4Q 2019 - Quarterly Industry Outlook - Malaysia

Highly Confidential
MALAYSIA - Quarterly Industry Outlook - 4Q 2019

1 October 2019
By Group Risk Research
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MALAYSIA – House View
- Outlook 3
- Summary of Financing Recommendations 4-5
- Industry Outlook
- Property 6-16
- Construction 17-26
- Palm Oil 27-38
- Rubber Gloves 39-42
- Oil and Gas 43-52
- Shipping 53-58
- Power 59-67
- Wholesale and Retail 68-72
- Food and Beverage 73-77
- Consumer Electrical and Electronics 78-83
- Healthcare 84-87
- Definitions 88-91
Highly Confidential 2
MALAYSIA – Outlook
Central Economic Scenario Sector 6-18m Outlook

Base • Malaysia’s economic growth is expected to remain weak in 2H 2019. We expect Bank Negara
Property Negative
Case Malaysia (BNM) to cut its key policy rate by 25bps to 2.75% in Nov 2019.
• Be aware of changing government policies especially from an environmental and social perspective. Construction Negative
Lower • The escalation in trade tensions between the US and China remains a key risks to economic growth. Plantation Neutral
Case We do not see an end anytime soon. Geo-political risk remains elevated. Rubber Gloves Positive
Upper • Fiscal and monetary policy stimulus will likely provide much needed support going into 2020. Oil and Gas Neutral
Case However, we expect this to be limited. Shipping Negative
Domestic Industry Cyclical Outlook Power Positive
Wholesale and Retail Negative
Wholesale and Retail Food and Beverage Neutral
Rubber Gloves Food and Beverage
Consumer E&E Consumer E&E Negative
Power Healthcare Positive

Property
Healthcare 2019e 2020f
Construction
GDP 4.4% 4.4%
Shipping
Policy rate 2.75% 2.75%
Plantation
Oil and Gas USD/MYR avg 4.18 4.16
Source: Maybank Kim Eng
Summary of Sectors Outlook

• Property activity improved slightly YoY. However, we expect challenges including rising unsold units, margin compression and supply/demand imbalances to persist.
• The steel sector is facing significant margin compression risks amid existing thin margins, rising feedstock cost and failure to raise prices. Player losses may arise.
• The palm oil industry has recovered somewhat over the last quarter but prices remain low with no significant boost to the outlook for now.
MALAYSIA – Summary of Financing Recommendations
Financing Recommendations
Sector Sector Rating
Prefer Avoid / Reduce
• Tier 1 developers with a strong saleability track record.

• Avoid high end developments, new developers with limited
Property Negative • Affordable terraces in good locations and affordable high
track record, offices and shopping complexes.
rise near LRT/MRTs.
• Subcontractors and players low on the value chain as they

• G6 and G7 Sarawak contractors.
are the most vulnerable.
Construction Negative • Players with high order book multiples and strong balance
• Building Material suppliers.
sheet.
• Contractors reliant on direct bids.
• Avoid refining and biodiesel businesses for now, with careful

• Integrated plantation companies, with a focus on ESG-
consideration given to plantation companies with sizable US
Plantation Neutral compliant medium to large sized industry players. Prefer
dollar debts. Reduce lending to smallholders due to their
those with diversified export market destinations.
high cost of production.
• Focus on rubber glove producers with more than 1b pcs of • Avoid small to medium-sized rubber glove producers,
Rubber Gloves Positive capacity, with preference given to those which have track especially those which have yet to diversify into nitrile glove
record in expansion and product innovation. manufacturing for medical use.
• Oil storage players, integrated O&G firms and projects that • Rig operators and OSV players due to low charter rates.
Oil and Gas Neutral are backed by oil majors. • Not recommended to finance marginal fields or ultra
• Maintain & evaluate for refiners and fuel retailers. deepwater projects.
Shipping Negative • Dry bulk, tanker & containership
• Renewable energy projects especially large scale solar. • Coal due to large carbon footprint.
Power Positive • Biomass/biogas due to high feedstock supply risk.
MALAYSIA – Summary of Financing Recommendations
Sector Sector Rating
Prefer Avoid / Reduce
• The mass grocery retail (MGR) segment, with the most

Wholesale and Retail Negative dynamic growth expected to be in the organised store • Consumer discretionary segment, especially importers and
sector. retailers of luxury goods.
• Manufacturers and traders with high import-content products

• Manufacturers with high export-content are preferred as
Food and Beverage Neutral as a softer Ringgit will adversely affect import costs.
they are deemed to be more resilient.
• Manufacturers and traders with high import-content products

• Stand-alone retailers.
Consumer E&E Negative as a softer Ringgit will adversely affect import costs.
• Hospitals at a newly designated healthcare hub such as

• Private hospitals with a proven track record and on an Iskandar.
expansion drive.
Healthcare Positive
• Hospitals that are championing medical tourism services as
well as those offering specialised niche treatment.
Malaysia - Property
- Summary
- Cycle
- Key Industry/Early Warning Indicators
- ESG Considerations
- Financing Recommendations
MALAYSIA - Property – NEGATIVE
Summary of Outlook
• The escalating trade war has dampened the moderate pick up for the property sector over 1H19. Less improvement is expected for 2019 over 2018.
• Loan approvals spiked 19.8% YoY in 2Q19 (amid a low base) with smaller quantums expected for the rest of 2H19.
• Notwithstanding, unsold residential units continued to register fresh records of 177k with further increase to 185k expected for the year.
• Amid the current challenging environment, opportunities and prospects remain for the warehouse and logistic center subsegment.
Key Indicators Insights and Outlook Unsold Residential Property

• 1Q19 Unsold residential property increased 31.0% YoY to alarmingly high levels 200,000
Unsold properties
of 177k. End 2019 unsold levels are expected to increase further to 185k. 180,000
Pulau
Pinang
• 1Q19(P) HPI growth: +1.3% YoY. 160,000 +116k unsold
House Price Index Johor
• The HPI growth for end 2019 is estimated to be between 0 to -3%. 140,000
• 1Q19 property transaction volumes are up 6.2% YoY to 84,424 units. 120,000
Transaction Volume Kuala
Units
• We expect minor overall improvements in 2019 amid the current downturn. 100,000
Lumpur
80,000
• The banking industry’s 2Q19 loan approval rates remained low both for
Loan Approval Rates 60,000 Selangor
residential (2Q19: 42.3%) and non-residential mortgages (2Q19: 39.6%).
40,000
• 1Q19 Office occupancy rates continued declining 0.9 ppt YoY to 76.5%.
Office Occupancy Rate 20,000 Others
• We are projecting further occupancy rate declines from 2019 to at least 2022.
0
Shopping Complex (SC) • 1Q19 SC occupancy rates continued declining 0.8 ppt YoY to 79.4%. 2014 2015 2016 2017 2018 2019F
Occupancy Rate • We are projecting further declines between 2019 to at least 2021. Source: Group Risk Research, NAPIC
Recommendations MGSIC codes

• Avoid high end developments, new developers with limited track record, offices and shopping complexes. • Residential: 41001a to d, 68101a to c, 68104a to b,
• Focus on Tier 1 developers with a strong saleability track record. Commercial: 41002b to e, 68102b to e, 68104d to g,
68109, Land: 68103a to b, Others: 41002a, 68102a,
• Financing preference towards affordable terraces in good locations, affordable high rise near LRT/MRTs. 68104c, 68103a to b, 68201, 68202, 68203, 68209
• Warehouses in strategic locations are recommended (ie. Logistic/industrial hubs, Klang, Urban areas).
Property-Cycle: Residential & Commercial to remain challenging in 2019-2020
Peak
Late-Upcycle Early Downcycle
Prices and Valuations Rise Low Rental Yields

Shortage of Tradespeople Stock Oversupply
More Buyers than Sellers Falling Construction Prices
High Confidence Affordability issues prevalent
Mid- Mid-
Upcycle Abundance of Tradespeople
Downcycle
Rentals Increase
Stock Levels Tightening Valuations Fall
Prices Rise More Sellers than Buyers
No Confidence
Late-
Early Upcycle Downcycle
Bottom
Unsold residential property expected to rise further
● Residential Property Sector Rating remains
Unsold Residential Trend Total Unsold Negative
200,000 6.00 Residential
5.4 years ● High unsold trend to continue through 2019-2020
Stock
180,000 worth of
Years of Unsold Inventory

160,000 unsold 5.00 o Early signs of recovery has diminished with
inventory the trade war escalation
Unsold Resi Units
140,000
4.00 Primary market
120,000 residential  Heightened tensions in the trade war
100,000 3.00
transactions has increased uncertainty and
(Annual)
80,000
continues to affect consumer
60,000
2.00 sentiment and demand for on various
Estimated
40,000 Years of Unsold asset classes including property.
1.00 inventory:
20,000 Unsold
o Johor remains as the greatest problem with
- 0.00
Stock/Primary 46,622 unsold units primarily in the high rise
Transactions
segment
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019F
(RHS)
Source: Group Risk Research, NAPIC ● Inventory levels continue to rise
Inventory Levels of listed Developers (Unsold completed development units) o Based on a basket of developers: inventory
Developer 2019F (RM'000) 4Q18 (RM'000) 4Q17 (RM'000) 4Q16 (RM'000) levels have risen sharply (more than doubled)
Ec o W orld Development Group Inc rease 140,489 24,707 24,884
Glomac Bhd Flat 132,800 139,818 114,196 over the last 2 years
Eastern & Oriental Bhd Flat 232,378 393,281 478,628
Hua Y ang Bhd Flat 75,646 107,856 41,881 ● Impact of High unsold and inventory
Matrix Conc epts Holdings Bhd Flat 650,316 258,986 459,907
Mah Sing Group Bhd Inc rease 731,257 628,981 359,989
o Affects developer cash flow, earnings
i-Bhd Inc rease 752,789 662,481 65,769 visibility and ability to launch new projects.
Sime Darby Property Bhd Flat 871,281 817,406 750,000
MKH Bhd Inc rease 259,515 158,343 88,952 Higher risk are seen for smaller developers as
S P Setia Bhd
Tambun Indah Land Bhd
Flat
Flat
1,586,946
145,998
1,702,008
147,657
877,905
1,378
larger developers have better cash flow
Tropic ana Corp Bhd Inc rease 129,270 31,893 34,931 management and marketing strength.
UEM Sunrise Bhd Inc rease 695,271 609,690 585,244
UOA Development Bhd Flat 1,681,241 1,766,099 217,207 o Various developers continue to focus on
LBS Bina Group Bhd
Gamuda Bhd
Inc rease
Flat
296,383
448,664
267,445
210,355
187,867
118,445
selling existing projects and focusing on more
Paramount Corp Bhd Flat 323,106 211,320 28,789 saleable projects (ie. Landed developments
Sunw ay Bhd Flat 1,857,934 1,693,600 661,783
Total 12,200,503 11,011,284 9,831,926 5,097,755 and strategically located high rises)
Y oY Inc rease 10.8% 12.0% 92.9%
Note: Sime Darby Prop 4Q17, 4Q16 figures are estimates Source: Group Risk Research, Bursa, Corporates  Overhang stock may be marketed
more aggressively or at lower margins
Sales expected to be lackluster in 2H19 on Trade War overhang
● Sales expected to be lackluster in 2H19.
Unsold Residential Property by States Unsold Residential Property by price ● Trade War remains major overhang
200,000 2019F: category
2018: >180k 200,000
2019F: o The ongoing trade war is continuing to
180,000 >180k
168k
Pulau Pinang 180,000 2018:
>RM1m elevate risks and impacting overall
160,000 9% 168k
160,000 11% sentiment.
140,000 10%
120,000
25% Johor 140,000
13%
RM500k-1m
o Any escalation places further economic
9% 120,000 29%
and demand risk.
Units
14%
Units
100,000 33% 12%

28% 100,000 32%
7% Kuala Lumpur
80,000 5% 80,000
9%
36% ● Overall weakness partly mitigated by:-
4% 3% 15% 20% 9% 8% 8% RM250k-500k
26% 13% 38%
60,000 20% 23% 31% 11% Selangor
60,000 12% 16%
27%
32%
38%
o Increase in Hong Kong interest
15% 13% 21% 18% 23%
40,000 28% 33%
40,000
20% 18%
13%
13%
17%
34%
33% 38%  Amid heightened uncertainties in
20,000 20,000 56% 47% 22% <RM250k
42% 42% 38% 38% 29% 24% Others 32% 21% 17% 17% Hong Kong. Local MM2H programme
0 0
2012 2013 2014 2015 2016 2017 2018 2019F 2012 2013 2014 2015 2016 2017 2018 2019F is an attraction.
Note: Includes Service Apartments and Sohos Note: Includes Service Apartments and Sohos  SP Setia and Mah Sing reported very
Source: Group Risk Research, NAPIC Source: Group Risk Research,
Source: NAPIC
i-Research, NAPIC high interest in their Hong Kong
New Primary Market Launches against roadshows.
OPR Rate
Sales 4.0% o Lower OPR rates
80,000
3.5%
 25 bps reduction in May 2019
70,000
 Possibility of another 25 bps cut by
60,000
3.0% year end
50,000
%
o Push by federal government to improve

Units
40,000 2.5%
loan eligibility for first-time home buyers
30,000
20,000 2.0% o Government/REHDA initiatives:-
10,000  Govt Policies: Stamp duty waiver
1.5%
0 and exemptions
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
4Q14
2Q15
4Q15
2Q16
4Q16
2Q17
4Q17
2Q18
4Q18
2Q19
2019F
2012
2013
2014
2015
2016
2017
2018
 National Home Ownership Campaign

New Launches Primary Mkt Transactions OPR Rate (%)  Property crowdfunding platforms
Estimated Surplus stock Source: Group Risk Research, NAPIC Note: Approval based on Value Computation Source: Group Risk Research, BNM  REHDA’s rebates and discounts
Banking Indicators are stable
Mortgage Loan Applications Mortgage Loan Approvals ● Temporary blip in demand

26,000 10,000 11,000 5,000 o 2Q19 loan applications and approvals
10,500 increased 19.1% and 19.8% YoY
24,000
9,000 10,000
4,000 respectively albeit from a low base.
9,500
22,000
8,000 9,000 o Notwithstanding, activity tapered off in
RM'mil
RM'mil
RM'mil
RM'mil
20,000 8,500 3,000 June19 and is expected to remain
18,000
7,000 8,000 lackluster amid the trade war escalation.
7,500
6,000 7,000
2,000 ● Loan approval rate expected to remain
16,000
6,500 rangebound
14,000 5,000 6,000 1,000 o Loan approval rates have plateau for
Dec-16
Mar-17
Dec-17
Mar-18
Dec-18
Mar-19
Dec-16
Mar-17
Dec-17
Mar-18
Dec-18
Mar-19
Jun-16
Sep-16
Jun-17
Sep-17
Jun-18
Sep-18
Jun-19
Jun-16
Sep-16
Jun-17
Sep-17
Jun-18
Sep-18
Jun-19
both residential and non-residential
mortgages
Resi Loan Applications Resi Loan Approvals Non-Resi Loan Approvals (RHS)
Source: Group Risk Research, BNM Source: Group Risk Research, BNM o Expected to remain within current range
of 40 to 45% for residential mortgages
Residential Property Transactions House Price Index  Federal Government push to grant
(Vol & Value) (HPI) 2019F & 2020F: loans
22,000 80,000 220 10.0%
Decline of 0 to -3%  Offset by bank’s gradually
21,000 75,000 210 8.0%
Index (2010=100)
200
increasing regulatory compliance
20,000 70,000 6.0%
190
costs
19,000 65,000 4.0%
RM'mil
● House Price Index (HPI) Growth projected to

Units
18,000 60,000
180
170
2.0% remain on a downtrend
17,000 55,000
16,000 50,000
160
0.0% o HPI growth is expected to continue its
150 -2.0% downtrend in 2019F and 2020F on overall
15,000 45,000
140 -4.0% market weakness
14,000 40,000
1Q19P
2019F
2020F
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
1Q19
Value Transacted Vol Transacted (RHS) HPI (2010=100) (LHS) YoY Growth (RHS)
Note: 1Q19P figures are preliminary and subject to change
Source: Group Risk Research, NAPIC Source: Group Risk Research, NAPIC
11
Office supply conditions to worsen in 2019-2021
Office Sector Vacant Space and Office Sector Outlook

Office Supply Growth (KL & Selangor)
Occupancy Rates ● Office subsector rating remains Negative.
+>18mil sq ft 4,000 81.0%
180,000,000 ● Demand from major sectors continue to remain
160,000,000 80.0% stagnated amid substantial completions
Occupancy Rate (%)

140,000,000 3,600
Space Sq m ('000)
79.0% o Banking Sector: The number of banking
120,000,000
sector staff shrunk by 5.3% YoY, therefore
100,000,000 3,200 78.0%
sq ft
reducing commensurating office demand.

