Author:kltrader | Publish date: Mon, 22 Nov 2021, 3:03 PM
Macquarie Equities Research (MQ Research) initiates coverage on the Malaysia gloves sector, with a view that the glove manufacturers have production cost advantages over its China peers and any newer entrants. Although average selling price uncertainty lingers, valuations have turned attractive with all three glove makers trading at EV/share below pre-pandemic levels.
MQ Research names Kossan as its top pick within the sector. Read on for MQ Research’s order of preference and target prices in an excerpt of the report dated 19 November 2021. Also, check out the associated Macquarie warrants over the glove names below.
Negatives Are Priced in
Incoming China glove supply threatens Malaysian manufacturers’ market share. However, MQ Research believes these negatives are priced in as share prices have now fallen 70-75% from pandemic highs. MQ Research believes large-cap Malaysia glove makers have a 25-35% production-cost advantage over China peers. MQ Research initiates on Malaysia’s glove manufacturers as valuations turn attractive despite average selling prices (ASP) in flux. All three glove makers in MQ Research’s coverage are trading at an enterprise value per share (EV/share) below pre-pandemic levels. If shares decline a further 10-15% - which MQ Research believes to be the absolute bottom – MQ Research sees an attractive entry point. ASPs are quickly declining (currently US$35-40 vs. mid-21 US$85-90 per ‘000 pieces), and MQ Research’s top pick Kossan’s differentiated product mix shields it from potential global oversupply. Kossan is trading at a steep discount to peers (post-pandemic PER discount to TopG/Hartalega of ~15%/ 50%) and at about half their pre-pandemic EV/share.
Production cost advantage over China/new entrants
China: MQ Research estimates that China glove manufacturers currently have 25-35% higher production costs vs. large-scale Malaysia manufacturers due to higher fuel and labour costs. If global oversupply occurs, and prices continue to decline, MQ Research believes Malaysian large-scale manufacturers will be the last to turn unprofitable. However, MQ Research expects China producers to continue to add capacity until costs normalise despite downward pressure on margins.
New entrants: MQ Research expects newer entrants in glove manufacturing to quickly become unprofitable as ASPs dive below production cost. Newer glove producers have an estimated production cost of US$35-40 per ‘000 pieces (vs. existing players of US$20-23). MQ Research believes newer players will either abandon expansion plans or exit the industry altogether.
Post-pandemic Supply-demand Outlook
Frost & Sullivan expects disposable glove demand to deliver a 15.9% volume compounded annual growth rate (CAGR) post-pandemic (2019-2025F) vs. 8.2% pre-pandemic due to increased hygiene awareness. MQ Research forecasts China producers to account for 24% of global supply post-pandemic (2023E) vs. 10% pre-pandemic (2019). MQ Research expects long-term ASPs to settle at US$24-26 per ‘000 vs. street estimates of US$25-30 on increased price pressure from China manufacturers. This is structurally higher than pre-pandemic prices of US$20-22 due to higher social compliance costs.
Valuations are now compelling; Kossan is MQ Research’s top pick
MQ Research uses a price-earnings ratio (PER) methodology to value glove manufacturers, applying MQ Research’s target multiples to post-pandemic FY23E/24E earnings per share (EPS) – years when MQ Research expects ASPs to stabilise. MQ Research’s multiples of 15x-21x represent between a -1.0SD to -0.25SD discount to pre-pandemic sector/company historical averages. Post-pandemic ASP uncertainty and labour practice issues linger. MQ Research’s order of preference is Kossan (OP) > Hartalega (OP) > Top Gloves (N).
Author:kltrader | Publish date: Fri, 19 Nov 2021, 3:56 PM
Alibaba Group Holding (ALIBABA) slashed its outlook for its current fiscal year along with the release of its September quarter results yesterday that missed analyst estimates for a second straight quarter. ALIBABA’s Hong Kong listed shares fell 5.3% while its U.S. listed shares fell 11.1% on Thursday.
Whether bullish or bearish, investors may gain leveraged exposure to ALIBABA as well as the Hang Seng TECH Index via the calls and puts listed on Bursa Malaysia.
Leading up to yesterday’s earnings release…
The 14% rebound in Chinese tech stocks in Hong Kong from this year's low in October is being challenged by potentially weaker earnings from industry bellwethers, which will provide insight into the impact of China’s regulatory crackdown on profit number. The earnings reports are crucial to investors who are enjoying a rare bounce in the Hang Seng TECH Index (HSTECH), which saw US$1 trillion of market value eroded during China's year-long crackdown on the tech sector.
ALIBABA saw one of the heaviest fines of US2.8bil by Chinese authorities in April on the back of the big tech crackdown. The stock which had tumbled as much as 49% to a record low from its February highs, has since rebounded 22% from its October lows, but is still trading at a relatively cheap price-earnings ratio of 17 times, having cheapened from a two-year average of 23 times, according to Bloomberg data.
