28 September 2021

Newsbreak
HLIB Research
PP 9484/12/2012 (031413) Economics & Strategy
Jeremy Goh, CFA
pwgoh@hlib.hongleong.com.my 12MP: Developmental boost
(603) 2083 1716
The 12MP was unveiled yesterday with a DE sum of RM400bn (+61% from
Felicia Ling 11MP). Its GDP growth target of 4.5-5.5% seems reasonable, within the pre-
xwling@hlib.hongleong.com.my Covid average of 4.9% (2016-2019). Fiscal consolidation remains on the cards,
(603) 2083 1713 at -3.0% to -3.5% by 2025 (2020: -6.2%). Despite being a long term positive,
12MP is unlikely to bring immediate market excitement which hinges on the
Goh Khing-Mae reopening momentum. Carbon neutrality appeared to be a noticeable theme
(benefitting RE and EV). However, construction – a favourite in past MPs –
kmgoh@hlib.hongleong.com.my
unfortunately saw no new mega projects. Policy developments on Bumi sha re
(603) 2083 1728
ownership and foreign labour cap at 15% (long term goal) are key areas to
eyeball on. Maintain KLCI target at 1,620.
Economic snapshot – Malaysia
2019 2020 2021F NEWSBREAK
Real GDP (% YoY) 4.3 -5.6 3.1
CPI (% YoY) 0.7 -1.2 2.2 The government yesterday unveiled the 12th Malaysian Plan (12MP) which spans
CA (RM bn) 52.9 60.0 55.0 from 2021-2025 with a headline development expenditure (DE) allocation of RM400bn
OPR (% year-end) 3.00 1.75 1.75 (11MP: RM248.5bn). The 12MP is anchored on 3 key themes focusing on (i) resetting
USD/MYR (average) 4.14 4.20 4.16 the economy, (ii) strengthening security, wellbeing and inclusivity as well as (iii)
advancing sustainability. Some of the 12MP’s selected targets include:
FBMKLCI Target: 1,620  Annual GDP growth of 4.5-5.5% (11MP actual: 2.7%).
Current Level: 1,533  Average monthly household income of RM10k by end-2025 (as of end 11MP:
RM7.2k).
FBMKLCI  GDP per capita gap between Klang Valley and Sabah to be reduced to a ratio of
Pts 1:2.5 and with Sarawak to 1:1.2 by 2025.
1700
 Reducing greenhouse gas emissions by 45% of GDP by 2030.
1650

1600
ECONOMIC VIEW
1550

1500 Towards a sustainable nation. Malaysia’s economy recorded an average growth of

1450 2.7% p.a. from 2016-2020, dragged down by Covid-19’s impact in 2020. From 2016-
2019, the economy recoded average growth of 4.9% p.a., still lower than the original
1400
Sep-20 Dec-20 Feb-21 Apr-21 Jul-21 Sep-21 11MP’s target of 5.0-6.0%. Hence, the 12MP target of 4.5-5.5% p.a. is in line with
previous performances. Based on the 4.5-5.5% growth rate, income per capita is
Top Picks expected to increase to USD14.8k in 2025, breaching the current high-income
Stock Rating Price Target threshold of USD12.7k.
MAYBANK BUY 8.10 9.40
TENAGA BUY 9.85 12.50 Stronger exchange rate assumption. GNI per capita is expected to increase to
TM BUY 5.78 7.93 USD14.8k in 2025 versus USD10.1k in 2020. In local currency terms, it will be
MRDIY BUY 3.90 4.51
RM57.9k in 2025 versus RM42.5k in 2020. This implies the use of USD/MYR
SUNWAY BUY 1.68 2.58
BURSA BUY 7.39 9.91 exchange rate of 3.90 for 2025 against 4.21 implied for 2020.
UWC BUY 6.19 6.75
VS BUY 1.64 1.77 Significantly higher DE allocation of RM400bn to propel growth. To achieve the
ARMADA BUY 0.445 0.80 national mission during the 12MP, the government has indicated that it will allocate
MBM BUY 3.23 4.80 RM400bn for DE, a significant increase of RM150bn (+60%) from the 11MP. Out of
SENTRAL BUY 0.87 0.98 the total allocation, we expect the economic sector to receive the lion’s share of the
FOCUSP BUY 0.765 1.03
pie similar to the 11MP at 58%, followed by social (26%), security (11%) and general
administration (5%). Priority will be given to Kedah, Kelantan, Perlis, Sabah, Sarawak
and Terengganu, similar to the geographical priorities in 11MP. This will translate to
an average of RM80bn/year for DE spending, higher than 2016-2020 average
spending of RM49.7bn/year. This is inline with the revival of pubic investment target of
+2.6% p.a. in 2021-2025 from -7.9% p.a. in 2016-2020. With 2021 mired in MCO
restrictions limiting construction activity, DE spending is anticipated to accelerate in
2022 onwards. As of 1H21, DE spending accounted for RM28.4bn, 41.2% of original
target of RM69bn. While the headline target of RM400bn is ambitious, the actual
spending depends on the implementation and environment over the next 5 years. In