80,000,000
77.0%
60,000,000 2,800
o Oil & Gas: Non-expansionary mode amid
40,000,000 76.0% challenging operating environment,
20,000,000 competition from Shale Oil and volatile
2,400 75.0%
- crude oil prices.
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2015 2016 2017 2018F 2019F 2020F 2021F o Fresh demand would primarily come from
Kuala Lumpur Selangor Unoccupied/Vacant Space Occupancy Rate (%) (RHS) the ICT and Co-working space sectors
Source: NAPIC, Newspaper publications, Annual Reports, various Note: Private Offices Source: Group Risk Research, NAPIC
 But would be largely dwarfed by
incoming supply
Banking sector staff force Crude Oil Prices
● Sector’s vacancies continued rising resulting in
6.0% 160
Crude Oil Prices the continued decline of occupancy rates.
140 remain soft historically
4.0%
o Deterioration is expected to continue for
120
2.0% at least the next 4-5 years.
USD per Barrel
100
0.0% 80
● Weak 2019-21F outlook
%
-2.0% 60 o Immense incoming supply in Klang Valley

40 and rising vacant space.
-4.0%
20 o Projected annual adsorption rates is
-6.0% 0 substantially below new completed supply.
2015
2012
2013
2014
2016
2017
2018
Mar-05
Dec-05
Mar-08
Dec-08
Mar-11
Dec-11
Mar-14
Dec-14
Mar-17
Dec-17
Sep-06
Jun-07
Sep-09
Jun-10
Sep-12
Jun-13
Sep-15
Jun-16
Sep-18
Jun-19
o Old offices occupied by tech oriented
YoY Chg in Staff count companies most at risk of displacement.
WTI Brent
Note: 2017 figure is an estimate Source: Group Risk Research, ABM Source: Group Risk Research, NAPIC o Competition from high spec but reasonably
priced new buildings.
Shopping Complex supply conditions to worsen in 2019-2021
Shopping Complex: Rapid Supply Growth Shopping Complex Vacant Space and Shopping Complex Sector Outlook
across 4 key states Occupancy Rates ● Shopping complex subsector rating remains
180,000,000 3,600 83.0%
160,000,000
+33mil sq ft
82.5%
Negative.
140,000,000 3,200 82.0% ● Sector’s vacancies and occupancy rates
Occupancy Rate (%)

improved slightly but remains weak
Space Sq m ('000)
120,000,000 81.5%
2,800 81.0%
100,000,000 o Underlying weak rental reversion
sq ft
80,000,000 80.5%
2,400 80.0%
prospects, tenant retention strategies and
60,000,000
79.5% promotional activities (rebates/rental free
40,000,000
2,000 79.0% periods/renovation incentives)
20,000,000
-
78.5%  These are costs and affect the
1,600 78.0% bottom-line of asset owners
2013
2014
2015
2016
2017
2018F
2019F
2020F
2021F
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
● Consumer Sentiment and Business Conditions
Kuala Lumpur Selangor Johor Pulau Pinang Unoccupied/Vacant Space Malaysia Occ Rate (%) (RHS)
Source: Group Risk Research, NAPIC, News publications, Annual Rpts, various Source: Group Risk Research, NAPIC
remain weak
o Exacerbated by escalation in Trade War
MIER's Business Conditions Index tensions
MIER's Consumer Sentiment Index
● Accelerating competition from e-commerce
140 80.0% 140 30.0%
o A surge of investments in e-commerce
120 60.0% 120 20.0%
operations in the region
100 100
40.0% 10.0% o Steady to growing traffic trends amongst
80 80
top e-commerce sites (Lazada, Shopee, 11
CSI
CSI
20.0% 0.0%
60 60 Street etc.)
0.0% -10.0%
40 40
● Weak 2019-20F outlook
20 -20.0% 20 -20.0%
o Immense incoming supply in 4 key states.
0 -40.0% 0 -30.0%
o Adsorption rates remain low.
2Q12
4Q12
2Q13
4Q13
2Q14
4Q14
2Q15
4Q15
2Q16
4Q16
2Q17
4Q17
2Q18
4Q18
2Q19
2Q12
4Q12
2Q13
4Q13
2Q14
4Q14
2Q15
4Q15
2Q16
4Q16
2Q17
4Q17
2Q18
4Q18
2Q19
o Secondary and lower tier malls in areas of
Consumer Sentiment Index Series1 Business Conditions Index Series1 high incoming supply most vulnerable.
Source: Group Risk Research, MIER Source: Group Risk Research, MIER
o Erosion from e-commerce.
Warehousing/Logistic centers: Growth sub-segment for property
Warehousing/Logistic center
● Financing is recommended for warehousing/logistic centres in Klang, logistic/distribution hubs and Urban areas with large existing
population/commercial/industrial catchment
o The sector is seeing an uptick and development of mega distribution centres
o Demand for warehousing and last mile logistic infrastructure is in-line with growth and growing requirements from e-commerce
o Expansion seen from logistic players, e-commerce players and large retailers such as Ikea, Tesco and Nestle
o Modern or Built-to-suit warehouses are preferred to be able to meet the needs of major e-commerce players and large retailers
● Demand pick-up for last-mile distribution centres
o Due to growing e-commerce transaction volume and increasing demand for quick delivery turnaround/next-day deliveries
o Demand is for centrally located last-mile distribution centres in urban areas
 This is an emerging trend and was traditionally not the area of distribution centres/warehousing demand
Key Developments
● IKEA is developing its Regional Distribution Centre in Selangor
o Located in Pulau Indah, Klang
o Operational in September 2020 supplying for South East Asia and Indian markets
o RM900m investment which includes a 1mil sq ft storage facility
● 380 acres of land in Pulau Indah, Klang converted into a free trade zone (FTZ)
o CBRE is currently marketing for sale 318 acres of land in the area which would likely be sold to a master developer
o Subsequently it would likely be developed into a logistical and warehousing hub.
● Pos Malaysia-Lazada e-Commerce Regional Distribution Centre – Sepang
o Pos Malaysia and Lazada have collaborated to developed an e-Commerce Regional Distribution Centre in Sepang
o Located in the old low-cost carrier terminal (LCCT)
o 430,000 sq ft for warehouse facilities
ESG Considerations
● Green Buildings is a core ESG consideration for

Green Building Index: Certified Buildings the property sector.
350 30.0%
o This can be achieved through the building
300 25.0% and development of new projects with
Number of Buildings (units)
250
20.0% Green building considerations or modifying
200 existing buildings towards this.
15.0%
150
● A Green Building focuses on:-
10.0% o Increasing the efficiency of resource use
100
(ie:- Energy, water and materials).
5.0%
50 Thereby saving energy and resources.
0 0.0% o Reducing building impact on human health
2015 2016 2017 2018 Jul-19 and the environment during the building’s
Platinum Gold Silver Certified Total YoY Chg (RHS)
lifecycle.
Source: Group Risk Research, GBI
● Adoption of Green Building considerations has
been increasing
Green Building Index: Certified Buildings o Under Green Building Index (GBI)
12.0 35.0% certification total certified buildings have
Gross Floor Area (mil Sq ft)
10.0 30.0% increased 76% to 479 buildings from 2014

to 2018.
25.0%
8.0
● Advantages
20.0%
6.0 o There may be preference to rent/occupy
15.0% Green Buildings by MNCs and corporates
4.0
10.0% pursuing Sustainability and ESG .
2.0 5.0% o Green Buildings offer energy and resource
savings hence may offer long term cost
0.0 0.0%
2015 2016 2017 2018 Jul-19
savings.
Non Residential Residential Total YoY Chg (RHS)
Source: Group Risk Research, GBI
● Very selective financing is recommended to avoid upside risk to GIL Ratios amid the sector’s high level of unsold units, challenging outlook in 2019 and
escalating trade war.
● Avoid and reduce exposure to:-

o High end properties and new developers with limited track record. Areas of high supply.
o Office subsector as supply and demand challenges will persist for the followings year
o Shopping Complex subsector on oversupply. Any considerations needs to accompanied by thorough analysis on supply and demand dynamics in the area.
● Financing preference towards affordable terrace properties in good locations. Considerations for affordable high rise property in prime locations and close
proximity to LRT/MRT station.
● Focus on Tier 1 developers with strong saleability track record.
● Financing is recommended for warehousing/logistic centers in Klang, distribution hubs and Urban areas with large existing population/commercial/industrial
catchment. Modern or Built-to-suit warehouses are preferred.
MALAYSIA - Construction
- Summary
- Cycle
- Key Industry and Early Warning Indicators
MALAYSIA - Construction – NEGATIVE
Summary of Outlook
• We have noted a shortage of fresh jobs for the last 15 months. However, current construction activity is sustained by previously secured jobs.
• Sarawak and Penang are key growth states amid overall sector downturn. Klang Valley maintains large job value despite substantial infrastructure contraction.
• Contractor PBT margins are expected to contract 2 to 4 percentage points (ppt) for infrastructure jobs and 1 to 4 ppt overall.
• We await tender/award stages for several infrastructure projects and Federal Budget 2020 (11 th Oct 2019) for industry prospects.
Key Indicators Insights and Outlook Construction GDP Growth

• Large decline in 2Q19 construction GDP Growth to +0.5% YoY 10.0%
Construction GDP
• Further downside expected over the next several quarters 9.0%
8.0%
• 2Q19 Contractor order books declined more sharply by -10.7% YoY
Construction Orderbooks 7.0%
• Further declines are expected in the near to mid-term 6.0%
%
• 2Q19 construction work change is now flat at +0.2% YoY to RM35.7bil 5.0%
Construction work 4.0%
• Current work activity is sustained by past ongoing projects
3.0%
Construction Sector • Construction sector impairments increase 0.10 ppt YoY to 2.6% as at June19 2.0%
Impairments • There is further risk to impairments due to sector risk 1.0%
0.0%
• Aug19 steel prices declined -12.5% YoY to RM2,165 pmt
Steel Price
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
• The lack of shocks to pricing is accommodative for sector
• Jul19 cement prices declined -3.2% YoY to RM16.15 per 50kg bag YoY Growth (RHS)
Cement Price
• However, pricing is likely trending upwards due to reduction in hidden rebates Note: 2015 Constant Prices Source: Group Risk Research, DOSM

• 2019’s outlook remains challenging. Financing should be selective towards reputable and proven contractors. • Infrastructure: 4210Xa to g, 429XXc, Building: 41001e
• Financing considerations could be made for players with high order book multiples and strong balance sheet. to h, 41002f, 41002h to j, 41003, 41009, Special Trades:
431XX, 432XX, 4330X, 4390X, 7110X, 71200, 4220Xa to d,
• Financing considerations could be made to G6 and G7 contractors that are proven and reputable. Others: 429XXa and b, 4220Xa to d
• Financing is recommended to reputable contractors in Sabah and Sarawak with good construction capabilities.
Construction – Cycle: Current downturn, anticipate recovery in 2 years
Peak
Boom in Construction Overbuilding

Excess Financing Stock Oversupply
Shortage of Tradespeople Falling Construction Prices
High Construction Prices Tightened Financing/Funding
High material cost
Mid- Mid-
Upcycle Downcycle
Low material cost Abundance of Tradespeople
Valuations Rise Valuations Fall
Financing/Funding Available Reduced Financing/Funding
Stock Levels Tightening Minimal Construction
Late-
Bottom
Rate of change in construction work activity to decelerate further
● Construction Sector Rating remains Negative,
Construction Sector Trends - Segmental work value (RM'mil)
but prospects are turning favourable for East
160,000 30.0% Malaysia
140,000
5% 5% 25.0% ● Moderate activity declines but sharp declines in
5%
5% 5% 5% margins
5% o 2019E overall construction work activity
120,000 20.0%
expected to flatten as growth decelerates
5%
37% 42% sharply before declining in 2020E.
45%
100,000 5% 34% 45% 46% 48%
15.0%  Due to weak replenishment and
5%
32% decline in orderbooks. We are
32%
expecting project awards to pick up in
80,000 10.0%
RM'mil
5%
2020 which would stem a decline in
35%
construction activity for 2021-2022.
7% 35%
60,000 5.0% o Building construction activity is expected
29% to decline between 2019E to 2022E as major
40,000 58% 0.0% non-residential projects complete. In 2019
61% 53%
63% 51%
63% 50% 49% 48% major completions include Rapid Pengerang,
60%
60% Exchange 106, Celcom HQ, Menara
20,000 64% -5.0% Prudential, Southkey Mall and Quarza Mall.
o Sharp construction margin declines
0
2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E
-10.0%  The key impact to the industry would
Special Trades 4,681 4,113 4,307 5,026 5,429 5,949 6,495 7,161 7,173 6,688 6,600 6,300 be an anticipated overall construction
Civil Engineering 18,305 28,204 32,301 32,689 36,588 43,318 51,087 60,593 64,342 60,000 62,000 64,800 margins contraction of 1-4
Building Construction 41,273 48,350 54,266 64,830 72,926 77,570 80,868 77,793 73,064 67,160 66,500 64,400 percentage points which is significant
YoY Growth (RHS) 5.7% 25.5% 12.7% 12.8% 12.1% 10.3% 9.2% 5.1% -0.7% -7.4% 0.9% 0.3% given inherently slim margins.
Source: Group Risk Research, DOSM
 Attributable to increased competition,
increased usage of open bidding and
rise in cement prices.
Outlook remains weak but outstanding order books to provide some support
Top Contractors - Latest Orderbook Cover (Revenue to orderbook multiples) ● Overall Contractor’s outstanding orderbook
- As at June19) continue declining sharply
14.00 8.8 10.0
Orderbook 4Q18
o Diminished earnings visibility. However,
12.00
8.0 the larger contractors maintain over 2
10.00 years of orderbook cover.
Multiple (X)
6.0
RM'bil
8.00 4.6
4.1 Orderbook 1Q19 o Industry orderbook replenishment has
6.00
2.7
3.1
2.5 4.5 2.9 2.2
4.0 been weak over the last 15 months.
4.00 1.5
2.0 o Outstanding orderbooks expected to
2.00
2.0x Orderbook Multiple
Orderbook/ continue declining until some
0.00 1.0 0.0 Revenue multple
stabilization in 1H20 depending on the
WCT 1Q19
Gadang
IJM
SunCon
HSL
KimLun
Kerjaya
George Kent
Muhibbah
Gamuda
Eversendai
finalized timing of awards for PTMP,
ECRL, Sarawak Coastal Highway and
Sarawak Second Trunk.
Source: Group Risk Research, Companies, Bursa announcements, Analyst Reports
o We are eyeing Budget 2020 scheduled for
11th October 2019 for any industry
Construction GDP Growth Corporate Outstanding Orderbook Trend
prospects
18,000 10.0% (Basket)
9.0% 43.0 3.0%
● Contractors shifting focus to building
17,000 41.8 construction
8.0% 42.0 41.2 2.0%
16,000
7.0% 41.0
39.9
1.0% o A growing number of contractors have
6.0% 40.0 39.4 0.0% refocused on building construction
RM'mil
RM'bil
15,000 5.0% 38.6