Lackluster Results and Guidance
Yesterday, ALIBABA missed revenue and earnings expectations for the September quarter as slowing economic growth in China weighed on results, adding to regulatory headwinds. In an announcement on the HKEX, ALIBABA recorded a revenue of RMB200.7bil (+29% year-on-year (y-o-y)), while net income was RMB3.4bil. Earnings per share (EPS) was RMB11.2 (-38% y-o-y). According to an article on CNBC (18 Nov), both revenue and EPS were below Refinitiv estimates of RMB204.9bil and EPS of RMB12.36.
Further, the company slashed its revenue guidance for its current fiscal year; it previously expected a revenue of RMB930bil (+29.5% y-o-y) but now expects growth to be between 20% to 23% y-o-y.
Author:kltrader | Publish date: Thu, 18 Nov 2021, 9:41 AM
Malaysia’s headline unemployment in September improved to 4.51% (versus 4.64% in August), the lowest level since the start of the pandemic. In its report dated 18 November, Macquarie Equities Research (MQ Research) says long term unemployment remains stable, with rehiring skewed to short term unemployed, while manufacturing led rehiring, with a skew to local and semi-skilled workers. MQ Research expects the positive momentum to persist to at least 1Q22 and continues to prefer consumer banks.
3Q21 Undone
Headline unemployment rates declined further to 4.51% - the lowest level since the start of the pandemic, effectively unwinding the impact of the third movement control order (MCO3.0). Gross employment saw +87k hires and gross excess unemployed persons is now around ~200k.
Long term (LT) unemployment (>6 months unemployed) remained stable in September, with the re-hiring skewed to the short term (ST) unemployed. There was also a marginal improvement in time-based unemployment in 3Q22 (workers working <30 hours/week but able to work more), that has helped trim overall unemployment. MQ Research’s latest survey in October saw a 6ppt decrease in respondents that flagged a loss of income (to 33%).
Unemployment remains heavily skewed to younger workers, with a 13.9% unemployment rate. Younger workers (15-24 year-olds) also continued to suffer the highest rates (+20% year-to-date (YTD)), of skill-related underemployment (tertiary educated but working semi/low-skilled jobs) despite an overall -1% improvement YTD, driven by older workers.
Manufacturing, Construction Lead Hiring
Manufacturing underpinned the bulk of hiring in 3Q21, as the government eased headcount curtailment for the sector. The sector saw filled jobs improve +1.3% quarter-on-quarter (q/q) (vs overall +0.7%). Manufacturing only accounts for 27% of total filled jobs but makes up 57% of vacancies and 44% of new job listings. Overall, this resulted in a skew to low-skilled hiring during the quarter.
MQ Research expects to see pandemic hit services sectors like food and beverage (F&B) and retail drive hiring in the coming months. Retail mobility indicators suggest recovery to 85%-90% of pre-pandemic levels on the back of robust consumer pent-up demand.
Positive for Consumer Banking
Overall, the continued rapid pace of rehiring bodes well for banks’ asset quality. Considering mobility restrictions were still partially enforced in September (October/November has seen more easing), this encouragingly is likely to persist going forward. The trajectory affirms MQ Research’s preference for consumer banks over non-consumer banks, that will benefit the most from a recovering labour market.
MQ Research’s top picks are RHB, Hong Leong and Public; see excerpt of the report: Malaysia Banks - 3Q21 Preview: Signal to noise is lower.
12-month Target Price Methodology
RHBBANK MK: RM6.35 based on a Price to Book methodology
HLBK MK: RM21.75 based on a Price to Book methodology
PBK MK: RM4.45 based on a Price to Book methodology
Author:kltrader | Publish date: Tue, 16 Nov 2021, 10:07 AM
The preliminary Bank Negara numbers suggest that the 3Q21 banking sector profit before tax (PBT) dropped by 12% quarter-on-year (q/q), mainly dragged by the higher provisions, which was expected. Meanwhile, the preliminary headline net interest income (NII) which fell by 6.3% q/q was higher than Macquarie Equities Research (MQ Research) has initially anticipated as the banks have not been able to properly accrue interests. Looking ahead, MQ Research has lowered bank’s earnings for FY21/22 and thinks that banks may maintain the elevated payout rations. MQ Research reiterates its preference for consumer-centric banks with RHB as its top picks.
3Q21: Modification losses and provision timing
Preliminary Bank Negara numbers flag -12% q/q (+19% year-on-year (y/y)) banking sector profit before tax, with return on equities (ROEs) dipping to 9.5% (2Q21: 9.7%). The main drag in 3Q21 will be higher provisions (expected) and modification losses (higher than MQ Research’s expectations). Core pre-provisioning operating profit (PPOP) is -0.7% q/q, +11% y/y, adjusting for one-offs.
Modification losses: Preliminary headline net interest income (NII) fell -6.3% q/q in 3Q21, largely driven by one-off modification losses that have been recognised due to the "Pemulih" moratorium (opt-in but with automatic approval). MQ Research’s estimated aggregate impact of RM900m-RM1bn is roughly 25% the scale of 2020’s modification losses. It is also worse than MQ Research’s initially anticipated, as it appears that banks have not been able to properly accrue interest on hire purchase and fixed rate personal loans. MQ Research has incorporated the NII impact in MQ Research’s estimates for FY21/22.