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Figure #3, it can be gleaned that in the previous years, actual development
expenditure spending came in short of the original target.

Handful of key projects. We understand that the key development projects identified
under the economic and social sectors would include (i) digitalisation and technology
infrastructure, (ii) utility and public transport (e.g. roads, rails, water and electricity
supply, ECRL, Gemas double track, Project Central Spine Road), (iii) education
training, (iv) public healthcare facilities and programmes (hospitals, hospital beds, ICU
equipment), (v) affordable housing and (vi) green technology. Most new infrastructure
projects are expected to be implemented via the Public Private Partnership (PPP)
method. Government announced that a specific facilitation fund for infrastructure
projects will be established under the PPP3.0 model which will not involve any
financial commitment from the government and will adopt the request for proposal
approach. This model is expected to be announced in mid-2022.

A more gradual pace of fiscal consolidation. Due to the pandemic that affected
global as well as the domestic economy, Malaysia experienced an increase in fiscal
deficit to -6.2% of GDP in 2020. Going forward, government has targeted a narrower
fiscal deficit to -3.0 to -3.5% of GDP in 2025 (11MP: -0.6% of GDP). Government
spending will continue to be channelled towards enhancing capacity building of the
nation and to obtain a higher multiplier effect. The government could continue to trim
its operating expenditure while broadening the revenue base further. Therefore, we
opine that a narrower budget target by 2025 remains achievable.

MARKET VIEW

Long term positive but lacks near term market excitement. In our view, the targets
and measures of the 12MP are broadly positive in the longer term but are unlikely to
cause much immediate market excitement as this still hinges on the near term
economic reopening momentum. At the onset, the 12MP’s targets seem realistic but
we are cognisant there could be longer term implementation risk as manoeuvring the
next half decade in an endemic won’t be a walk in the park. Some of the notable
market/ sector implications are as follows:
 Foreign labour. Long term goal for national workforce to be limited to a maximum
15% foreign labour. Sectors that are currently foreign labour dependent are
construction, EMS, gloves, plantations and to a lesser extent, tech.
 Bumi ownership. To introduce safety net for sustainable Bumiputera equity
ownership, where Bumi companies or shares are only sold to other Bumi
consortiums, companies or individuals. Holdings and disposals of ownership in
Bumi companies to be regulated by related ministries and agencies.
 Construction. Headline DE sum of RM400bn is a 61% increase from 11MP. While
positive, this typically translates to smaller to mid-sized jobs as mega projects tend
to be funded “off-budget”. There was also an absence of widely anticipated mega
projects like MRT3.
 Property. The focus here was mainly on increasing supply of affordable housing
(500k homes target under 12MP) and access to financing for buyers. This push
should be beneficial for developers focusing on the affordable housing space (e.g.
Matrix and Lagenda).
 Carbon neutral. Malaysia aims to achieve carbon neutrality by 2050. This should
see more investments into RE (players in this space are Cypark, Solarvest,
Samaiden, Pekat and Ipmuda – all not rated) while conventional power generation
players (Tenaga and Malakoff) have been re-strategizing to reduce investments in
coal plants and re-invest into RE. PetGas should benefit from the potential higher
gas utilisation (in replacement of other carbon fuel energy). There is also a push for
more EV vehicles – OEMs already offering EV and HEV, include BMW (Sime),
Mercedes (DRB), Porsche (Sime), Volvo (Sime & MBMR), Honda (DRB), Hyundai
(Sime) and Nissan (TCM). Both Toyota (UMW) and Mazda (BAuto) are expected to
start introducing HEV models in the near term.