39.0 -1.0% tenders to sustain orderbooks
%
4.0% 38.0 -2.0%
14,000
3.0% 36.8 o Much of the orderbook wins in the last 12
37.0 -3.0%
13,000
2.0% months were building construction
36.0 -4.0%
1.0%
35.0 -5.0%
oriented.
12,000 0.0% 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 o Margins are expected to contract on
3Q16
2Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
Orderbook Trend QoQ Chg (RHS) increased industry competition with

Sampling includes: IJM, WCT, Suncon, GeorgeKent, Kerjaya, HSL, Kimlun,
Construction GDP (RM'mil) YoY Growth (RHS) Eversendai, Muhibbah, Gadang lower margins being the new normal. This
Note: 2015 Constant Prices Source: Group Risk Research, DOSM Source: Group Risk Research, Bursa, Companies, Research Reports is amid pricing recovery pressure from
cement inputs.
Several major building projects completing
Status/Updates of Key current projects
Project Timelines of Major Projects
● ECRL – The ECRL has been revived but at a lower
cost of RM44bil (from RM65.5bil) with a
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
realignment on the western portion. 40% of the
ECRL (RM65.5b->44b) project will be awarded to local contractors. This
offers some relief to peninsular Malaysia players
MRT 2 (RM39.3b->30.5b)
but we do note that this may come with higher
Pan Borneo Highway (Sarawak) (RM16.5b- execution risk given potentially slim margins.
>RM15.8b)
Pan Borneo Highway (Sabah) (RM12.8b)

● Pan Borneo Highway (Sabah & Sarawak) –Changed
LRT3 (RM31.6b->RM16.6b)
to turnkey contractor model. Under turnkey model,
KL Metropolis (RM10b) the contractors are more susceptible to price
fluctuation and cost overrun risks. Notwithstanding,
Gemas-JB Double Track (RM9.4b)
the 2 projects are a massive boom for the 2 states
BBCC (RM4.5b) being the largest infrastructure project in East
Malaysia. Tenders and awards ongoing in Sabah.
Baleh Dam (RM8b)
Rapid Pengerang
● KVMRT 2 – Project continues with a lower
West Coast Expressway (RM6b) construction cost of RM30.5bil (From RM39.3bil).
Contractors involved have work scope reduced.
PNB 118 (RM5b)
Project changed from PDP model to Turnkey.
Exchange 106 (Est RM3b) Players are more susceptible to price fluctuation
and cost overrun risks.
Johor-Singapore RTS (RM4b) (Deferred)
KV Double Track Upgrade (RM5.3b->4.3b) - under

review ● Rapid Pengerang – The massive integrated
petroleum complex is in its final phases of
Previous Timeline Current Revised Timeline
completion. It would subsequently cease to be a
Source: Group Risk Research, DOSM, Media, Analyst Reports major contributor to the construction industry.
Key growth areas for 2H19-2020
Key growth areas 2H19-2020
● Sarawak –
o State government has tabled the largest ever state budget at RM11.9bil with RM9.0bil allocated
for development expenditure.
o Major projects currently in the pipeline: Sarawak Coastal Highway (RM5bil), Sarawak Second
Trunk Road (RM4-6bil), Sarawak Water related jobs (RM2.8bil).
o Financing considerations made based on capabilities of contractors is important to ensure that
these more complex jobs can be delivered.
● Sabah –
o 2019’s development allocation for Sabah increased 21% to RM5 bil from RM4.13 bil in 2018.
o Construction of transportation infrastructure, port/water facilities and water related
infrastructure will be the core focus.
o Pan Borneo Sabah (previously valued at RM12.8bil) is a major catalyst for Sabah’s construction
Source: Group Risk Research sector being the state’s largest infrastructure project by value.
New Infrastructure project pipeline 2019 RM’bil  Sabah Pan Borneo was only 16.9% completed (As at May 19) meaning ample jobs remain
o Financing considerations made based on capabilities of contractors is important to ensure that
Penang Transport Master Plan (PTMP) 40 these more complex jobs can be delivered.
● Penang –
Sabah Pan Borneo Highway 4 o Major boost expected from PTMP (Est Value: RM40b). Initial tenders are expected by 1H2020 and
construction at the end of 2020.
Sarawak Coastal Highway 5
o Currently pending approvals from the Federal Government and Transportation Ministry
Sarawak Second Trunk Road 6 o Proposed LRT, Monorail, BRT, Highways, Undersea Tunnel etc.
● Water Projects –
Sarawak Water Grid Phase 1 8 o There is a critical need for new water infrastructure across various states
o Plants overloaded: Selangor & Kedah, High Non-Revenue Water: Kedah, Perlis, Pahang & Kelantan
Klang Valley Double Tracking 4 o Federal Government and Pengurusan Aset Air Bhd are allocating large capex for the sector.
Source: Group Risk Research
Cement prices to rise while steel prices rangebound
● Expect cement prices to have bottomed out
Steel Prices - Bars PMT Average Cement Prices (50kg bag)
o We expect cement prices to have bottomed
2,800 60.0% 21.00 15.0%
out and would gradually increase through a
50.0%
2,600
40.0%
20.00 10.0% reduction in rebates (Rather than significant
RM pet metric ton (PMT)
2,400 30.0% 19.00 5.0% official price increase)

20.0%  Cement price rebates prior to this were
RM
2,200 18.00 0.0%
10.0% as high as 20-30%
2,000 0.0% 17.00 -5.0%
 Stronger Cement industry positioning
-10.0%
1,800
-20.0%
16.00 -10.0% through M&A Exercise between YTL
1,600 -30.0% 15.00 -15.0% Cement and Lafarge Malaysia
 Cement producers have been
Jan-16
Jan-17
Jan-18
Jan-19
Apr-15
Apr-16
Apr-17
Oct-15
Oct-16
Oct-17
Apr-18
Oct-18
Apr-19
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
May-17
Aug-17
May-18
Aug-18
May-19
Aug-19
Feb-18
Feb-19
Nov-17
Nov-18
unprofitable and require to pass on

Steel Bars RM PMT YoY Chg (RHS) Average Cement Price (50kg Bag) YoY Chg (RHS) costs
Source: Group Risk Research, MITI Source: Group Risk Research, DOSM  Production costs have been rising
● Prices of steel bars are expected to remain
Construction - Loan Approvals Construction - Gil Ratio stable
35,000 53.0% 8.0% 5.0%
o Expected to trade range bound between
51.0% 7.5% 4.5%
30,000 RM2,000 to RM2,400 PMT in 2019E and 2020E.
49.0% 7.0% 6.6% 4.0%
25,000
47.0% 6.5% 3.5%
o For further details on steel, please refer
20,000 to our Industry Insights publication for
RM'mil
45.0% 6.0% 3.0%

43.0% 5.5% 2.5%
steel (separate report).
15,000 2.8%
41.0% 5.0% 2.0% ● Loan indicators stable for the Construction
10,000
39.0% 4.5% 1.5% sector
5,000 37.0% 4.0% 1.0% o Industry loan approval rates have spiked over
6M19
2013
2014
2015
2016
2017
2018
0 35.0% 1H19 indicating loosened sector lending
2011
2012
2013
2014
2015
2016
2017
2018
6M19
Construction Gil Ratio By Purpose (LHS) o GIL ratio by purpose is stable. However GIL
Loans Approved (RM'mil)
Construction Approval Rate (RHS) Construction Gil Ratio By Sector (RHS) ratio by sector is higher YTD as compared to
Source: Group Risk Research, BNM Source: Group Risk Research, BNM 2017 and 2018
Steel Sector Outlook - Negative
● Malaysia construction demand remains flat
Steel Prices - Bars PMT o Construction GDP growth is dropping sharply and is expected to remain weak as major projects and
2,800 60.0%
development complete. Contractors now face thinner margins and competition which may affect demand
50.0% and payables for steel. The revival of the ECRL and planned rollout of PTMP provides some relief. New
2,600
40.0% major projects such as rail or large integrated developments are required to sustain demand.
RM pet metric ton (PMT)
2,400 30.0% ● High demand growth in certain regional countries but offset long term by high capacity growth plans
20.0%
2,200 o Philippines – One of the fastest growing construction and infrastructure markets in the region.
10.0%
2,000 0.0% o Indonesia - The government plans for IDR 5,957 trillion (USD412bil) in investments from 2020 to 2024
-10.0% primarily for hundreds of construction projects.
1,800
-20.0% o However, there is very high capacity growth planned in the region – Indonesia, Vietnam and Philippines. This
1,600 -30.0%
includes the 3.5m MT plant by Alliance Steel in Malaysia. Substantial supply risk long term.
May-17
Aug-17
May-18
Aug-18
May-19
Aug-19
Feb-18
Feb-19
Nov-17
Nov-18
● Thin industry margins

Steel Bars RM PMT YoY Chg (RHS) o Players in the industry have very thin margins especially measured over the longer term. This exposes them
Source: Group Risk Research, MITI to volatility from currency fluctuations, supply/demand swings and feedstock price volatility etc.
o Currently, the industry is facing volatility through increase in feedstock and uncertainties on demand.
Construction GDP Growth Losses of industry players may easily arise especially for inefficient players due to these fluctuations.
20,000
(Current Prices) 18.0% ● Risk from Trade War
16.0% o The elevated trade war places increased risk to the steel sector as it may impact demand for big ticket
18,000
14.0% items including cars and houses. The trade war also increases some risk to dumping in the region from China
16,000 12.0% as tariffs increases the export cost and prices to the US. However, the impact is relatively modest as US is
the 25th largest export destination for steel from China.
RM'mil
10.0%
14,000
8.0%
● Conclusion
12,000 6.0%
o We maintain our negative rating on the sector. Demand from the construction sector is currently
4.0%
10,000
2.0%
challenging but would receive some support once the ECRL construction work accelerates next year.
8,000 0.0%
However, there is much near term risk due to the trade war, rising costs and failure to pass on cost
increase. Moreover there is longer term risk due to high production capacity growth in the region. As such
3Q15
1Q17
4Q18
2Q14
3Q14
4Q14
1Q15
2Q15
4Q15
1Q16
2Q16
3Q16
4Q16
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
1Q19
2Q19
avoid inefficient and highly leveraged players as these will be the most vulnerable in a competitive
Construction GDP (RM'mil) YoY Growth (RHS) environment. Weakness is seen across the upstream, midstream and downstream segments. Steel Prices
Note: Current Prices Source: Group Risk Research, DOSM
(Steel Bars) are expected to largely range from RM2,000 to RM2,400 pmt for 2019E and 2020E.
● 2019’s outlook remaining challenging. Avoid and reduce exposure to:-

o Subcontractors and players low on the value chain as they are the most vulnerable.
o Building Material suppliers.
o Contractors that have historically been reliant on direct bids.
● Financing considerations could be made for players with high order book multiples and strong balance sheet.
● Financing to large (G6, G7) with strong ability to win open tenders is recommended.
● Financing to reputable contractors in Sabah and Sarawak with good construction capabilities amid increased state government spending and large infrastructure
construction growth is recommended. Avoid players with do not have strong capabilities as there is risk of being unable to deliver on higher requirements of new
infrastructure projects.
● Maintain relationship with larger players that are able to withstand the downcycle (Expected 2-3 years)
● Financing considerations should be made based on high compliance of Occupational Safety and Health (OSH) standards for the purpose of sustainability and
reduction of work related accidents which could disrupt work operations.
● ESG aspects should be evaluated especially for cement producers. Manufacturing of cement is responsible for a hefty 7% of total global carbon dioxide emissions
and is thus unfavourable from an ESG standpoint. Evaluation of financing to cement producers should account for the company’s ESG initiatives and its initiative
on greener alternative solutions.
MALAYSIA – Palm Oil
- Summary
- Cycle
- Key Industry Indicators
- Early Warning Indicators
MALAYSIA - Palm Oil – NEUTRAL
Summary of Outlook
• We remain NEUTRAL on the palm oil sector with an average price estimate of RM2,100 in 2019 and RM2,300 in 2020.
• Relative to the previous quarter, key industry indicators have recovered to healthier levels. However, the recovery is still slow and further upside to prices will
depend mainly on the exchange rate, certification by planters, weather effects and external demand.
• Negative weather effects are expected to be temporary
Key Indicators Insights and Outlook Malaysia CPO seasonal production

Prices rebounded over the last 3 months and is expected to remain above the 2.2
CPO 3M futures
RM2,000 per tonne.
2.0
We expect higher production as the industry enters a seasonally high yield period
Production
(chart on the right). Weather effects are expected to have a marginal down effect. 1.8
2019
Tonnes (m)
We expect external global demand to be sustained as stronger demand from China 1.6
Exports Prior
and India are expected to counter the weaker demand from Europe.
1.4
years
Stockpiles We continue to expect declining stockpiles albeit at a marginal pace.
1.2
Price discount of CPO to CPO price discount of US$100-US$150/tonne to soybean oil is expected to continue
Soybean Oil to attract demand for CPO. 1.0
Fertilizer prices Fertilizer cost is expected to remain largely flat in 2H 2019.

0.8
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
The ONI and IOD weather indicators suggest that the dry season is expected to
Climate change
taper off towards 1H 2020. Source: Bloomberg, Group Risk Research

• Focus on certified and ESG-compliant medium (>1,000ha) and big-sized plantation companies (>10,000ha). • 01261, 01261a, 01261b, 01262, 01262a, 01262b
Integrated plantation companies are preferable and to avoid refining and biodiesel businesses. • 10401,10401a,10401b, 10402, 10402a,10402b
• 462XXa, 462XXb
• The pursuit of sustainable palm oil opens significant opportunities in new product development, improving
yields and mechanisation of labour intensive tasks.
Palm Oil – Sign’s of an early upcycle emerging but downside risks remain
Peak
Late-Upcycle Early
Prices are elevated Prices start to ease

Production rises Production start to rise
Exports robust Exports turn moderate
Stocks dip further Stocks start to rise
Mid- Mid-
Upcycle Prices start to rise Prices dip further Downcycle
Production moderates Production gains pace
Exports rebound Exports sluggish
Stocks start to ease Stocks are elevated
Late-
Bottom
CPO price to hold steady around RM2,100 per tonne in 2019
2019 Avg Forecast
Research House
5.50 1500 RM/tonne
Estimated cost of production in 2018 of top 10 listed
5.00 plantation companies – RM1,830 (according to MKE Research) MPOC 2,300
4.50
2000
MPOB 2,500
4.00 AllianceDBS Research 2,560
3.50
MIDF Research 2,400
RM/tonne (inverted)
2500
Tonnes (m)
3.00
CIMB IB Research 2,100
2.50
3000
Kenanga IB 2,100
2.00
UOB Kay Hian 2,400
1.50
Affin Hwang Capital
2,300
1.00
3500 Research
0.50
TA Securities 2,400
0.00 4000 Hong Leong IB 2,300

May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
May-19
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Maybank KE 2,100
CPO suppy - Production + Stockpiles CPO price per tonne Estimated cross of production (RM)
Industry Average 2,315
Source: MPOB, MKE Research, Group Risk Research
Climate Surveilance – Oceanic Nino Index (ONI) and Indian Ocean Diopole (IOD)
Dry weather expected to taper off as we head into Q1 2020
If the haze situation is prolonged, the FFB yield will likely be negatively impacted
due mainly to lower rainfall and lack of sunshine. This will in turn lead to lower
supply and hence higher prices. CPO supply from Indonesia and Malaysia fell 3.5% and
13% respectively in 2016 following the Southeast Asian haze from Jun to Oct 2015.
During this time, CPO prices rose 23% yoy to RM2,653 per tonne in 2016
Oceanic Nino Index (ONI) – Definition and Methodology

• The El Nino weather effect occurs when the ONI rises above 0.5 for five consecutive months. ONI is the standard measure for measuring deviations from normal temperatures.
• To calculate the ONI, scientists from NOAA's Climate Prediction Center calculate the average sea surface temperature in the Niño 3.4 region for each month, and then they average it with values from the previous
and following months. This running three-month average is compared to a 30-year average. The observed difference from the average temperature in that region—whether warmer or cooler—is the ONI value for that
3-month "season."
Indian Ocean Diopole (IOD) – Definition and Methodology

