan.

PORTS, maintain NEUTRAL

Measures Remarks

Implementation of the National Port Policy Regularity framework for development in

capacity as well as improving efficiency by

streamlining port and jetty functions.

A single communications platform among ports

and stakeholders

All port authorities required to establish a port

community system for exchange of

information.

Channel deepening works and ports capacity

expansion

To attract more international liners and Ultra

Large Vessels with capacity exceeding 18,000

TEU’s.

Introduction of National Transport Model Strengthen inter-agency collaboration in

formulating integrated transport policies.

Last-mile connectivity to Ports Rail and road expansion works to improve

accessibility to Port Klang.

A National Port Policy will be implemented. While details are scarce, we believe the policy will be aimed at

propelling Malaysian Ports, namely Port Klang and PTP higher up in the rankings of the world’s busiest

ports through increasing efficiency and facilitating port expansions. The 11MP will see a single

communications platform being set up among port operators and logistics players for information and

intelligence sharing to improve overall efficiency. In addition, channel deepening works and wharf

expansions to cater to ultra large vessels will be facilitated under the 11MP. Moreover, a perennial

predicament faced by Port Klang will be addressed, i.e. last-mile connectivity to Port Klang via road and

rail improvements.

We view the developments under the 11MP as unexciting and maintain our NEUTRAL call on the sector

with similar calls on Westports (TP: RM4.40) and NCB (TP: RM2.70). We believe potential catalysts for

the sector could come from a revision of container handling tariffs in Port Klang, alliances between major

shipping liners and better than expected trade activity mainly within the Intra-Asia and Asia-Europe

routes. Within the sector, we prefer NCB due to its potential for corporate exercises (with MMC’s PTP,

Johor and Penang Ports), better than expected recovery of its subsidiary Kontena Nasional and better

than expected TEU growth.

PLANTATION, maintain NEUTRAL

Measures Remarks

Modernising Agriculture

Improving productivity and income of farmers,

fishermen, and smallholders

Accelerating adoption of ICT and farming

technology: Most of plantation companies

in Malaysia has adopted ICT in their daily

operation, i.e: motorized cutter,

mechanical buffalo, Personal Digital

Assistant and GPS.

Preserving and optimizing agriculture land:

This help to partly mitigate the current

issues of limited plantable area in Malaysia

and help to increase productivity.

Intensifying research & development and

commercialization in priority areas: Strong

R&D activities help to improve the crop

yield and alleviate the rising concern over

limited supply of agriculture product, palm

oil in particular which has been

decelerated due to unavailability of

plantation land.

Promoting training and youth agropreneur

development

Review and upgrade training curriculums:

The improvement in the current training

curriculums will help to produce more

skillful workers and reduce the

dependency on foreign workers.

Strengthening institutional support and extension

services

Extension officers will be pooled to offer

one-stop advisory services to farmers,

fishermen and smallholders: This strategy

helps to promote Good Agricultural

Practices in plantation.

Building capacity of agricultural cooperatives and

associations along the supply chain

This strategy enables farmers and planters

to manage their production costs and

hence, provide a stable margin to their

businesses.

Improving market access and logistics support Provide platform to smallholders in

marketing their products and eventually

increase the competitiveness among the

local plantation players. This strategy also

help Malaysia to capture larger market

share in the international market by

providing better market access and

logistic.

Scaling up access to agricultural financing Flexibility in obtaining financing will help to

accelerate planting and replanting

activities in Malaysia.

Intensifying performance-based incentive and

certification programmes

Encourage compliance of farmers and

smallholders to the Malaysia Good

Agricultural Practices certification and

other certifications. The compliances of

farmers to these rules enable them to gain

better market access.

Encouraging sustainable energy use to support

growth

Enabling growth in the oil and gas subsector -

Implementation of clean fuel in the transport

sector

Introduction of EURO 4M, EURO 5

standards for clean fuel and B15 (15%

biodiesel blending) roll out by 2020

Increase palm oil consumption and help to

provide support to CPO price

The strategies introduced in the Eleventh Malaysian Plan will positively contribute to the growth of

agriculture in Malaysia. We believe that the presented strategies will enable plantation industry in

Malaysia to grow despite having a limited arable land. The outcomes of implementation of these

strategies can be seen gradually in the next couple of years. However, at this current juncture, we do not

foresee any strong catalyst to uplift Malaysian plantation industry, particularly the palm oil industry.