Maintain KLCI target at 1,620. Our end-2021 KLCI target is maintained at 1,620
(15.7x PE on mid-CY22 EPS). We continue to see near term upside bias to the
market on back of a rather fast tracked economic reopening, effectively putting the
country in Phase 4 of the NRP by late-Oct/ early-Nov.

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Focus Charts
Figure #1 Growth targets of various MP
%
8 10MP 11MP 12MP
(6.0% p.a.) (4.5-5.5% p.a.) (4.5-5.5% p.a.)
6
4
2
0
-2
-4
-6
-8
2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021f

2022f

2023f

2024f

2025f
Real GDP growth

BNM, EPU

Figure #2 Allocation by sector (11MP)

Eleventh Malaysia Plan (RM249bn)

General
administration
5%
Security
11%

Social
Economic
26%
58%

BNM

Figure #3 History of development expenditure allocation (RM bn)

Development allocation (RM bn)
Malaysia Plan Duration
Original target Revised allocation Actual
First MP 1966-1970 4.6 4.2
Second MP 1971-1975 7.3 9.4 7.5
Third MP 1976-1980 18.6 31.1 21.1
Fourth MP 1981-1985 39.3 46.4 48.1
Fifth MP 1986-1990 40.1 37.3 35.9
Sixth MP 1991-1995 55.0 58.5 54.7
Seventh MP 1996-2000 67.5 103.6 99.0
Eighth MP 2001-2005 110.0 160.0 170.0
Ninth MP 2006-2010 200.0 230.0 221.5
Tenth MP 2011-2015 230.0 n.a. 215.8
Eleventh MP 2016-2020 260.0 220.0 248.5
Twelfth MP 2021-2025 400.0
BNM, EPU

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Sectorial Analysis
Automotive Daniel Wong (603) 2083 1720 kkwong@hlib.hongleong.com.my

 Mobility Greening with the mobility of people and goods will be the main consideration in
urban and rural planning. In this regard, a low carbon mobility blueprint will be introduced to
guide the planning, implementation, monitoring and evaluation of green mobility initiatives.
The blueprint will outline strategies to reduce GHG emissions from the transportation sector
as well as accelerate the shift to green mobility.
 The usage of green vehicles, which reduce air pollution and GHG emissions, and increase
energy efficiency, as a preferred mode of transport will be promoted to drive the transition to
green mobility. Incentives provided to local manufacturers to produce green vehicles and the
purchase of these vehicles by consumers will be reviewed.
 The B20 biodiesel programme that contains 20% palm methyl ester will be expanded
throughout the country in stages, while the B30 programme will be introduced at the end of
the 12th Plan to further increase the use of biofuel. Alternative fuel sources, including
compressed natural gas, hydrogen energy and fuel cell will also be expanded. A study to
identify mechanisms in phasing out old vehicles in a sustainable manner will also be
undertaken.
 The private sector will be encouraged to invest in advancing next generation vehicles,
technologies and supporting infrastructure, such as energy -efficient, hydrogen-powered and
electric vehicles, and their charging stations. In relation to this, triple-helix13 collaboration will
be intensified, while the green-related incentive schemes will be enhanced. These schemes
include the Green Technology Financing Scheme (GTFS), Green Investment Tax Allowance
(GITA) and Green Income Tax Exemption (GITE).

HLIB’s VIEW:
 The measures are overall positive to further push the transformation of the automotive
industry into adopting EVs (Electric Vehicles) as part of the nation commitment to achieve
carbon neutrality by 2050. However, we only expect a mass adoption of EV in the longer
term due to current lack of affordable mass EV models as well the supporting infrastructure.
 OEMs that are already offering EV and HEV, include BMW (Sime), Mercedes (DRB),
Porsche (Sime), Volvo (Sime & MBMR), Honda (DRB), Hyundai (Sime) and Nissan (TCM).
Both Toyota (UMW) and Mazda (BAuto) are expected to start introducing HEV models in the
near term.
 We maintain Neutral on Automotive sector – Top Picks: DRB-Hicom (BUY; TP: RM2.30),
MBM Resources (BUY; TP RM4.80) and Sime Darby (BUY; TP: RM 2.68)

Banking Chan Jit Hoong (603) 2083 1722 jhchan@hlib.hongleong.com.my

 Transforming the financial ecosystem to meet future needs, through: (i) promoting innovation
and competitiveness to enhance efficiency, along with (ii) facilitating more financing across
business life cycle.
 Enhancing the resilience and governance of the financial system, via: (i) more collaborative
approach among regulatory authorities within and beyond the country, coupled with (ii) more
outcome-focused regulatory action to shape market and institutional behaviour.
 Promoting a sustainable and inclusive financial system: (i) promoting Islamic finance, (ii)
advancing financial inclusion and literacy, together with (iii) enhancing sustainable financial
services.