• Sustained changes in the difference between sea surface temperatures of the tropical western and eastern Indian Ocean are known as the Indian Ocean Dipole or IOD.
• The IOD has three phases: neutral, positive and negative. Events usually start around May or June, peak between August and October and then rapidly decay when the monsoon arrives in the southern hemisphere
around the end of spring.
• A negative IOD often results in more rainfall than average. A positive IOD often results in less rainfall than average.
When El Niño coincides with a positive IOD, the two phenomena can reinforce their dry impacts. Likewise, when La Niña coincides with a negative IOD, the chance of above-average winter–spring rainfall
typically increases.
Malaysia – Key Palm Oil Industry Indicators
Increased supply is likely to be met with an equal increase in demand
Malaysia CPO seasonal production Palm Oil Stockpiles Palm Oil Exports
2.2 3.50 70% 4.70
60% 4.50
2.0 50%
3.00 4.30
40% 4.10
% yoy growth
1.8 30%
Tonnes (m)
2019
USD/RM
2.50 3.90
Tonnes (m)
20%
1.6 3.70
10%
0% 3.50
1.4
Prior 2.00
3.30
-10%
years 3.10
-20%
1.2 1.50 2.90
-30%
-40% 2.70
1.0 1.00
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
May-09
May-11
May-13
May-15
May-17
May-19
Sep-08
Sep-10
Sep-12
Sep-14
Sep-16
Sep-18
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
Jan-18
0.8
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Palm Oil Export USD/RM
Source: Bloomberg, Group Risk Research Source: Bloomberg, Group Risk Research Source: Bloomberg, Group Risk Research
• We expect CPO production to remain flat based on • The decline in stock piles has been one of the two • The ongoing trade war has resulted in a significant
seasonal production trends. key driver pushing palm oil prices higher over the pickup in external demand for palm oil especially
last quarter. from China. The growing threat of the African
• Both the ONI and IOD weather indicators suggest Swine Fever has also led to greater consumption of
that the impact (low sunlight and hot weather) of • Malaysia’s move to suspend export duties on crude palm oil compared to soy oil.
production will unlikely be significant. palm oil (CPO) until end 2019 will help improve its
export competitiveness and reduce stockpiles. • The rise in India’s custom duty on refined palm oil
• Going into 2020, production is likely to decline due imports from Malaysia to 50% will likely limit the
price advantage Malaysian refiners have over their
to less use of fertilisers to conserve cash and
slowing growth in mature oil palm area. The competitors. The duty is expected to last for 180
beginning of the biological tree stress period will days. Hence the current exports growth will
weigh on production. unlikely be sustained.
Palm Oil vs Soybean oil
Soybean oil demand affected by trade war, palm oil to the rescue
CPO spreads vs soy bean oil Crude palm oil spread - Soyoil and Rotterdam Palm Oil CIF price discount to
500 Rapeseed Argentina Soybean Oil
USD premium over CPO price
450 400
450
400 350 400
350 350
300
300 300
USD per tonne

USD per tonne
250 250 250
200
200 200 150
150 150 100
100 50
100 0
50
50 -50
0
-100
Aug-08
Dec-09
Aug-10
Dec-11
Aug-12
Dec-13
Aug-14
Dec-15
Aug-16
Dec-17
Aug-18
Apr-09
Apr-11
Apr-13
Apr-15
Apr-17
Apr-19
0 -150
Nov-14 Nov-15 Nov-16 Nov-17 Nov-18
Jun-09
Jun-11
Jun-13
Jun-15
Jun-17
Feb-08
Feb-10
Feb-12
Feb-14
Feb-16
Feb-18
Oct-08
Oct-10
Oct-12
Oct-14
Oct-16
Oct-18
Argentina US Brazil Soyoil vs palm oil Rapeseed vs palm oil
• CPO spreads remain supportive of crude palm oil • According to MKE Research, due to the late • Demand for palm oil in Europe is expected to
demand. planting of corn and soybean this season arising persist for now given the competitive pricing.
from wet conditions in the US, the yield of these However, this is unlikely to last given the EU
crops will be impacted, thus pushing prices ruling to gradually reduce the usage of palm bio-
higher. diesel towards 2030.
Palm Oil and Financial Markets
CPO price upside expected to be limited. Exchange rate is key!
Crude Palm Oil Futures Curve CPO price vs Equities CPO price vs USD/MYR
2500 10000 3,900 4,400 4.60
9000 4.40
2400 3,400 3,900
8000 4.20
RM per tonne
2300 3,400 4.00
CPO price RM
7000 2,900
RM/t
Index
USD/MYR
3.80
2200 6000 2,900
2,400 3.60
2100 5000 2,400 3.40
1,900
4000 3.20
2000 1,900
3000 1,400 3.00
1900 1,400 2.80
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-07
May-08
Jan-09
May-10
Jan-11
May-12
Jan-13
May-14
Jan-15
May-16
Jan-17
May-18
Jan-19
Sep-07
Sep-09
Sep-11
Sep-13
Sep-15
Sep-17
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
Jul-22
Apr-20
Apr-21
Apr-22
Oct-19
Oct-20
Oct-21
CPO price per tonne FBM Plantation Index CPO price (LHS) USD/MYR (RHS)
24-Jun-19 20-Sep-19
• The derivatives market continues to highlight a • The Plantation Index has stabilized given the • The weaker Ringgit has provided much support to
pickup in prices but only by a marginal amount stabilization in crude palm oil prices. CPO prices. We expect this to continue given our
towards just above the RM2,400. forecast for the Ringgit to remain within current
• Most firms are hit not only from weaker oil prices levels over the couple of years.
• However, prices are expected to remain weak in but also from increased cost of production in the
the short term. form of higher wages. Fertiliser prices remain • Crude palm oil prices may have been a lot lower
stable. than current levels should the Ringgit have
Note: The futures curve captures market expectations of remained at levels five years ago.
CPO prices going forward at any one particular date. • The negative perception on the palm oil industry
will only add downward pressure. • As such, if global monetary policy leads to
significant quantitative easing, the stronger
ringgit will have significant impact on the
industry.
Technical Analysis – Malaysia CPO price 6-18 months outlook
Chart patterns suggests a slow gradual rise toward the RM2500
4000
Key technical indicators suggest that the price cycle has turned with healthy positive
momentum A rise towards the RM2800 level which is key resistance from the downward
sloping line connecting the tops in early 2011 and early 2017 is growing more likely.
However, the rising overbought signal suggest that any rise will most likely be very gradual.
3500
3000
RM per tonne
2500
2000
1500
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Key technical indicators – MACD, RSI and ADX
Highly Confidential Source: Bloomberg, Group Risk Research

Tonnes (m) RM/tonne
1.5
2.5
3.5
1
2
3
1500
2000
2500
3000
3500
4000
1000
Jan-11
May-11 Jan-11
Sep-11 May-11
Jan-12 Sep-11
May-12 Jan-12
Stable
May-12
Sep-12
Sep-12
Danger
Jan-13
Warning
Jan-13
May-13
May-13
Sep-13 Sep-13
Jan-14 Jan-14
May-14
Source: MPOB, Group Risk Research

May-14
Source: MPOB, Group Risk Research

Sep-14 Sep-14
Jan-15 Jan-15
May-15 May-15
Sep-15 Sep-15
CPO Price
Jan-16 Jan-16
May-16 May-16
Sep-16
Palm Oil Stockpiles

Sep-16
Jan-17 Jan-17
May-17 May-17
Sep-17 Sep-17
Jan-18 Jan-18
May-18 May-18
Sep-18
Sep-18
Jan-19
Jan-19
May-19
May-19
%
RM/tonne
-15
-10
0
5
10
-5
1000
2000
2500
3000
3500
4000
1500
Jan-11
May-11 Jan-11
Sep-11 Apr-11
Jan-12 Jul-11
Oct-11
May-12 Jan-12
Sep-12 Apr-12
Jul-12
Jan-13 Oct-12
May-13 Jan-13
Sep-13 Apr-13
Jul-13
Jan-14 Oct-13
May-14 Jan-14
Apr-14
Sep-14 Jul-14
Source: Bloomberg, Group Risk Research

Jan-15 Oct-14
Jan-15
May-15 Apr-15
Sep-15 Jul-15
Jan-16 Oct-15
Jan-16
Highly Confidential May-16
CPO 3M Futures
Apr-16
Sep-16 Jul-16
Jan-17 Oct-16
Jan-17
May-17 Apr-17
Sep-17 Jul-17
Oct-17
Jan-18 Jan-18
May-18 Apr-18
% Change of RM/USD 3M Forward Rate
Sep-18 Jul-18
Oct-18
Jan-19 Jan-19
Risk Trigger Dashboard as at August 2019 – Still Cautious
May-19 Apr-19
Jul-19
US$/tonne Index
100
150
50
200
0
50
100
150
200
250
300
350
400
450
500
Jan-11
Jan-11
May-11
May-11
Sep-11
Sep-11
Jan-12
Jan-12 May-12
May-12 Sep-12
Sep-12 Jan-13
Jan-13 May-13
May-13 Sep-13
Sep-13 Jan-14
Jan-14 May-14
May-14 Sep-14
Sep-14 Jan-15
Source: World Bank, Group Risk Research
Jan-15
May-15
May-15 Sep-15
Sep-15 Jan-16
Jan-16 May-16
May-16 Sep-16
Fertiliser Price Index
Sep-16 Jan-17
Jan-17 May-17
May-17 Sep-17
Sep-17 Jan-18
Jan-18 May-18
May-18 Sep-18
Price Discount of CPO to Soybean Oil
Sep-18 Jan-19
Jan-19 May-19
May-19
36
ESG Considerations
ESG Considerations
Land bank of top ten listed companies as
• As at end August 2019, about 55% of oil palm plantation had been certified with the Malaysian at May 2019
Sustainable Palm Oil certification. The government is hopeful that all plantation companies and
smallholders would be certified by 1 January 2020. The mandatory implementation date for the 813,924, 32%
Malaysian Sustainable Palm Oil Supply Chain Certification Standard on palm oil products has not been
finalized.
• The Ministry of Primary Industries has proposed to put a cap on the expansion of oil palm plantation in
Malaysia at 6.5m ha by 2023 from 5.8m ha in 2018.
• Labour issues such as fair wage level and living conditions of plantation workers are becoming more
1,707,896,
prominent. A number of companies are reporting higher costs in order to rectify these issues. However, 68%
we see this as a positive. Delayed action may lead to fines, loss of license and abandonment of
customers (given non-compliance to certified standards).
• Significant landbank by top listed companies in Malaysia suggests the growing pursuit to expand Planted area (ha) Remaining land bank (ha)
plantations ( Please be aware of the No deforestation, No Peat and No Deforestation.
Tracing the palm oil supply chain

'Crosscheck' is Sime Darby Plantation's major step forward in their journey to creating a deforestation-free
supply chain. It is an open source online tool that is available to everyone. 'Crosscheck' allows users to trace
to supply back to its source, making it possible to identify where problems exist.
http://www.simedarbyplantation.com/sustainability/crosscheck-0
Global Forest Watch - Forest Monitoring Designed for Action - https://www.globalforestwatch.org/
Climate Surveillance – ASEAN Specialized Meteorological Center - http://asmc.asean.org/home/
Issues and Concerns and Financing Recommendations
• Upstream players are likely to be negatively impacted given low palm oil prices. Integrated plantation companies are preferable. Those seeing improved yields
above industry average will do well.
• Indonesia’s temporary suspension of export levies on palm products since Dec 2018 has created a more level playing field for Malaysian downstream producers.
• Avoid refining due to overcapacity and underutilization rates and biodiesel businesses. Companies are looking into developing their oleochemical and specialty
oils capacity as the sector commands higher utilization rates, prices and margins.
• Focus on ESG-compliant medium (>1,000ha) and big-sized plantation companies (>10,000ha). Companies who focus on high margin differentiated and sustainable
products.
• Give priority to ESG-compliant plantation companies with exposure to Indonesia. These are likely to attract greater market share as non-compliant companies are
abandoned by purchasers.
• Careful consideration is given to plantation companies with sizable US dollar debts.
• Mechanical harvesting initiatives involving collection of fresh fruit bunches, infield transportation and crop care is needed with strong demand potential from
plantations. Companies who have adopted data analytics, precision agriculture and drones to improve yields will likely do better.
Issues and Concerns

• Stagnant yield growth over the years
• Rising labour cost due to the government’s plan to raise minimum wage
• Key risks to the sector are:
(i) weather anomalies resulting in poorer-than-expected output growth;
(ii) lower-than-expected CPO price achieved;
(iii) negative policies imposed by import countries;
(iv) unfriendly government policies at producing countries;
(v) sharply lower crude oil prices which makes palm biodiesel demand not viable; and
(vi) weaker competing oil prices (like soybean and rapeseed).
MALAYSIA – Rubber Gloves
- Summary
- Cycle
MALAYSIA - Rubber Gloves – POSITIVE
Summary of Outlook
• The rubber glove industry is expected to remain healthy given sustained demand. However, rising competition is expected to weigh on performance going forward.
• The ongoing trade restriction may impact ASEAN players should China divert its gloves from the US to other markets. However, the Malaysian rubber glove industry
is expected to gain market share should the US remove Generalized System of Preferences (GSP) privileges for Thailand and Indonesia. Thailand and Indonesia
export USD207 million and USD65 million worth of rubber gloves to the US respectively.
Key Indicators Insights and Outlook Natural Rubber Latex Price

12
Production growth levels are expected to rise marginally as earlier capacity cuts
Production
comeback online. 10
Exports External demand is likely to grow at a steady pace but trade war risks remain.
8
RM/kg
Latex Prices Latex prices are likely to stabilize around current levels.
6
We expect prices to remain stable but recent spike in oil prices may cause prices to
Nitrile Prices
rise temporarily. 4
RM/USD forex The weaker ringgit is expected to remain supportive of external demand.
2
Jan-11
May-11
Jan-12
May-12
Jan-13
May-13
Jan-14
May-14
Jan-15
May-15
Jan-16
May-16
Jan-17
May-17
Jan-18
May-18
Jan-19
May-19
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
The average selling prices of both latex and nitrile rubber gloves are expected to
Average Selling Prices
remain stable.