Therefore, we are NEUTRAL on plantation industry.

BANKING, maintain NEUTRAL

Measures Remarks

To reinforce Malaysia as a global Islamic finance

marketplace through the introduction of

innovative Islamic financial products and

services. To enhance the diversity of industry

players, increase vibrancy in the Islamic financial

markets, and promote Malaysia as the referral

centre for Islamic financial transactions.

The introduction of wider range of innovative

Islamic financial products and services will

promote the growth of Islamic securities

issuance by companies to raise funds in

Malaysia and attract investors to invest. This is

expected to lead to a strong fee income

growth for banks.

The Eleventh Plan will focus on developing

resilient and sustainable SMEs to achieve

inclusive and balanced growth. The contribution

of SMEs across all sectors is targeted to increase

to 41% of GDP by 2020.

With strategies focusses on enhancing

productivity of SMEs via automation and

innovation, enhancing ease of doing business

for SMEs and development of SMEs in East

Malaysia, we view this will be focus area for

banks in the future to extend their financing

to. Moving ahead, we expect banks to focus

more on lending to SMEs.

TOBACCO, maintain NEUTRAL

Measures Remarks

The manufacturing sector is expected to record a

growth of 5.1% p.a

This is led by the domestic-oriented

subsector which is expected to increase

by 4.4% in-line with better business

confidence and consumer sentiments.

Among the key industries that will drive

growth are food, beverages and

tobacco; and machinery and equipment.

To achieve this growth for the tobacco sector,

we expect strong enforcement from the

authorities on battling against the illegal

cigarette trade.

We believe that the current efforts are quite

effective as there has been a decline in the

illegal cigarette trade for 2014 compared to

2013.

This will be able to further benefit the cigarette

manufacturers as a growth in the tobacco

industry would portray a better contract

manufacturing volume.

We maintain NEUTRAL on the sector. The main challenge for the tobacco sector is the illegal cigarette

trade in Malaysia. Legal volumes are still suffering from the impact of the illegal cigarette trade which is

considerably high in Malaysia. However, the nationwide crackdown carried out by the Royal Malaysian

Customs (RMC) have proven to be effective as the illegal cigarette level has reduced by -6.1ppts year-

over-year to 32.8% in Wave 3 (Oct – Dec 2014) of the Illicit Cigarette Study. With a sustainable strong

enforcement by the RMC, we expect the illegal cigarette level to reduce further and legal volumes to

increase.

CONSUMER, maintain NEUTRAL

Measures Remarks

Strengthening the monitoring and

enforcement of price control regulations.

Consumers may report unethical pricing

practices and stockpiling by retailers

through the Skuad Pengguna, consumer

associations and the eAduan system.

1Harga 1Malaysia programme to

continue standardizing prices of

subsidized goods between Sabah,

Sarawak, and Peninsular Malaysia.

This leads to improvement in market efficiency

and purchasing power, which will benefit

retailers as consumer demand will continue to

grow.

Standardisation of prices would allow

comprehensive access to goods and services at

a fair price, thereby reducing the burden to the

consumers

We are NEUTRAL on the sector as well as on the consumer related stocks under our coverage such as

Padini, Aeon Co., Parkson, Nestlé, F&N and MSM as we anticipate moderating impact on consumer

spending from government initiatives.

MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X).

(Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad)

DISCLOSURES AND DISCLAIMER

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Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe

are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained

therein and it should not be relied upon as such.

This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different

assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the

discretion of MIDF AMANAH INVESTMENT BANK BERHAD.

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MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS

STOCK RECOMMENDATIONS

BUY Total return is expected to be >15% over the next 12 months.

TRADING BUY Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow.

NEUTRAL Total return is expected to be between -15% and +15% over the next 12 months.

SELL Negative total return is expected to be -15% over the next 12 months.

TRADING SELL Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has

been assigned due to negative newsflow.

SECTOR RECOMMENDATIONS

POSITIVE The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE The sector is expected to underperform the overall market over the next 12 months.