HLIB’s VIEW:
 Minimal direct effect on the banking sector. In our opinion, the above are not something new
and banks have been proactively embarking on these initiatives.
 Retain OVERWEIGHT. The sector’s risk-reward profile is still skewed to the upside as most
negatives have been considered by the market. In our view, Covid-19 woes will likely fizzle

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out in 2022 while the state of the economy and banking sector will only get better in time.

Construction Edwin Woo (603) 2083 1718 ckwoo@hlib.hongleong.com.my

 Construction GDP target (2021-2025). Under the plan, sector GDP growth p.a. is projected
at 4.2% to be driven by civil and residential building subsectors (11MP: -0.7% p.a.).
 Development expenditure. Total development expenditure (DE) ceiling for 12MP is set at
record high of RM400bn which includes rehabilitation of certain government agencies.
Disbursement is guided to begin picking-up in 2023 onwards given ongoing fiscal challenges.
Basic development needs of states like Sabah, Sarawak, Kedah, Kelantan, Perlis and
Terengganu will be prioritised.
 Rural development. Focus will be given to construct and upgrade 2,800km of rural roads
including: (i) Nanga Tulie to Rumah Bujah in Sarawak, RM280m (ii) Dudar to Kota Belud in
Sabah, RM101m (iii) FELRA in Pahang, RM135.3m and (iv) Kampung Gagu to Ulu Beranang
in Negri Sembilan, RM179.2m. Additionally, RM1.6bn has been allocated to enhance
connectivity between rural areas.
 Digital infra. A total of RM7.7bn will be allocated to Sabah and Sarawak for the execution of
JENDELA to widen network coverage in both states.
 Flood mitigation. RM16bn over the next 10 years will be allocated for this.
 Water. Under 12MP, RM25.8bn has been approved to enhance water access and efficiency
of service.
 Affordable housing. 500k units will be built through initiatives including Rumah Mesra
Rakyat, Residensi Wilayah and Program Perumahan Rakyat.
 Existing projects. Continuing focus on existing projects such as PBH, ECRL, Gemas-JB
Double Track, KVDT Phase 1, RTS, WCE, CSR and Kota Bahru-Kuala Krai Highway.
 PPP focused. Going forward, government will leverage on private sector to deliver
infrastructure projects. Projects to be executed under this model will be announced in mid-
2022. A special committee will be formed to enable quicker execution.

HLIB’s VIEW:
 DE ceiling for 12MP translates to a 61% increase vs. 11MP. Excluding estimated DE for
2021, 2022-2025 could see an average of RM83bn per annum. While positive, this typically
translates to stronger flows of small-mid scale projects as sizable jobs are usually funded off-
budget. Furthermore, a portion of this will be allocated to the rehabilitation of certain
government agencies. Despite aggressive DE targets we take note of: (i) absence of new
mega projects like MRT3 (ii) back-loaded schedule of disbursement; 2023 onwards and (iii)
declining share of construction GDP (sector growth target: 4.2% p.a.; GDP growth target:
4.5-5.5% p.a.).
 Sustained development focus on Sabah and Sarawak could benefit contractors such as HSL
(BUY; TP: RM1.08), Naim (Not Rated) and CMS (Not Rated). Sarawak Cable (Not Rated)
is a beneficiary of increasing rural electrification. AQRS (Not Rated) and Suria (Not Rated)
should benefit from developments in Sabah.
 Proceeding with RTS could benefit Johor-based Kimlun (HOLD; TP: RM0.84) while flood
mitigation projects should benefit MRCB (HOLD; TP: RM0.41).
 Expansionary allocation for the water sector bodes well for Taliworks (BUY; TP: RM0.96).
 Execution of JENDELA could spur demand for towers, benefitting Rohas (HOLD; TP:
RM0.29)
 A shift towards PPP financing is advantageous to contractors with large balance sheet and
strong gearing position such as IJM (BUY; TP: RM2.18) and MRCB (HOLD; TP: RM0.41).
 Overall, 12MP is a slight disappointment to listed contractors with no mention of new mega
projects and back-loaded DE allocation. While its DE ceiling is high (vs. 11MP), this typically
translates to more small-mid-scale projects which may not catalyse KLCON performance.
Nonetheless, we believe mega jobs could be announced on a rolling basis but we are
uncertain on timing due to: (i) fluidity of government finances (recovery timing etc.), (ii)
elevated input costs and (iii) maximising PFI in funding struct ure. We would only turn positive
should tangible developments for sizable projects turn up. W e maintain NEUTRAL on