• Focus on well-established rubber glove producers with more than 1b pieces of production capacity and have • 22XXXc, 22XXXd, 22XXXe.
exposure to export markets in both the developed and developing countries.
• Preference should be given to those which have a good track record in product innovation and capacity
expansion strategies especially in nitrile biodegradable gloves.
• Glove makers need to be aware of increasing regulation and stricter certification
Key Indicators of Rubber Glove Industry
Lower commodity prices a strong support to selling price
Production & Sales Value of Rubber Gloves Average Selling Price of Rubber Gloves • We expect production growth to normalise at the
5000000 1600000 0.40 100 current trend and earlier capacity cuts come back
4500000
1400000
0.38 80 online.
0.36
4000000 60
1200000 0.34
3500000
0.32 40 ● Average selling price (ASP) of rubber gloves rose
Pairs
3000000 1000000 0.30 20 over the last quarter due to falling input costs
RM/pair
RM
%
2500000 0.28
800000 0 and earlier cuts in capacity to maintain the
0.26
2000000
0.24
-20 selling price.
600000
1500000 -40
0.22
1000000 400000 0.20 -60
● With both latex and nitrile prices easing, the
Aug-09
May-10
Aug-12
May-13
Aug-15
May-16
Aug-18
May-19
Feb-08
Feb-11
Feb-14
Feb-17
Nov-08
Nov-11
Nov-14
Nov-17
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
industry is expected to fair better.
Production Volume (LHS) Sales Value (RHS) ASP (LHS) YoY Change
Source: DOSM, Group Risk Research
Source: DOSM, Group Risk Research ● The ongoing trade restriction may impact ASEAN
players should China divert its gloves from the US
Exports vs USD MYR Natural Rubber Latex Price to other markets. However, the Malaysian rubber
1800 4.60
4.40 12 glove industry is expected to gain market share
1600 should the US remove Generalized System of
4.20
10 Preferences (GSP) privileges for Thailand and
1400 4.00
Indonesia. Thailand and Indonesia export USD207
Tonnes ('000)
3.80
1200 8 million and USD65 million worth of rubber gloves
RM m
RM/kg
3.60
to the US respectively.
1000 3.40 6
3.20
800
3.00 4
600 2.80
2
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jan-11
May-11
Jan-12
May-12
Jan-13
May-13
Jan-14
May-14
Jan-15
May-15
Jan-16
May-16
Jan-17
May-17
Jan-18
May-18
Jan-19
May-19
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Volume USD/MYR
Source: Bloomberg, Group Risk Research Source: Bloomberg, Group Risk Research
Financing Recommendations and ESG Considerations
Issues and concerns ESG Considerations
• Aggressive capacity expansion may lead to oversupply • The main focus in this industry is on labour issues.
• Volatility in raw material prices - Rubber plantations – Worker accommodation conditions and
wages remain a key issue
• Rising cost of production driven by higher electricity and gas prices
- Rubber glove factories – Concerns over overtime working
conditions and low wages are key issues
Financing Recommendations • We expect more regulation and certification within this industry as
climate change and ESG issues take on a larger role in the functioning of
• Focus on well-established rubber glove producers with more than 1b industries.
pieces of production capacity.
• Give priority to those which have exposure to export markets in both the
developed and developing countries.
• Preference should be given to those which have a good track record in

product innovation, process automation and capacity expansion.
• The Malaysian rubber glove industry is expected to gain market share

should the US remove Generalized System of Preferences (GSP) privileges
for Thailand and Indonesia. Thailand and Indonesia export USD207 million
and USD65 million worth of rubber gloves to the US respectively.
MALAYSIA – Oil & Gas
- Summary
- Cycle
MALAYSIA - Oil & Gas – NEUTRAL
Summary of Outlook
• The O&G sector has bottomed and now entering an early upcycle stage amidst higher oil prices and gradual increase in capex level.
• Global oil demand is expected to be in excess of supplies while oil prices would remain volatile amidst fluctuating supplies and low demand growth due to the on-
going trade war.
• Hike in Petronas capex bodes well for higher upstream activities but the prospect for OGSE players remain uncertain as charter rates seemed to lag.
• Tight refining margin to persist but recovery is in the horizon as the new International Maritime Organisation (IMO) 2020 rule on cleaner shipping fuel takes effect
in early 2020 and this would stoke up demand.
Key Indicators Insights and Outlook Oil Prices

130
• Oil supplies may be curtailed by OPEC cut and sanctions on Iran & Venezuela.
Global oil supply & demand 120
• Downside risk could still come from higher shale oil production by the US. 110
Crude oil prices • Market consensus for oil prices is ~USD65-70/bbl. Volatility to remain. 100
USD per barrel

90
• Total capex would be more than RM50 billion in 2019. 80
Petronas capex
• Allocation for local upstream segment would be ~RM14-15 billion. 70
60
• Higher rig count seen for Asia Pacific as upstream activities keep on increasing
Average Rig Count 50
• Total active rigs in Malaysia to reach mid 20s, according to Petronas. 40
• Margin has declined and expected to remain low in the near future. 30
Dec-09
May-10
Dec-14
Mar-11
Aug-11
Jan-12
May-15
Mar-16
Aug-16
Jan-17
Oct-10
Apr-13
Feb-14
Oct-15
Apr-18
Feb-19
Jun-12
Sep-13
Jun-17
Sep-18
Dec-19 (f)
Jul-14
Jul-19
Nov-12
Nov-17
Average refining margin • Recovery is expected later this year as shipowners require cleaner bunker fuel,
which would generate huge demand in a short time.
WTI Dated Brent
• Oil intake in Malaysia has been on an uptrend and should rise further.
Total oil consumption Source: Index Mundi, EIA, Group Risk Research
• The auto sector to remain as the main demand generator.
Recommendations Industry codes
• Focus on project backed by oil majors instead of independent players. • 0610X, 0620X, 0910Xa-g, 301XXa-c
• To avoid projects in ultra deep water or marginal fields. • 49300, 50122, 51101a
• To avoid financing to rig operators or OSV players. • 19XXXb, 3520Xa-b, 40799a, 40799c, 5210Xa
• Prefer companies that involve in maintenance, decommissioning works and downstream segment.
O&G sector has bottomed and now entering an early upcycle stage
Peak
- Oil prices at high level - Oil prices weakening

- High capex allocation - Capex cut esp upstream
- Plenty of jobs to bid - Reducing jobs
- Full recovery in availability
charter rates - Declining charter rates
Mid-Upcycle Mid-Downcycle
- Oil prices gaining strength - Oil prices rock bottom

- Rise in upstream capex - Halt in upstream capex
- Pick up in jobs awarded - New jobs is close to none
- Moderate recovery in - Charter rates below
charter rates breakeven level
Early Upcycle Late-Downcycle
Bottom
Global oil demand would be in excess of supply; oil prices to remain volatile
World Oil Demand & Supply • Global oil demand growth is forecasted to stay
1.5 105 above the significant threshold of 100mb/d in
1.1 100.7 2019 and grow by 1.2 mb/d, supported by lower
1.0 0.9
99.8
100 prices and new petrochemical projects.
•
bpd (million)
Global oil supply is expected to be in deficit of
bpd (million)
0.6
0.5
0.5 95 0.9 mb/d in 2019 against global demand.
0.2
• OPEC has pledged to cut output by 800,000 bpd
0.0 90 this year as part of an agreement with Russia
and other non-OPEC producers.
-0.5
-0.6
-0.5
85
• Going forward, higher production from the non-
-0.9 -0.9
OPEC countries, especially the US, remains a
-1.0
-1.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
80 downside risk for the supply side. Meanwhile,
Surplus (Deficit) Demand (RHS) Supply (RHS) the on-going global trade tensions are expected
Source: IEA, Group Risk Research to weigh on oil demand.
Oil Prices
130 • Meanwhile, the benchmark Brent crude oil
120 prices averaged USD73/bbl in 2018 and
110 USD65/bbl year-to-date (ytd).
100 • Going forward, oil prices are expected to
USD per barrel
90
remain volatile due to surging inventories
80
amidst escalating trade tensions and growing
70
macroeconomic uncertainties which would
60
dampen overall demand.
50
40 • The consensus is for oil prices to average
30 ~USD65-70/bbl in 2019 while Petronas expects
prices to range between USD60-70/bbl.
Dec-09
Mar-10
Dec-10
Mar-11
Dec-11
Mar-12
Dec-12
Mar-13
Dec-13
Mar-14
Dec-14
Mar-15
Dec-15
Mar-16
Dec-16
Mar-17
Dec-17
Mar-18
Dec-18
Mar-19
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Dec-19 (f)
Sep-19 (f)
WTI Dated Brent
Source: Index Mundi, EIA, Group Risk Research
Increase in upstream capex bodes well for greater offshore activities
Petronas Capex (as at 2Q19) • Petronas guided that its capex for 2019 will rise
30.0 above RM50 billion (2018: RM46.8 billion); to be
YoY: - 10%
QoQ: - 5% shared between upstream segment, specialty
25.0
chemicals and renewable energy.
• From the total, RM30 billion is allocated for
RM (billion)
20.0
upstream activities, of which half (RM14-15
15.0 billion) is for domestic upstream. (2018: RM12
billion, of which RM6.9 billion for E&P)
10.0 • The higher capex stance should spur a modest
surge in O&G activities in Malaysia, which
5.0 augurs well for the local OGSE players.
0.0
• Petronas’ upstream portfolio consist of 233
2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 producing fields (175 domestic and 58
Source : Petronas, Group Risk Research international) and 24 new projects.
• Meanwhile, the Baker Hughes rig count data
Average Rig Count - Asia Pacific Average Rig Count - Malaysia also implied improved industry sentiment as
300 15% 14 80%
269
13 YTD, there are 12 more rigs in service in Asia
256
250 241 246 254 231 10% 12
12 12 60% Pacific as compared to 2018 but the number of
220 219 active rigs in Malaysia remained the same.
200 187
201 5.3%
5% 10
9
40%
• The segment’s future activities has been guided
Unit
Unit
0% 8 8 8 8 20% by Petronas in Petronas Activity Outlook 2019-

7
150 2021. The report indicates a more robust
-5% 6 0%
5 upstream segment in the medium term, which
100 4
-10% 4 -20% bodes well for rigs utilisation and daily rates.
50 -15% 2 -40%
• Also note that several companies were already
awarded contracts to provide maintenance,
0 -20% 0 -60% construction and modification (MCM) and plant
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Rig count Annual change (RHS) Rig count Annual change (RHS) turnaround and daily maintenance (TA4MS)
Source : Baker Hughes, Group Risk Research Source : Baker Hughes, Group Risk Research services at various offshore facilities.
Petronas Activity Outlook (PAO) 2019 - 2021
No Type
Year
Outlook • As indicated in PAO 2019–21, the upstream
2019 2020 2021 segment would see an increase level of activity
Drilling Rigs & Hydraulic Workover Units (HWUs) in the medium term, as per guidance on future
1
project planning:
Jack-up rigs (JURs) 16-18 17-19 17-19 Positive
o Greenfield: ~20 projects (~30% oil-related)
Tender Assisted Drilling Rigs (TADRs) 3-4 3-4 2-3 Steady with all new facilities development.
Hydraulic W orkover Units (HW Us) 5-6 2-3 3-4 Steady
o Brownfield: ~30 projects (~75% oil-related)
with 10% involve new facilities development.
2 Offshore Fabrication - in tonnage (MT)
• This signals higher utilisation rates for the O&G
W ellhead Platforms (W HP) 6.2-8.7 7.5-18.1 0-6.1 Steady services & equipment (OGSE) segment but near
Central Processing Platform (CPP) 26-47 38-63 0-40 Modest term outlook remains lacklustre as charter rates
have lagged despite the players getting more
Hook-Up & Commissioning (HUC) and
3 work. This is because Petronas are still pursuing
Maintenance, Construction & Modification (MCM) - no of man-hours (millions) competitive cost structure.
- HUC 4.9 3.6 5.4 Steady • Consequently, this would affect the players’
- MCM 17.7 17.6 18.7 Positive earnings and may still put some of them in the
red, especially the ones with weaker balance
4 Floating Offshore Facilities (Floaters) - no of unit sheet.
- Aframax 1 0 0 Modest • As it is, a few of them are already under the
- Panamax 0 1 0 Modest Corporate Debt Restructuring Committee
(CDRC) program.
8 Marine Vessels (or OSVs) - no of units
Anchor Handling Tug Supply (AHTS) (<100MT) 67-72 60-65 62-66 Positive
AHTS (>100MT) 38-44 38-42 38-42 Positive
Platform Supply Vessels (PSVs) &
49-52 51-54 51-52 Positive
Straight Supply Vessels (SSVs)
Fast Crew Boats (FCBs) 80-83 79-82 83-88 Positive
Source: Petronas
Low refinery margins expected to recover in the short term; sustained
investment seen in the downstream segment
Average Refining Margins (as at Jul 2019) • Due to pricier crude oil and oversupply of
9 8.30 refined oil products in the region, the average
8 refining margin for the Tapis crude has declined
7
by USD3.1 YTD and stood at USD1.74/bbl.
6.36
6
5.79
5.34
6.24
5.80 • In the immediate term, compressed margin is
expected to remain owing to excess inventories
USD/bbl
4.74 4.89 4.81 4.86

5 4.55
4.11 in the region and higher average feedstock cost
4
3.06
3.47
3.10
which would narrow the crack spread between
2.91 2.62 price of crude oil and petroleum products.
3
2
2.00 2.08 1.74 • But refiners can look forward to a surge in
1
demand and improved margins at the end of
0.52
0.17 this year as the shipping industry gets ready for
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 a historic fuel switch in order to comply with
Source: IEA, Group Risk Research Dubai crude Tapis crude the new IMO 2020 rule to cut sulphur emission.
• Refiners who managed to hedge their feedstock
Investment in Petroleum Refineries & Products requirements should be spared from further
36.0 25
23 margin tightening.
32.0
19 20
• Locally, growth in the downstream segment
28.0
18 would be encouraging as approved investment
24.0 has risen in value as well as unit in 2018. In
RM (billion)
15
15
Unit
20.0 14 total, 23 projects were approved (2017: 9
16.0 12
projects) with a value of RM32.9 billion (2017:
12
10 RM16.7 billion).
12.0
8.0
8
7
9
• Notable addition would be the additional
5 refining capacity of 300,000 bpd once the RAPID
4.0 project in Pengerang Integrated Complex (PIC)
0.0 0 in Johor begins its commercial operation in
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source : MIDA, Group Risk Research Value Unit (RHS) October 2019.
Demand for fuel products to remain healthy
Total Oil Consumption • Total oil consumption in Malaysia has been on a

800 8.44 9.00 rising trend. In 2017, total consumption stood
8.18 8.21
700 7.24
7.61 731 8.00 at 731,000 bpd or a rise of 4.1% YoY.
702
600
7.01 688
7.00 • Total oil consumption per capita have also grew
586 6.00 slightly to 8.44 barrels (2016: 8.21 barrels).
500
509 • Going forward, demand for diesel, aviation fuel
bpd ('000)
barrel
5.00
400 445 and fuel oil should remain buoyant in line with
4.00
300
Malaysia’s economic expansion, which was
3.00 projected to grow by 4.3-4.8% in 2019 (2018:
200
2.00 4.7%).
100 1.00 • Main source of demand would come from the
0 0.00
growth in auto sales, which was projected to
2000 2005 2010
Total
2015
Per Capita (RHS)
2016 2017 increase by 0.2% YoY in 2019 to 600,000 units.
Source: ENI, Group Risk Research
• In addition, demand from the aviation sector
should also grow, in tandem with airlines’ route
Total Industry Vehicle (TIV) All Aircraft Movement
800 15% 1,050 20% expansions and surge in overall travel demand.
MAHB is targeting to bring 10 new airlines to
700
10% 1,000
15% Malaysia, which bodes well for higher uptake of
600 aviation fuel in the future.
5% 950
500 10%
'000
'000
400 0% 900
5%
300
-5% 850
200
0%
-10% 800
100
0 -15% 750 -5%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
TIV Change yoy (%) Total Change yoy (%)
Source: MAA, Group Risk Research Source: MAHB, Group Risk Research
Issues and Concerns
• The pace of consolidation remains slow

o Consolidation has been the top agenda of Petronas, not only to address the overcapacity in the industry but also to grow the local OGSE companies to be
more resilient and nimble. Malaysia O&G industry is considerably big with around 4,000 companies registered with Petronas. The sheer size of the industry
warrants more consolidation to take place, especially during the period of fewer new jobs, thin margins and strong competition. To push for this agenda,
Petronas has started to be more transparent about its requirements over the next 2-3 years.
o To reform the industry, the company will implement systemic changes in contract rollouts whereby it plans to offer contracts on a bigger scale in the coming
years, known as ‘economies of scale’ contracts. These contracts should not only meet the company’s requirements, but also 16 of its partners under the
Petroleum Arrangement Contracts.
o However, despite the push from Petronas, local merger and acquisition (M&A) activities are anticipated to remain soft in the foreseeable future. The
stabilising oil prices tend to make valuation steeper and therefore hinder more M&A prospects.
• Local OGSE firms are too dependent on local jobs