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Construction sector with SUNCON (BUY; TP: RM1.87) as our top pick.

Consumer Syifaa’ Mahsuri Ismail (603) 2083 1710 syifaa@hlib.hongleong.com.my

 In Chapter 5 of Addressing Poverty and Building and Inclusive Society, assistance such as
cash transfers and healthcare support will continue to be provided on a need basis.
Productive welfare programmes, including entrepreneurship and micro financing will be
intensified to provide economic opportunities for the poor.
 In Chapter 11: Boosting Digitalisation and Advanced Technology, accelerating trade through
eCommerce is one of the main agenda. The National eCommerce Strategic Roadmap 2.0,
2021-2025 will be implemented to spur eCommerce activities.

HLIB’s VIEW:
 Various cash handouts and schemes are aimed at easing the cost of living. This further
continual of handouts will help boost the disposable income and improve consumer
spending and sentiment moving forward.
 Productive welfare programme in the effort to help generate job opportunities will ensure
that unemployment rate remain controllable. This in turn will boost the labour market that will
spur private consumption.
 Additionally, roadmap in enhancing eCommerce would provide new avenue of growth for
our consumer players, on top of the expected retail recovery in traditional brick -and-mortar
channel.
 We maintain NEUTRAL. Top picks: FocusP (BUY, TP RM1.03) and MrDIY (BUY, TP
RM4.51).

EMS Syifaa’ Mahsuri Ismail (603) 2083 1710 syifaa@hlib.hongleong.com.my

 In Theme 1 of Resetting the Economy, focus will be placed on the development of eight
strategic and high impact industries and activities, namely (E&E), global services,
aerospace, creative, tourisms, halal, smart farming and biomass. E fforts will be focused on
accelerating these industries to be more sophisticated by producing high value-added
activities and products, attracting quality investments and expanding exports as well as
contributing in green economy agenda.

HLIB’s VIEW:
 We opine this would indirectly positively impact the EMS sector and help to flourish the
manufacturing ecosystem in Malaysia. With more companies coming in, there could be a
positive spill over effect of manufacturing chain to the local EMS players.
 Reiterate NEUTRAL. Top pick: VSI (BUY, TP RM1.77).

Gloves Sophie Chua (603) 2083 1726 SophieCSL@hlib.hongleong.com.my

 The Government aims to reduce the dependency on foreign workers within the next five
years, either by employing more local workers or by emphasizing on production automation.

HLIB’s VIEW:
 While the glove makers have been investing heavily on automation in the recent years to
reduce reliance on foreign labour, the manufacturing of gloves, especially the packing and
stripping process, is still considered rather labour-intensive, with an average efficiency level
of c.1.5 to 2.0 workers per million pieces of gloves (WPM) per month. Hiring more local
workers will undoubtedly drive up the glove makers’ labour costs (labour costs accounts for
c.10% of the glove players’ total cost), however, we think that the impact will still be
manageable as the manufacturers remains committed to continue investing in automation, to
further reduce its WPM required.
 We maintain our Neutral rating on the Gloves sector – Top Glove (HOLD; TP: RM2.80),
Hartalega (HOLD; TP: RM6.50) and Kossan (HOLD; TP: RM2.65).

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Healthcare Sophie Chua (603) 2083 1726 SophieCSL@hlib.hongleong.com.my

 The Malaysian Government targets to achieve a hospital bed ratio of 2.06 per 1000 residents
by the end of the 12MP.
 Construction works for 12 new hospitals are currently underway and is expected to be ready
within the next 5 years.