o Looking at Petronas’ capex allocation with only around one-third is allocated to the upstream segment in Malaysia, it would bode well for local OGSE
companies to lessen their reliance on home market and explore overseas market so as to take advantage of the emerging opportunities in the global
upstream segment.
o The prospect in Southeast Asia (SEA) alone seems to be improving as Rystad Energy forecasted that there would be 50 O&G fields in the SEA region that will
reach final investment decision (FID) for development during the three-year period from 2018 through 2020.
o With 19 fields, Indonesia has the largest count in the SEA FID forecast whereas gas is expected to make up around 85% of the resources, with the largest to
come from Vietnam.
o Local players could also go for maintenance contracts in Brunei and Myanmar.
ESG Considerations and Financing Recommendations
ESG Considerations
• Positioning LNG as the preferred marine fuel of choice
o As a major player in the LNG business, PETRONAS is well-positioned to support the strategic intent for Malaysia to become the regional LNG bunkering hub.
Efforts are now being put in place towards advocating LNG as the preferred marine fuel of choice.
o Collaborating with industry associations like MOSVA, the company has formed some programmes to encourage migration as well as developed necessary
infrastructures to support a swift and effective migration of local OSV fleet to LNG, as the cleaner option. Local vessels are currently diesel-fuelled.
o The first commercial LNG Bunkering is poised for start-up by 2H19 from RGT1 (Sg Udang, Melaka) and RGT2 (Pengerang, Johor), followed by KSB (Kemaman,
Terengganu) and ASB (W.P. Labuan).
o Dual-fueled LNG-based engines are expected to be the future solution.
• Green retail fuel stations

o Shell became the first company in the Asia Pacific region to go the green route for retail fuel stations with the introduction of its first two green retail fuel
stations i.e. Shell Damansara Jaya and Shell Taman Connaught. Both stations have been awarded the Green Building Index (GBI) certification.
o The eco-friendly stations are equipped with solar photovoltaic system installed on the canopy of the station, revised lighting element, white painted roofs
and walls, waterless urinals and water saving taps and also energy monitoring system.
• Prefer large and integrated O&G firms as opposed to pure E&P companies.
• Focus on project backed by oil majors instead of independent players.
• The establishment of Petroleum Sarawak Bhd (Petros) means that Sarawak O&G players would tend to benefit more than their counterparts for Sarawak-based
projects.
• Not recommended to finance marginal fields or ultra deepwater projects. Not recommended to finance rig operators or OSV players at the moment.
• M&E for both oil refiners and fuel retailers.
• With a decent numbers of greenfield projects being earmarked, fabricators are expected to benefit while higher production activity would benefit maintenance,
floating production storage and offloading as well as on-shore storage players.
• On the longer term, other potentially good segments are decommissioning and abandonment of structures.
MALAYSIA – Shipping
- Summary
- Cycle
MALAYSIA - Shipping – NEGATIVE
Summary of Outlook
• The shipping sector would continue to deteriorate in 2019 as the sector is still dealing with structural issues affecting both supply and demand.
• Supply glut across all major segments continued to weigh on freight rates amidst low demand growth attributed to the trade war.
• Operating cost is expected to rise due to higher bunker fuel prices and as shippers scramble to meet the new IMO 2020 fuel regulation.
• Earnings growth must still come from continued cost-cutting exercises and slow-steaming to keep fuel costs to a minimum.
Baltic Dry Index (BDI)

Key Indicators Insights and Outlook 2,500 190%
• The recovery momentum continued but BDI remains unpredictable.

Baltic Dry Bulk Index • Freight rates volatility may persist amidst vessel oversupply and possible 2,000 140%
contraction in demand.
1,500 90%
Baltic Dirty Tanker Index & • Lower demand growth brought down freight rates.
Index
Baltic Clean Tanker Index • High fleet growth to become a problem again in 2019.
1,000 40%
• Supply glut and weak demand had weighed on freight rates and result in
Shanghai Containerised
negative margins.
Freight Index (SCFI) 500 -10%
• Lower demand growth is foreseen to prolong due to the trade war.
• Price levels remain below the 10-year average but still consider high.
Bunker fuel prices - -60%
• The recovering global oil prices would keep bunker fuel prices elevated. 3Q15 1Q163Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19
BDI Annual change (RHS)
* BDI measures the shipping costs of bulk cargoes and various raw materials
such as iron ore, coal and grain..
• Financing should only be considered for companies that manage their costs well, focus on their core business • 5011X, 50121, 5021X, 5022X, 5222X, 52241
and yet remain flexible. • 301XXd, 33XXXb, 33XXXc
• As for vessels, young and modern fuel-efficient vessels are preferred as they command higher rates due to
their superior fuel efficiency and environmental credentials relative to older ships.
Dry bulk & tanker segments unattractive as fleet growth to outstrip demand
2,500
Baltic Dry Index (BDI)
190%
• The recovery momentum for Baltic Dry Index (BDI) continued in 3Q19, underpinned by a 943% increase
in rates for Capesize ships. Due to improved demand to carry iron ores and coal, earnings for the smaller
dry bulk ship sizes have also risen since the start of the year. Current level is marginally higher than last
2,000 140%
year and has surpassed the 10-year average.
1,500 90%
• While present performance bodes well for the segment’s long term recovery, caution must still be
exercised as freight rates volatility could persist in the short term given that demand may easily be
Index
derailed by the trade war and the changing nature of the Chinese iron ore demand.
1,000 40%
• Meanwhile, growth of global fleet, which stood at 865.3m DWT currently, is projected to outpace
demand. Year-to-date, newbuilding deliveries stood at 25.6m DWT compared to demolitions of only 5.5m
500 -10%
DWT. BIMCO expects that the dry bulk fleet will grow by 3.7% this year.
- -60%
• As at September 2019, total order book stood at 93.3m DWT. Over the next 24 months, there will be a
3Q15 1Q16
3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 large number of vessels scheduled for delivery amidst a considerably high orderbook to fleet ratio of
BDI Annual change (RHS)
8.9%.
* BDI measures the shipping costs of bulk cargoes and various raw materials
such as iron ore, coal and grain..
Baltic Dirty Tanker Index (BDTI) & • Both the Baltic Dirty Tanker Index (BDTI) and the Baltic Clean Tanker Index (BCTI) have plunged since
Baltic Clean Tanker Index (BCTI) the start of the year, mostly on account of ample availability, as the tonnage list remained in excess due
1200
to limited scrapping and relatively steady new tanker deliveries. Furthermore, global refinery throughput
1100
have also declined owing to longer maintenance period.
1000
• Looking ahead, the pressure on freight rates will remain in 2019 due to vessels oversupply, as there are
900
still sizeable newbuildings deliveries this year, coupled with immaterial demolition activity.
Index
800
• By Aug 2019, the tanker fleet already grew by 4.3%, with the full year growth projected by BIMCO to
700 reach 5.3%. The higher fleet growth comes not only from increased deliveries, but also from slower than
600 expected demolitions. Total orderbook as a percentage of fleet size remain at a high ratio of 10.8%.
500 • Lower demand risk would come from the resumption of sizable Opec-led production cuts aiming to prop
400
3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19
up prices, sanctions against Iran & Venezuela as well as reduce demand from China for US oil due to
BDTI BCTI trade war. However, the impact may be cushioned to some extent as and when the new low sulphur fuel
* BDTI tracks charter rates to transport crude oil.
types are made available around the globe seeing that this will provide a much-needed boost to demand
* BCTI tracks shipping cost for oil products i.e. gasoline, diesel or fuel oil. for tanker shipping.
Outlook for container segment remains dim due to weak demand amidst high
overall cost
Shanghai Containerised Freight Index • On account of higher volume growth, the Shanghai Containerised Freight Index (SCFI) inched up
(SCFI) slightly on quarterly basis during 3Q19 but declined on yearly basis. Current level is still considerably
1000 100%
lower than the 10-year average.
80%
900
60% • Moving forward, global fleet is expected to remain in overcapacity and since the active vessels have a
800
40% young age profile, demolition is still a long way off.
Index
700 20% • Furthermore, if there are stronger signals for recovery in freight rates, demolition activities would ease
0% while idle fleet would easily be redeployed. Reactivation of idle ships limits the upside to higher
600
-20% operating margins and likely to cause another cycle of downturn or highly negative margins.
500
-40% • Meanwhile on the demand side, volume growth rate stood at a mere 0.8% for the first seven months of
400
3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19
-60% 2019. Low growth levels can be expected in global demand for container shipping in the near future.
SCFI Annual change (RHS) • The implementation of tariffs and uncertainty over the future of trade war between major economies
Source: Bloomberg, Group Risk Research remains significant. Risk of lower growth is amplified due to the trade tensions between the US on one
* SCFI measures the cost to transport containers from the Shanghai port to all
major regions side and China, Europe and some other countries on the other side.
Bunker Fuel Price

650 60%
600 • Bunker fuel prices track the global oil prices and since global oil prices have somewhat recovered,
550
40% bunker fuel prices have, in general, remained high.
• Although current levels are below the heights seen in 2012 when prices averaged USD655/tonne, it is still
USD per tonne
500 20%
close to the average price for the last 10 years i.e USD479/tonne.
450
0% • This does not augur well for shipowners/operators given that bunker fuel accounts for ~60% of vessel
400
operating expenses.
350 -20%
• Other costs like drydocking and repairs and maintenance are also anticipated to increase accordingly.
300
-40%
• In the short term, compliance to the new IMO 2020 marine fuel sulphur cap rule would add more burden
250 to shipowners. According to consensus, the cost to shippers could rise by a third or more.
200
3Q15 1Q16
3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19
-60% • Shipowners’ ability to pass these extra costs on to shippers will depend on the market conditions, and as
Price Annual change (RHS) long as supply is larger than demand, passing on extra costs will be extremely difficult.
Issues and Concerns
• Overcapacity remains a big issue in all major segments and coupled with moderate growth in demand owing to slowing global economic growth and unresolved
U.S.-China trade conflict, would result in perpetual freight rates volatility.
• To tame the size of global fleet, demolition activities need to be consistently high while simultaneously holding back on contracting new ships.
• Earnings growth must still come from continued cost-cutting exercises and slow-steaming to keep fuel costs to a minimum.
• Operating cost would increase especially with the recovering bunker fuel prices as well as to meet the IMO 2020 regulation on new sulphur cap in bunker fuel.
o There is no single fuel type that complies with the new rules. Refineries across the world are coming up with different solutions to meet the sulphur-
reduction target, which could damage ships’ engines, by inadvertently mixing incompatible products.
o Fuel supply is also a concern as there may not be enough blended fuel to go round and some smaller ports may not have access to it.
o Vessels with exhaust-gas cleaning systems (aka scrubbers) that remove the pollutant will be able to keep burning existing products that are cheaper, but the
equipment is expensive and takes up cargo space.
ESG Considerations & Financing Recommendations
ESG Considerations:
• The IMO 2020 rules – cleaner fuel
o The introduction of the 0.5% sulphur cap represents a momentous change for ship operations. As of 1 st January 2020, all ships are required to burn fuel with a
sulphur content of not more than 0.5% (down from 3.5%), unless fitted with an exhaust gas emissions cleaner (aka scrubber) capable of reducing sulphur
emissions to 0.5% or less.
o The 2020 global cap will apply to all ships flying the flag of a state that has ratified MARPOL Annex VI and/or calling at a port or passing through the waters
of a state that has ratified the Convention, which means that the sulphur cap will apply to 96% of the world’s fleet.
o Ships should monitor and maintain a log of exhaust emissions. A failure to properly maintain the log or make false entries is likely to be considered a non-
compliance.
o When the scrubber cannot be used, ships must take on board enough 0.5% fuel to be able to reach their next bunkering port after the new regulation comes
into force.
• To further reduce CO2 emissions
o Significant changes in hull design, propulsion systems, fuel types and automation are required for the industry to meet the 2050 IMO target i.e. 50% reduction
in CO2 emissions by 2050.
o Further developments should assess and understand the green house gas (GHG) intensity of alternative fuels and ensure that further measures on GHG
emissions reduction do not result in market distortion. Also to guarantee ship safety.
• Using LNG as bunker fuel
o Using LNG as the marine fuel of choice would lower the GHG emission as LNG emits zero sulphur when burnt, thus making it a much cleaner option. While
most vessels are currently diesel-fuelled, dual-fueled LNG-based engines can be the solution in the future.
Financing Recommendations:
• Financing should only be considered for companies that manage their costs well, focus on their core business and yet remain flexible.
• As for vessels, young and modern fuel-efficient vessels are preferred as they command higher rates due to their superior fuel efficiency and environmental
credentials relative to older ships.
• Also preferred LNG-fuelled vessels as they are more environmental-friendly.
MALAYSIA – Power
- Summary
MALAYSIA - Power – POSITIVE
Summary of Outlook
• Underpinned by the growing population and local economy as well as stabilise tariff, healthy power demand is expected to continue, albeit at slower growth rate.
• Supplies should be ample in the medium term as ~5,000MW will join the grid by 2020, while risk of oversupply has been allayed due to future capacity annulations.
• Aided by Renewable Energy Transition Roadmap 2035, the renewable energy (RE) would remain as the growth segment for years to come.
• The impact of higher fuel cost (if any) to overall operating cost would be muted as TNB and other IPPs are protected under the Imbalance Cost Pass-Through (ICPT)
mechanism.
Key Indicators Insights and Outlook 35,000

Installed Capacity, Maximum Demand & Electricity Reserve Margin
40%
• Adequate supply foreseen in the medium term. 30,000 32%

35%
Electricity Supply • Oversupply risk is mitigated by cancellation of four planned power plants with 35%
2,800MW combined capacity. 25,000

29%
30%
• Demand is forecasted to grow by low single digit in 2019, underpinned by 25%
Electricity Demand 20,000
Malaysia’s economic growth, rising incomes and continuous urbanisation. 20%
15,000
• A new level of peak demand was recorded in 2Q19. 17%

15%
Maximum Demand • Likely to see new peak demand given the rising population and stable 10,000
economic growth. Also supported by the increasingly warm weather. 10%
5,000
5%
• Reserve margin should stay within the acceptable range now that some
Electricity Reserve Margin
upcoming projects have been cancelled. 0
Peninsular Malaysia Sarawak Sabah Total
0%
Installed Capacity Maximum Demand Reserve Margin

Generation Mix • Future fuel mix would still be dominated by coal.
Source: EC, Group Risk Research

• Gas-fired power plants are preferred as it is the least expensive fossil fuel, burns cleaner than coal and has a • 3510Xa, 3510Xb, 3510Xc
smaller carbon footprint. • 3510Xd, 3510Xe, 3510Xf, 382XXa, 382XXb
• For RE projects, the Bank is recommended to provide financing only to companies that have obtained the • 3510Xg
requisite quotas (letters of award) from SEDA or EC.
Supply and demand dynamics are expected to remain healthy
Electricity Supply • Both electricity supply and demand have been

45 10% growing steadily over the years. In general,
9% demand growth usually outpaced supply growth,
40 8% reflecting good planning by the Energy
Kilowatt-Hours (billion)
7% Commission (EC).
35 6% • Electricity supply rose steadily during 2Q19,
4.6% 5% supported mainly by public installations.
30 4% • Supplies should be sufficient over the medium
3% term given that ~5,000 MW of new generation
25 2% capacities would join the national grid from
1% now until 2020.
20
2Q16 4Q16 2Q17 4Q17 2Q18 4Q18 2Q19
0% • Furthermore, cancellation of four upcoming IPP
Public Installation Private Installation Annual change (RHS)
projects has mitigated the immediate risk of
Source: DOSM, Group Risk Research oversupply.
• During the same period, electricity demand also
Electricity Demand grew progressively on the back of Malaysia’s
45 10%
4.5% GDP growth. Details on segmental growth
40 9%
are as per list below:
Kilowatt-Hours (billion)
35 8%
o Industrial = avg growth 2.6%
7%
30
6%
o Domestic = avg growth 6.5%
25
5% o Commercial = avg growth 2.9%
20
4% o Others = avg growth 3.4%
15 3.9%
3% • For 2019, demand is forecasted to grow around
10 2% low single digit (~2-3%), supported by Malaysia’s
5 1% economic growth, rising incomes and
0 0% continuous urbanisation.
2Q16 4Q16 2Q17 4Q17 2Q18 4Q18 2Q19
Industrial, Commercial & Mining Domestic & Public Lighting Annual change (RHS)
Source: DOSM, Group Risk Research
Electricity reserve margin to stay within acceptable range
Installed Capacity, Maximum Demand & Electricity Reserve Margin • As at 2018, total installed generation capacity
in Malaysia stood at 29,651 MW, as per details
35,000 40%
below:
o Peninsular Malaysia = 24,139 MW
30,000
35% o Sarawak = 4,233 MW
32%
o Sabah = 1,279 MW
35%
30%
• Meanwhile, peak demand recorded at all major
25,000
29% geographical locations in Malaysia are as
follows:
25% o Peninsular Malaysia = 18,339 MW
20,000 o Sarawak = 3,623 MW
o Sabah = 949 MW
20%
• Based on these figures, electricity reserve
15,000 margin in Malaysia stood at 29%.
15% • Going forward, the reserve margin is not
17%
expected to exceed the 30% threshold given the
10,000 cancellation of the four upcoming projects but
10% likely to remain close.
• The EC has set a minimum of 20% while the
5,000 desirable and healthy level is around 24-25%.
5%
0 0% * Reserve margin is the amount of installed