HLIB’s VIEW:
 Being one of the leading healthcare facilities management provider in Malaysia, with
experience managing hospital maintenance works for both public and private hospitals
(locally and outside of Malaysia), we reckon that the opening of more new public hospitals
would likely benefit Edgenta, as it currently provides healthcare support to 85 public hospitals
and labs in Malaysia.

Oil & Gas Jeremie Yap (603) 2083 1729 jeremieyjh@hlib.hongleong.com.my

 The government is looking to streamline existing policies to respond the global trends on the
prospects of clean and sustainable energy sources.
 Initiatives will be implemented to ensure progressive and sustainable development of the
local oil and gas sector. This will be done by:
1) development of a natural gas roadmap;
2) promoting high value investments in the petrochemical space;
3) scaling up the biofuel usage; and
4) prioritising the usage of domestically produced petrol and diesel.

HLIB’s VIEW:
 We are mildly positive on the government’s stance to venture more into the natural gas
space – as it is cleaner and produces fewer carbon emissions compared to crude oil.
We believe that natural gas would be the preferred choice of fossil fuel going forward – in line
with Petronas’s long-term target towards achieving net zero carbon emissions by 2050.
 We are hopeful that the high value investments in the petrochemical space would be focused
on specialty chemicals due to three key reasons: (i) the increasing competition in the basic
chemical space; (ii) specialty chemicals are less -susceptible to market downturns; and (iii)
superior profitability margins.
 We maintain OVERWEIGHT on the Oil & Gas sector. Our top picks are Bumi Armada
(BUY; TP: RM0.80) and Dialog (BUY; TP RM3.45).

Property Nazira Abdullah (603) 2083 1717 nurulnazira@hlib.hongleong.com.my

Increasing supply of affordable housing for target groups

 The government targets to build 500k units of affordable housing during the period of 12MP
(a total 282k units were built during 11MP) to increase house ownership amongst B40 and
M40 groups.
 The government will allocate RM2.25bn in 12MP period to build and repair 85.5k housing
units under the Housing Assistance Program.
 The construction of affordable houses will be made a priority in the development of new
townships, making them accessible to low income groups.
 A regulation will be introduced to limit the purchase of only one affordable house per eligible
citizen.
 Ceiling prices of affordable housing will also be introduced in the secondary market to
control house prices, especially in the urban areas.

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Access to financing
 RTO programme will be expanded to cover houses priced up to RM500k with an option to
purchase the property within 5 years of renting.
 In addition, the Fund for Affordable Homes and Youth Housing Scheme will continue to be
provided in financing the purchase of the first house.
 The Sk im Pinjaman Perumahan will be strengthened to assist households that own land to
build affordable houses.
 A new financial model with more attractive loan packages will be introduced to increase
take-up rate
Managing housing construction costs
 Initiatives will be undertaken to manage the construction cost of affordable houses. Charges
and fees imposed by local authorities and utility providers for the construction of affordable
housing will be standardised.
 A model for affordable housing development based on a cost-sharing mechanism will be
introduced through collaboration between the Federal Government and state governments,
and private developers.
 The existing Industrialised Building System (IBS) incentives will be reviewed to encourage
developers to use IBS technology to manage costs and improve efficiency.

HLIB’s VIEW:
 Overall, we maintain our NEUTRAL call on the sector with mixed impacts from policy
measures as most of the initiatives are from the continuation of previous policies.
 The proposals are largely catered towards affordable housing, which some developers
deem as not economically feasible due low profit margin does not commensurate with the
capital investment and risks involved to construct affordable housing for B40 and M40.
However, we are hopeful that these initiatives and cost control measures by government will
attract more developers to venture into these affordable housing market and improve overall
property segment. There are niche players in the affordable housing space that are able to
tap this underserved segment yet generate superior margins from low land cost and tight
cost controls; in this regard, we like Matrix (BUY; TP: RM2.20) and Lagenda (BUY;TP:
RM2.01).
 On access to financing, we are positive on the continued initiatives by government to assist
first-time home buyer and lower income earners to secure sufficient financing in their
purchase, which will in turn boost property sales . With regards to RTO scheme, we are
largely neutral as the ability to purchase a home is still dependent on the purchaser’s
financial capability. Nonetheless, this scheme may improve the affordability of houses as it
allows purchasers to lock in their house prices for 5 years with stamp duties being
exempted.