Peninsular Malaysia Sarawak Sabah Total
capacity above the maximum demand express in
Installed Capacity Maximum Demand Reserve Margin percentage term
Source: EC, Group Risk Research
Coal to remain as the main fuel mix in the medium term
Power Generation Mix (2Q19) • Malaysia’s power industry has started to rely more on coal as the main fuel to generate power since 2016.
Total Coal = Distillate - IPP
17,721 Gwh
Distillate -
TNB 0% • The trend continued in 2Q19 as more than 50% of the 31,918 Gwh electricity generated during the quarter
0% were produced by coal-fired power plants. Details as below:
Oil - TNB
Coal - IPP 0% o Coal = 17,721 Gwh (55.1%)
25%
Coal - TNB
Oil - IPP
o Gas = 13,299 Gwh (41.7%)
30%
0% o Hydro = 734 Gwh (2.6%)
Solar - TNB
0% o Solar = 163 Gwh (0.5%)
Gas - TNB
20% Solar - IPP
Gas - IPP
22%
Hydro
3%
0%
• Even though production from gas-fired power plants have also increased significantly, most of future
Total Gas =
13,299 Gwh industry output is expected to be produced by coal-fired power plants.
Total Hydro = 734 Gwh
Total Solar = 163 GwH
Source: TNB, Group Risk Research
• Based on upcoming capacity, coal would continue to be the main fuel mix in the medium term (by 2020:
Fuel Cost Breakdown (2Q19) Coal 61% vs Gas 33%).
Total Coal =
RM2,841 mil
Total Oil =
RM3 mil • Correspondingly, it did cost more to produce electricity using coal during the quarter but the total cost
was only just a tad higher than gas. This is because average coal prices have declined quite a lot since
Distillate -
TNB 4Q18.
0%
Coal - TNB Coal - IPP
Total LNG =
25% 25%
RM140 mil Distillate - IPP
0%
LNG
0.6%
Gas - TNB Oil - TNB
22% 0%
Gas - IPP
26% Oil - IPP
Total Gas = 0%
RM2,728 mil
Total Solar = Solar
RM42 mil 1%
Source: TNB, Group Risk Research
Lower operating cost going forward due to projected cheaper coal prices
Electricity Generation Cost - by Fuel Coal Prices • Overall operating cost is expected to decrease
120 100% due to lower input fuel cost especially for coal.
Type
45 100
80% • During 3Q19, prices dropped considerably as the
60% global market try to cope with lesser demand
and increase production. Coal prices are
USD / tonne
40.5 80
68.8 40%
40 projected to average USD93.8/mt in 2019 and
60 20% USD87/mt in 2020 (vs US$106/mt in 2018).
35 40
0% • Meanwhile, gas prices would increase gradually
-20% given that under the Regulatory Period 2 (RP2),
20 subsidised gas price will be raised by
sen / kWh
30.6 -40%
30 -41.2% RM1.50/mmbtu every six months until they
0 -60% reach market parity, in line with the plan to
3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19
Price Annual change (RHS) gradually rollback gas subsidies to this sector.
25 Source: World Bank, Group Risk Research • As at 2Q19, piped gas price for the power sector
is subsidised at RM27.20/mmbtu for
Gas Prices consumption of up to 1,000 mmscfd. Beyond
20 40
35.7 this, players need to purchase gas at market
35 price.
15
14.4
30
• Average LNG prices procured by TNB has risen
RM/mmbtu
moderately compared to a year ago.

10 25 27.2 • The impact of higher fuel cost (if any) to overall
10
operating cost would be muted as TNB and
20 other IPPs are protected under the Imbalance
5
Cost Pass-Through (ICPT) mechanism.
15
10
2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19
0
Hydro Coal Piped Gas LNG Average LNG Price Average Piped Gas Price
Source: TNB, Group Risk Research Source: TNB, Group Risk Research
Renewable Energy (RE) to remain as focused segment
• The Government has introduced some measures aimed at reducing Malaysia’s carbon emissions and
Large Scale Solar (LSS) Tenders: shifting to renewable energy (RE) is one of them.
• After tendering for two rounds of bidding for large scale solar (LSS) projects with a combined capacity of
958 MW, the Ministry of Energy, Science, Technology, Environment and Climate Change (MESTECC) has
LSS Capacity COD tendered for the third round (LSS3) in February 2019.
• Details on LSS3 are as follows:
1 395 2017/2018 o Solar parks ranging in size from 1-100 MW; total aggregate capacity of 500MW.
o To be commissioned in 2021.
2 563 2019/2020 o The bidding process has ended (Feb - Aug 2019). Winners will be announced by year-end.
3 500 2021 • In total, MESTECC will tender at least RM3.2 billion in contracts this year, involving RE and energy
efficiency (EE) projects. Projects other than the LSS3 are:
o Retrofitting of 50 government-owned buildings with EE technology;
Total: 1458 o Adoption of the new Net Energy Metering (NEM) mechanism.
Source: SEDA, Group Risk Research
• Non-solar RE projects would continue to be catalysed by available quota under the feed-in-tariff (FiT)
Installed Capacities Biogas, scheme. In this respect, the Sustainable Energy Development Authority (SEDA) will and have availed new
(as at Aug 2019) 68 MW
quotas as follows:
10%
o Biogas = 30MW, for bidding period of 15-29 July 2019
Solar PV,
380 MW
Biomass,
104 MW
o Biomass = 10MW
64% 17% o Small hydro = 74.6MW
• The Government is targeting to grow the RE portion of the total generation capacity mix from 2%
currently to 20% by 2025. In order to achieve this target, the country would need around RM33 billion
worth of new investments.
Small Hydro,
50 MW
9%
Source: SEDA, Group Risk Research
Issues and Concerns and ESG Considerations
Issues and Concerns
Aside from certain generic factors that affect the credit strength of industry players e.g. management quality, corporate governance and prudent financial
management, other concerns includes:
• Local economy suffers prolong recession which will impact demand growth.
• Long delay in the commercial operation date of future power plants which will impact total supplies.
• Non-renewal of PPA of 1st and 2nd generation power plants due to the current Government’s RE aspiration, affecting financial performance of these IPPs.
• Less earnings for solar players due to low tariff. It was reported that ~70% of the 563 MW awarded in LSS2 may be delayed or worst, fail to achieve commercial
operation date (COD).
• Uncertainties and more competitive industry as a result of the recently approved 10-year masterplan (MESI 2.0) to reform the sector and introduce liberalisation
across the value chain; from fuel sources, generation to transmission and distribution and retail in Peninsula Malaysia.
ESG Considerations
• MESTECC is in the midst of formulating the Renewable Energy Transition Roadmap 2035 (RETR 2035) to ascertain its RE aspirations and long term mission to
reduce CO2 emissions. To be published by end-2019, RETR2035 will address the followings:
o The future of electricity system and the RE targets in the electricity mix and total primary energy supply up to 2035;
o The strategies, comprehensive action plans and resources required in order to shift to future electricity system and subsequently achieve the RE targets;
o The impact indicators with measurable economic (e.g. contribution to GDP, GNI), social (e.g. employment) and environmental (e.g. health indicator) benefits
of the strategies for RE on annual basis until 2035.
• Specifically for solar, the third large scale solar (LSS3) program will provide incentives for bidders to use the unusable land, i.e. land that cannot be used for
productive purposes, so as to attain greater efficiency in land usage for RE generation.
o The Government has also awarded floating LSS projects on dams/lakes and encourage more participation for rooftop solar.
• MESTECC is also planning to introduce new policies on Waste-to-Energy (WTE) technologies within the next three months as well as exploring ways to grow the
biomass and small hydro, as part of its push to hit its 20% RE capacity mix target by 2025.
• Virtual power plant technology:
o TNB is partnering with South Korea’s I-On Communications and KH Shinhwa SnC to introduce virtual power plant technology in Malaysia.
o The technology uses a battery capable of generating up to 1 MW of electricity.
o TNB would place batteries in five different locations in Klang Valley for trial purposes within the next three years.
• With a resilient outlook on account of well-founded fundamentals, the Bank is recommended to continue giving out financing to companies in this sector.
• For the non-renewable energy (RE) projects, gas-fired power plants are preferred as it is the least expensive fossil fuel, burns cleaner than coal and has a smaller
carbon footprint. Natural gas emits half the carbon of coal.
• As for RE projects, the Bank is recommended to provide financing only to companies that have obtained the requisite quotas (letters of award) from SEDA or EC.
• Solar and hydro projects are more favoured compared to biomass or biogas due to lower initial capex (solar), lower operating risks and ease of maintenance.
• For biomass and biogas, the Bank should only consider borrowers who own the feedstock or have secured long term supply contracts with feedstock owners.
• Also, plants with shorter distance to the main transmission lines are preferred as distance can be a critical success factor for biomass plant.
• For hydro and WTE projects, the Bank should only consider projects that have completed environmental impact assessment studies and projects that have
alternative sources of waste supplies (for WTE only).
MALAYSIA – Wholesale and Retail
- Summary
- Cycle
MALAYSIA - Wholesale and Retail – NEGATIVE
Summary of Outlook
• Trading activities are anticipated to remain volatile, largely influence by political uncertainties and geopolitical risks which continue to erode business optimism,
as well as influencing consumers’ assessment of their financial situation.
• Consumers are expected to remain cautious but hopeful towards the economy, which will be reflected in their spending plans moving forward.
• Nonetheless, retail sales are expected to pick-up slightly especially towards year-end period.
Key Indicators Insights and Outlook

• 2Q19 reading inched up but remained below optimism threshold of 100,
Consumer Sentiment Index implying that cautious and prudence still persistent.
(CSI) • Pick-up in spending expected towards year-end due to back-to-school and
Christmas celebrations.
Wholesale and Retail Trade • Reaching its all-time high in 2Q19, but unlikely to maintain the momentum
Index given the global and domestic headwinds impacting trade.
• Headline inflation in July rose a tad slower YoY (+1.4% vs. +1.5% in June)
Consumer Price Index (CPI) • Inflation is likely to stay benign throughout 2019 as cheaper fuel-related costs
would help cushion rising price pressure of imported items, particularly food.
• It is expected to trade at USD/MYR 4.18 for the year, as heightened US-China
USD-MYR trade tensions would continue to put emerging markets at risk in the coming
months.

• In terms of financing, Maybank is recommended to exercise greater caution in extending credit facilities to • 46499, 46999,
the consumer discretionary segment (especially importers and retailers of luxury goods), as they will be • 4711X, 4719X, 479XX,
adversely impacted by lower discretionary spending much more than those in the consumer staples trade. • 40799b, 40799e
Wholesale and Retail – Well into the mid-downcycle as sales and prices
continue to deteriorate
Peak
Late-Upcycle Early
Peak Sales Price easing

High profits margin Sales moderating
Production rising Profits margin drop
Economies of scale Stocks start to rise
Mid- Mid-
Production moderates Stocks are elevated
Exports rebound Operating costs
Stocks start to ease escalate
Discontinue product
lines
Late-
Bottom
Wholesale and Retail – Shopping plans to proceed cautiously
• 2Q19 CSI reading inched up from the five-quarter low to 93.0, supported by Ramadhan and Raya
celebrations but stubbornly remained below optimism threshold of 100, implying lingering wariness on the
sentiment front.
Optimistic • However, pick-up in spending towards year-end is anticipated due to back-to-school and Christmas
Pessimistic
celebrations shopping spree.
• In summary, consumers are expected to remain cautious on spending moving forward, especially on
discretionary items and luxury goods.
• Wholesale and Retail Trade Index was at its all-time high of 127.8 in 2Q19 (2015 re-base), with 6.1% YoY
growth despite 2Q18 being part of the tax-holiday period last year.
• Nevertheless, we opine that trading activities are anticipated to remain volatile, largely influence by
political uncertainties and geopolitical risks which continue to erode business optimism, as well as
influencing consumers’ assessment of their financial situation.
• Sales prices are likely to stabilise, as intense competition continue to react as a lid for any hike, although
weakening of the ringgit are increasing costs of imports.
Issues and concerns ESG Considerations
• Stretched external uncertainties adversely impacting domestic economy Reverse Logistics implementation in W&R industry in Malaysia
and influencing unfavourable spending behaviour.
• Reverse logistics has been identified as the best method especially in
• Rising cost of living dealing with waste management.
• Rising cost of doing business • It leads to energy conservation and pollution reduction, sustainability
and green logistics processes.
Financing Recommendations • The implementation not only improves supply chain relationships, but
also lead to economic advantage and better inventory control.
• Mass grocery retail (MGR) segment is anticipated to remain lucrative,
with the most dynamic growth likely in the organised store sector - • However, due to the industry is heavily fragmented (especially on the
convenient and affordable options. retail front), it makes monitoring both difficult and critical.
• Preference should be given to modern retail outlets and convenience- • Limited studies and awareness programmes have been conducted to the
format stores, as well as sub-urban hypermarket expansions. industry players resulted to :
• Exercise greater caution in extending credit facilities to the consumer • Players unfamiliar with environmental policies and regulations such
discretionary segment (especially importers and retailers of luxury goods) as Solid Waste and Public Cleansing Management Act 2007
– likely to be adversely impacted by lower discretionary spending as • However, 3R campaigns are practiced, and
opposed to those trading in the consumer staples and household goods.
• The green practices of local supplier support, green consumer
research, and promotion of green products in stores were found to
be highly practiced by hypermarkets, and supermarkets.
Malaysia – Food and Beverages
- Summary
- Cycle
- Issues and Concerns
MALAYSIA – Food and Beverages – NEUTRAL
Summary of Outlook
• The sector is expected to see stronger growth towards the final quarter, supported by festivities, school holidays and high tourist season factor.
• Demand for convenience food products, particularly via convenience store formats, is anticipated to remain high resulted from rising incomes, urbanisation and
hectic lifestyle.
• Malaysia's thriving tourism industry represents a very important market for drink manufacturers, and its emerging status as a regional halal centre could attract
larger and well-established investors with innovative and high commercial value product lines.

Consumer Price Index (CPI) - • Strong growth momentum since 4Q18 to record a 14-month high in July.
food & non-alcoholic • It is expected that the prices of main food staples would remain on the
beverages increasing trend onwards as 2H has more festivities and holidays.
Industrial Production Index – • Production growth to moderate in 3Q but to catch up from October onwards
Where is it
Food Products catering to the upcoming festivals and holiday seasons. heading?
• 30mil tourists targeted for 2019 (+16.3% YoY)
Tourist Arrivals
• Boosted by increasing flight connectivity from other destinations to M’sia
• Respectable growth recorded even during low season of 1Q19 .
Wholesale Trade & Retail
• Growth momentum for both wholesale & retail is expected to pick up in the
Trade – Food & Beverages
coming quarters.
• Growth is expected to remain robust, albeit narrower in projected growth
Annual food spending
(2019: +8.8%) vs. +10.3% registered in 2018.

• Manufacturers with high export-content are preferred as they are deemed to be more resilient and the • 1010X, 1020X, 1030X
weakening Ringgit would result in higher margins for the manufacturers. However, there is a need to be • 463XX, 463XXa, 463XXc
cautious about lending to manufacturers and traders with high import-content products as a softer Ringgit will • 4711X, 472XX, 472XXa, 472XXc
adversely affect import costs. • 56101, 56102, 56103, 56104, 56105, 56106,
56107, 562XX, 56302, 56303, 56399.
Food and Beverages – Cycle has entered late-upcycle.
Peak
Late-Upcycle Early
Peak sales Moderate sales

Moderating profit margin Low profits margin
High competition Price-cutting measure
Economies of scale Stocks start to rise
Mid- Mid-
Production moderates Stocks are elevated
High M&A costs High operating costs
Rising profit margin Discontinue product
Growing sales volume lines
Late-
Bottom
Slower annual food spending growth but still buoyant
• Food products recorded respectable growth in 2Q19 (June: +6.2% YoY) on the back of Ramadhan and Hari
Raya festivities which took place in May and June.
• Subsequently, 3Q months are likely to be quieter, as most consumers have front-loaded their shopping
activities during Raya promotions and would likely spend on necessary essentials only.
• Nevertheless, with Deepavali, school holidays and Christmas lining up in 4Q19, September onwards should
see food production picking up.
• Producers to continue focusing on:
• Products that support overall health – fruit and fish-based products, nutritional snacks, green,
herbal and fruit teas, value-added dairy-based products.
• Convenience - ready-to-eat food, frozen food and prepared mixes. E.g. Cake Mix.
• Popular and ‘lifestyle’ products – premium coffee, carbonated drinks.
• Innovative Halal food segment – expanding halal food processing facility and increase quality
standards of halal product offerings for local and regional Muslims population’ consumptions.
• Annual food spending is expected to remain fair, albeit narrower in projected growth (2019: +8.8%) vs.
+10.3% registered in 2018.
• Correspondingly, wholesale and retail trade for F&B has been uptrending, and is expected to continue for
the rest of 2019. However, as consumers still cautious on their spending, the growth will be more gradual,
but will spike especially during festivities and school holidays.
• Industry strength and opportunities include:
• Young Malaysians are increasingly interested in branding and tend to embrace new international
products
• Thriving tourism industry represents very important market for drink manufacturers
• Private labelling as an appealing option to price-sensitive consumers, particularly as they familiarise
with modern retail concept.
Issues and Concerns ESG Considerations
Challenges in meeting consumers’ increased awareness with regards to: MS 1514 Good Manufacturing Practise (GMP) for Food
• Food ingredients
• Healthy, fresh, using nutritional ingredients, food with value- • MS 1514 Good Manufacturing Practise (GMP) for Food is a prerequisite
added ingredients which tend to care for bones, brains, body certification before food manufacturers can implement Hazard Analysis
etc. and Critical Control Points (HACCP) (a food safety system).
• Producers to respond by incorporating new ingredients into
their existing range, e.g. omegas, probiotics etc. • Apart from building consumers’ confidence in producing food in
accordance with the best manufacturing practices, it is paramount for
• Food preparations manufacturers to provide safe and reliable food products for public
• Hygienic, not highly processed (deem as junk food), food that consumption.
low in cholesterol, trans fat and sugar, but remains tasty.
• The need to keeping abreast with changing consumers Financing Recommendations
preferences and to continue formulating products to meet
these demand.
• Prefer - Food manufacturers with high export-content; more resilient and
moderating food commodity prices should further assist financial footing.
• Food provenance
• Clearly stated the origins of each ingredients and what
• Cautious - Food manufacturers with high export-content; weakening
processes it has gone through, whether it can be traced in
currency will adversely affect import costs.
the event of contamination, product recall etc
• Brands need to be aware of consumer demands for clear
information on the provenance of their food, and to make • Exceptions - The big boys, especially those producing a broad range of
changes accordingly. food products as their larger volume should outweigh the increased
costs.
MALAYSIA – Consumer Electrical and Electronics
- Summary
- Cycle
- Issues and Concerns
MALAYSIA – Consumer Electrical and Electronics – NEGATIVE
Summary of Outlook
• Production cyclicality of consumer E&E products is expected to continue, although the quantum is unlikely to match that of previous years.
• Dismal domestic and external demand anticipated, largely affected by global economic tensions and unabated economic and geopolitical uncertainties in major
trading countries.
• Manufacturers are not putting high expectations in business activities in the next six months in tandem with lower projected world trade volume.

Industrial Production Index
• The production continued to be cyclical (drop during 1Q) but is expected to
(IPI) – Electrical and
pick-up in the coming quarters to meet increasing demand.
Electronic products
• Tapering growth expected as this segment could suffer blow from slowing
Exports of Consumer E&E
trade especially from key regional markets.
• Rebounded from the lowest reading in five quarters but remained below
Consumer Sentiment Index
optimism level of 100.
(CSI)
• Consumers are likely to remain as prudent spenders.
• Remained below threshold level of 100 for the fourth consecutive quarter.
Business Condition Index
• Manufacturers are not putting high expectations in business activities in the
(BCI)
next six months.
World Trade Volume • The world trade volume is expected to grow slower at +3.4% (2018: +3.8%)
(Projection by IMF) mainly due to the knocked-on effect of the US-China trade war.

• Maybank is recommended to continue financing original equipment manufacturers (OEMs) that are on long- • 27500, 27999
term contracts as opposed to original brand manufacturers (OBMs). • 46496, 46510
• For the retail sub-sector, the Bank is not recommended to lend to stand-alone electrical appliances’ retailers.
Consumer E&E - Cycle has entered early down-cycle, sales slowing down
Peak
Late-Upcycle Early
Prices are elevated Prices start to ease

Production rises Production start to rise
Exports robust Exports turn moderate
Stocks dip further Stocks start to rise
Mid- Mid-
Production moderates Production gains pace
Exports rebound Exports sluggish
Stocks start to ease Stocks are elevated
Late-
Bottom
Outlook turns delicate as economic climate for both external and domestic
wanes
● Exports growth of E&E products are expected to deteriorate this year, based on the plunge of the global
exports order to its six-and-a-half low, with a back-to-back sub-50.0 readings for the first time since the
second half of 2012 (May’19: 49.8, Jun’19: 49.4).
● Global economy is likely to be subdued too. IMF has downgraded its 2019 growth projection for emerging
economies (+4.1% in July from +4.4% in April) but increased slightly its advanced economies forecast to
+1.9%, which was relatively slower than +2.2% recorded in 2018. This condition would adversely impact
consumer E&E exports moving ahead.
● The BCI indicators are pointing towards uninspiring outlook for the manufacturing sector in the next six
months with both sales and expected export sales deteriorate.
● Subsequently, CSI noted that fewer households were planning on buying washing machines, refrigerators
and cookers in the next six months as opposed to the last quarters.
● With consumers still remain apprehensive towards their spending plans, domestic demand is anticipated to
grow at a slower pace this year (+4.8% vs. +5.0% in 2018).
Issues and Concerns
Issues and Concerns

Protracted volatile external conditions
• Trade war, protectionism and uncertainty on the Brexit deal as well as geopolitical conflicts around the world are causing instability and uncertainties on
global economy.
• This will likely impact our external trade, including exports of Consumer E&E products.
Slower than expected growth in private consumption and private investment

• There is a likelihood that consumers to become even more careful in their spending plans as their optimism towards economic conditions deteriorate
further.
• Shrinking household finances would mean spending is directed particularly on non-discretionary items such as housing, food or school-related expenses.
• Maybank is recommended to continue financing original equipment manufacturers (OEMs) that are on long-term contracts as opposed to original brand
manufacturers (OBMs) that carry higher risks because their brands need to be really strong to be accepted globally. Also, manufacturers with high export-content
are preferred as weakening Ringgit would result in higher margins for the manufacturers, assuming the trade is nominated in USD.
• For the retail sub-sector, the Bank is not recommended to lend to stand-alone retailers as they can easily lose the support of their suppliers while most consumers
also tend to favour bigger and branded outlets.
ESG Considerations
ESG Considerations
Proposal of household e-waste regulation (end-May 2019):
• To make it mandatory for consumers to send certain unwanted electrical and electronic items to places licensed to handle e-waste.
• The proposed regulation covers televisions, air-conditioners, refrigerators, washing machines, personal computers and mobile phones.
• Legislative provisions to control the management mechanism as to ensure the waste will not pollute the environment or cause any harm to human health.
• The Department of Environment (DoE) has announced that the draft regulation was still under review by the Attorney General’s Chambers.
• The proposed e-waste regulation concept:
• Producer Responsibility system – based on the concept of shared responsibilities, where manufacturers and importers must pay a recycling fee upon
putting their products on market, to ensure that they are responsible for the products until the latter’s “end of life”.
• The recycling fee will be used to pay for the proper collection and recycling of the e-waste in an environmentally sound manner.
• Currently, enforcement of the regulation was only for the management of e-waste generated from industrial premises, of which no legal mechanism for the
control and management of e-waste generated by households.
• Why is this important?
• Most e-waste contains precious metals (such as gold, silver, platinum and palladium), iron, copper, aluminium and plastics that can be extracted and
sold.
• However, much e-waste also contains rare earth, hazardous metals (such as mercury, lead and cadmium) and chemicals like chlorofluorocarbon and
flame retardants.
• Dumping or illegal recycling of e-waste can cause these materials to leak into the environment.
MALAYSIA – Healthcare
- Summary
- Cycle
MALAYSIA - Healthcare – POSITIVE
Summary of Outlook
• We remain Positive on the sector, as demand is projected to expand moving forward in tandem with country’s demographic and lifestyle changes, higher awareness
of healthcare services (including insurance and medical coverage) plus the catalytic role of medical tourism.
• In addition, hospitals are fast becoming a viable component in a township development to enhance overall property value and proximity to a hospital has also been
regarded as a key feature for the retirement living concept.

• 32.6mil population (+1.1% YoY), with 127.4k live birth (-2.5% YoY) and 41.4k
Demographics Statistics
deaths (-1.9% YoY) in 4Q18, points to growing number of potential customers.
Private sector expenditure • Increasing trend for the past 10 years (from 42.7% in 2006 to 48.5% in 2016)
on health (as % of total amounted to RM25.1bil in 2016 and expected to equally match the public
expenditure) sector in by 2021.
• Benchmarking Malaysia’s ratio of beds per 1,000 population of 1.95 in 2017

No. of hospitals and beds (latest available data) against the OECD’s average of 3.1 in 2010, there is still
a lot of catching up to do, both public and private alike.
• The sub-segment grew 20% and 15% for arrivals and receipts, respectively in
Total Medical Tourism 2018, and aspired to grow 25% in 2019 for both arrivals and receipts, as various
Arrivals and Receipts measures have been done to promote Malaysia as an international destination
for treatments in high-value medical areas.

• In terms of financing, Maybank should continue financing private hospitals with a proven track record and on • 861XX, 8620X, 8690X, 87XXX
an expansion drive.
• Hospitals that are championing medical tourism services as well as those offering specialised niche treatment
should be on the list of potential prospects too.
Healthcare – Stabilising demand with opportunities to expand further
Peak
Late-Upcycle Early
Booming demand Slowing sales numbers

High profits margin Declining earnings
High economies of Customer base
scale contracts
Mid- Mid-
Upcycle High investment in Escalating operating Downcycle
R&D costs
High marketing and Lost efficiency
advertising costs Loss-making towards
Uptick in demand late downcycle
Late-
Bottom
• For financing purposes, private hospitals with a proven track record and on an expansion drive should be given priority. The newcomers, especially those located
at a newly designated healthcare hub such as Iskandar, needs to be further scrutinised, especially on the business sustainability front in terms of financial
standing and their long-term plans.
• Given a subdued domestic fiscal outlook, hospitals that are championing medical tourism services should be a better bet, as the continuous weakening of the
Ringgit augurs well for international patients to seek treatment here. However, exceptions could also be given to those offering specialised niche treatment of
certain diseases due to patient-concentration factors.
DEFINITIONS
Definitions of Business Cycles
Early Cycle Mid-cycle, Accelerating Late Cycle, Peaking Down Cycle

Economy Indicator is below trend and Indicator is above trend and Indicator is above trend and Indicator is below trend and
accelerating accelerating decelerating decelerating
1 2 3 4
Industry This stage is when industry This stage is when industry is Stage where industry growing The stage where industry is
growth is below trend but the growing as per historical above trend, capex could be decelerating
industry is bottoming out and averages but is accelerating increasing or demand is peaking
recovering so likely set to peak
3
2 4
Source: Maybank Research
Definitions of House View Ratings
Positive Positive growth drivers remain. New drivers may be emerging.
Neutral No key growth drivers or risk factors at play for now.
Negative Negative risk factors remain. New risks may be emerging.
Why do research views differ across research functions?
Research unit Research focus
Maybank Group Risk Research Focusing on supporting, protecting and growing the Bank’s credit portfolio
Focusing on providing key macroeconomic, exchange rate and commodity prices forecast on major and
Maybank KimEng Economics
regional economies and . Conducting thematic research on economics and financial market developments.
Maybank KimEng Equities Focusing on providing buy/sell recommendations on equities
Maybank Asset Management Focusing on asset allocation views of various funds
Maybank Etiqa Focusing on asset allocation views

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Highly Confidential

MALAYSIA - Quarterly Industry Outlook - 4Q 2019

By Group Risk Research

Central Economic Scenario Sector 6-18m Outlook

Power Healthcare Positive

Summary of Sectors Outlook

• Tier 1 developers with a strong saleability track record.

• Subcontractors and players low on the value chain as they

• Avoid refining and biodiesel businesses for now, with careful

Shipping Negative • Dry bulk, tanker & containership

• The mass grocery retail (MGR) segment, with the most

• Manufacturers and traders with high import-content products

• Manufacturers and traders with high import-content products

• Hospitals at a newly designated healthcare hub such as

Key Indicators Insights and Outlook Unsold Residential Property

Recommendations MGSIC codes

Late-Upcycle Early Downcycle

Prices and Valuations Rise Low Rental Yields

Years of Unsold Inventory

100,000 33% 12%

o Push by federal government to improve

 National Home Ownership Campaign

Mortgage Loan Applications Mortgage Loan Approvals ● Temporary blip in demand

● House Price Index (HPI) Growth projected to

Office Sector Vacant Space and Office Sector Outlook

Occupancy Rate (%)

reducing commensurating office demand.

-2.0% 60 o Immense incoming supply in Klang Valley

Occupancy Rate (%)

● Green Buildings is a core ESG consideration for

10.0 30.0% increased 76% to 479 buildings from 2014

● Avoid and reduce exposure to:-

● Focus on Tier 1 developers with strong saleability track record.

Key Indicators Insights and Outlook Construction GDP Growth

Recommendations MGSIC codes

Late-Upcycle Early Downcycle

Boom in Construction Overbuilding

15,000 5.0% 38.6

Orderbook Trend QoQ Chg (RHS) increased industry competition with

Pan Borneo Highway (Sabah) (RM12.8b)

KV Double Track Upgrade (RM5.3b->4.3b) - under

2,400 30.0% 19.00 5.0% official price increase)

unprofitable and require to pass on

45.0% 6.0% 3.0%

● Thin industry margins

● 2019’s outlook remaining challenging. Avoid and reduce exposure to:-

Key Indicators Insights and Outlook Malaysia CPO seasonal production

Fertilizer prices Fertilizer cost is expected to remain largely flat in 2H 2019.

Recommendations MGSIC codes

Prices are elevated Prices start to ease

4.00 AllianceDBS Research 2,560

0.00 4000 Hong Leong IB 2,300

Oceanic Nino Index (ONI) – Definition and Methodology

Indian Ocean Diopole (IOD) – Definition and Methodology

USD per tonne

2300 3,400 4.00

Highly Confidential Source: Bloomberg, Group Risk Research

Source: MPOB, Group Risk Research

Source: MPOB, Group Risk Research

Palm Oil Stockpiles

Source: Bloomberg, Group Risk Research

plantations ( Please be aware of the No deforestation, No Peat and No Deforestation.

Tracing the palm oil supply chain