Technology Tan J Young (603) 2083 1721 jytan@hlib.hongleong.com.my

 R&D grants and incentives will be reviewed to cater to advanced technology push and
market pull activities.
 End-to-end R&D activities will be promoted to ensure the R&D outputs are able to go through
extensive experimental development and testing programmes to meet the technology and
product standards.
 Research institutions and centres of excellence will be streamlined to reduce redundancy
and increase the effectiveness of conducting R&D activities.
 Dedicated technology and innovation centres will be established to drive technology
development, accelerate innovation and technology transfer as well as increase the
development of home-grown technologies.
 To infuse competition and foster greater innovation, efforts will be undertaken to facilitate
entry of new players such as digital banks, digital insurers, robo-advisors and digital brokers,
as well as support market participants in embracing new innovative business models.

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HLIB’s VIEW:
 We view the measures to stimulate more R&D positively as it is a crucial element to sustain
the sector growth by being more competitive and innovative. ViTrox (BUY, TP: RM23.28)
who spends generously in R&D (11% of FY20 revenue) is expected to benefit directly from
these initiatives. Besides that, we also believe that the tech sector will enjoy the spill over
effects indirectly as these incentives will enhance the ecosystem of the sector.
 Revenue (BUY; TP: RM2.28) who has recently acquired 25% stake in Vsure (digital insurer)
is expected to be the direct beneficiary as 12MP will embrace new innovative business
models.
 Maintain OVERWEIGHT stance on the sector.

Telecommunications Tan J Young (603) 2083 1721 jytan@hlib.hongleong.com.my

 JENDELA to provide 100% population coverage, wider 5G coverage, broadband to 9m

premise by 2025.
 Launch 5G by end of 2021.
 Various digital initiatives in order to achieve digital economy contribution target of 25.5% to
GDP by 2025.

HLIB’s VIEW:
 Reiterate our view that fixed players will be the immediate beneficiaries during the
infrastructure phase where fibre assets are mandatory pre-requisite. In turn, TM (BUY, TP:
RM7.93) and TdC (BUY, TP: RM5.61) are the potential beneficiaries if their capex are co-
funded for rapid deployment. Cellcos will also enjoy more cost effective backhaul solution
through wholesale arrangement.
 We laud government’s move to establish DNB to rollout a single neutral 5G infra. In fact, we
coined this concept 6 years too early for 2G network (refer to our report titled “2015 Outlook ”
dated 19 Jan 2015) for the same benefits of efficiency gain and eliminate asset duplication.
 Maintain Neutral stance on the sector.

Utilities Daniel Wong (603) 2083 1720 kkwong@hlib.hongleong.com.my

 The Government will continue to address climate change across all sectors, particularly main
Green House Gas (GHG) emitting sectors, namely energy, transport, industrial processes
and product use, waste management, agriculture, forestry and land use.
 The focus will be on developing enabling instruments for climate action, including carbon
pricing and carbon tax. Efforts will also be focused on promoting green and resilient cities
and townships, enhancing green mobility and augmenting the consumption of low carbon
energy as well as expanding the green market and government green procurement (GGP).
 Augmenting Low-Carbon Energy Efforts to pursue low-carbon energy through RE and EE will
be scaled-up to reduce GHG emissions. The development and utilisation of RE sources will
be intensified to meet the 31% RE target of total installed capacity. The RE industry will be
encouraged to venture into floating solar and waste-to-energy projects. Apart from large
hydro and solar, focus will also be on increasing the contribution from other renewable
sources, such as biomass and biogas. The use of existing and new technologies, namely
cogeneration, solar thermal and fuel cell will be further promoted to expand options available
to the industry.

HLIB’s VIEW:
 The measures will encourage more investments into RE segments, which will benefit Cypark,
Solarvest, Samaiden, Pekat and Ipmuda (all not-rated). Conventional large power generation
players such as Tenaga and Malakoff have been re-strategizing in order to reduce their
business investments in coal power generations and re-invest into RE. Petronas Gas will
also benefit from the potentially higher utilization of gas (in replace of other carbon fuel
energy) in the longer term.

9 HLIB Research l www.hlebroking.com

Economics & Strategy l Newsbreak
 We maintain Overweight on Utilities sector – Tenaga (BUY; TP: RM12.50), PGB (BUY; TP:
RM19.00) and YTLP (BUY; TP RM0.85).

Wood based Tan Kai Shuen, CFA (603) 2083 1714 KSTan@hlib.hongleong.com.my
Manufacturing

 “Advancing sustainability” is one of the three key themes the 12MP is anchored on. In
particular, “gamer changer VIII: embracing the circular economy” will be implemented under
this theme.
 The wooden furniture industry was highlighted as an example of how circular economy can
be implemented under the 12MP blueprint.
 Companies undertaking local waste recycling activities that are high-value added and use
green technologies are eligible for Pioneer Status or Investment Tax Allowance under the
Promotion of Investments Act 1986. These activities include the production of reconstituted
wood-based panel boards or products.
 In supporting the circular economy, the adoption of user-pay and polluter-pay principles, as
well as self-regulation among industries will be further promoted.
 Separately, “Game Changer II: Catalysing Strategic and High Impact Industries to Boost
Economic Growth” identifies biomass as one of the strategic and high impact industri es and
activities that will catalyse economic growth. A total of RM10bn will be invested in the
biomass industry in the period 2021 – 2025. Incentives will be introduced to encourage the
development of collection, aggregation and pre-treatment facilities for biomass feedstock to
strengthen the value chain.

HLIB’s VIEW:
 The rubber woods are primarily planted to harvest its latex and the rubber logs and stumps
are normally burnt during replantation. The panel boards and furniture industry integrates
circular economy in its production process by using rubber wood as a raw material. This will
extend the lifecycle of the rubber wood and reduces carbon emissions from burning.
 The panel board producers (Evergreen, Heveaboard) may be eligible for Pioneer Status
(PS) or Investment Tax Allowance (ITA) under the Promotion of Investments Act 1986. PS is
given by way of exemption from corporate tax on 70% of the statutory income for five years ,
while, ITA is granted on 60% qualifying capex incurred for a period of five years and is
utilised against 70% of the statutory income. The PS and ITA incentives on panel boards
production if implemented may also encourage new entrants to the industry, which may be a
threat to the current players in the medium term.
 The wood wastes are by-products and wastage in the production of panel boards and
furniture, which can be used as biomass fuel. With a planned investment total of RM10bn in
the biomass industry in the period 2021 – 2025, this presents opportunities for the wood
manufacturers to either (1) supply biomass to biomass-based products manufacturer; or (2)
to venture upstream / downstream to develop its own biomass technology and capabilities.
Evergreen is currently using biomass boilers (with wood waste as its fuel) to generate
heating and electricity for its production processes.
 Other noteworthy circular production process employed is by Heveaboard where it recovers
the wood waste tree bark to grow fungi in its fungi cultivation segment.
 Key risks from the game changer “embracing the circular economy” include (1) regulatory
fines for the breach in compliance to waste management and pollution laws; (2) additional
cost incurred in the transition to a circular manufacturing process; and (3) potential
additional cost to comply with stricter regulatory standards and reporting requirements.
 The game changer “embracing the circular economy” presents key opportunities and risks to
the wood-based manufacturing industry as highlighted above. We maintain Neutral on the
sector – Evergreen (BUY: TP: RM0.67), Heveaboard (HOLD; TP: RM 0.58), Lii Hen
(BUY; TP: RM3.74) and Homeritz (BUY; TP: RM0.78).

10 HLIB Research l www.hlebroking.com

Hong Leong Investment Bank Berhad (10209-W)

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Stock rating guide

BUY Expected absolute return of +10% or more over the next 12 months.
HOLD Expected absolute return of -10% to +10% over the next 12 months.
SELL Expected absolute return of -10% or less over the next 12 months.
UNDER REVIEW Rating on the stock is temporarily under review which may or may not result in a change from the previous rating.
NOT RATED Stock is not or no longer within regular coverage.

Sector rating guide

OVERWEIGHT Sector expected to outperform the market over the next 12 months.
NEUTRAL Sector expected to perform in-line with the market over the next 12 months.
UNDERWEIGHT Sector expected to underperform the market over the next 12 months.

The stock rating guide as stipulated above serves as a guiding principle to stock ratings. However, apart from the abovementioned quantitative definitions, other qualitative
measures and situational aspects will also be considered when arriving at the final stock rating. Stock rating may also be affected by the market capitalisation of the individual
stock under review.

11 HLIB Research l www.hlebroking.com