Provisions: The 25% q/q increase in net provisions is within MQ Research’s expectations as banks had generally under-provisioned in 1HCY21. In 3Q21 results, MQ Research mostly expect that banks will maintain their credit cost guidance with the possibility it may be lowered as banks trim pre-emptive provision recognition and push provisions into FY22 instead (with the exception of Hong Leong Bank and Ambank due to different financial year-ends). Looking ahead, MQ Research thinks peak asset quality stress for the banks has arrived with the economic reopening. While timing of impairment recognition will introduce some noise into FY21/22 reporting, MQ Research holds the view that the market’s emphasis on asset quality will diminish.
Lower FY22E banks earnings by -5.9%; ratings unchanged
MQ Research has lowered banks’ earnings for FY21/22 to account for the 1) one-off modification losses, 2) one-off “Prosperous Tax” and 3) deferment of provisions from FY21 to FY22. MQ Research lowers aggregate banks’ FY21/22 adjusted net profit by -1.6%/5.9% and have lowered target prices by ~1% on average on unchanged price-to-book (P/B) multiples (since the impact is one-off) but reflecting the impact to book value. MQ Research has also assumed that banks will endeavour to maintain the elevated payout ratios and thus have kept MQ Resarch’s dividend per share assumptions unchanged.
Consumer > Non-consumer
MQ Research reiterates its preference for consumer-centric banks over non-consumer banks. Headline unemployment declined to 4.5% in September, and MQ Research expects to see continued improvement in line with the economic reopening. MQ Research anticipates consumer banks will enjoy better loan growth from post-lockdown pent-up demand and outperform non-consumer banks that have to grapple with asset quality indigestion, especially in the SME space. MQ Research’s order of preference is: RHB Bank > Hong Leong Bank > Public Bank > CIMB Bank > Maybank > Ambank.
Author:kltrader | Publish date: Mon, 15 Nov 2021, 9:53 AM
Inari Amertron (INARI) announced an all-time high quarterly revenue and profit last Friday, with its 1Q22 revenue and net profit surging 24.0% year-on-year (y/y) and 52.6% y/y, respectively, which was mainly derived from higher revenue growth led by the radio frequency business. Macquarie Equities Research (MQ Research) said this was in-line with its expectations and believes that the company will continue showing strong volume momentum into the next quarter.
MQ Research maintains Outperform recommendation on INARI, which is also one of its preferred names in the tech sector. Read on for an excerpt of this report dated 12 November 2021.
Strong Seasonal Peak
INARI reported 1Q22 (ended Sept) adjusted net profit of RM108m (+56% y/y, +22% q/q), which was in-line with MQ Research’s/consensus expectations; 29%/28% of respective FY22E forecasts. 1HFY represents the peak seasonal revenue for INARI, which historically averages ~60% of earnings in the period.
INARI declared a first interim dividend of 2.8sen/share, (93% payout ratio) which is ahead of MQ Research’s expectations.
Smartphone cycle drives radio frequency (RF) segment
RF segment (61% of revenue) booked a 38% y/y (+36%q/q) increase in revenue. Note that 1QFY21 was a relatively low base as the seasonal peak earnings were delayed into 2QFY21/3QFY21. Note, this is in spite of MQ Research’s assumption of Apple trimming iPhone production by 5m (from 90m to 85m) in 1HFY22. MQ Research anticipates the broader supply chain bottlenecks have driven INARI’s RF customers to maintain relatively high loadings to mitigate any supply disruptions.
Opto segment (32% of revenue) booked a 4% y/y and +2% q/q increase in revenue. Meanwhile the generic segment saw 24% y/y growth (from a low base; 1QFY21 suffered covid-disruptions).
Action and Recommendation
MQ Research maintains its Outperform recommendation on INARI. MQ Research expects the strong volume momentum to persist into 2QFY22; i.e. MQ Research believes it will be unlikely for INARI to disappoint in the short term. MQ Research continues to recommend remaining well-weighted in tech/exporters/thematics, and INARI is one of MQ Research’s preferred names in the sector.
Management will be hosting the usual post-results call on Monday (15th Nov at 10.30am), where more detailed updates will be provided.
12-month Target Price Methodology
INRI MK: RM4.35 based on a total shareholder return methodology
Author:kltrader | Publish date: Thu, 11 Nov 2021, 9:47 AM
Macquarie Equities Research (MQ Research), in collaboration with ACIES Malaysia, has conducted proprietary randomized stratified survey to glean insight into Malaysian’s personal health and finances, as well as sentiment on economic and political outlook. Despite increased demands and consumer spending, people prioritise rebuilding savings rather than spending on non-essential items or purchasing big ticket items such as vehicles, houses and holidays. MQ Research also summarised other survey findings, covering the economic sector while highlighting My E.G. Services and Telekom Malaysia, among others, as its top thematic sector.
Key Points
Pent-up demand is driving consumption, but will it last? MQ Research’s survey finds consumers prioritise rebuilding savings and eschew big-ticket items.
Focus shifting from public health to the economy. Managing cost of living will be crucial for government going forward.
Conflicting indicators on government’s popularity; MQ Research thinks pressure for populist policies remains, at least until elections are done.
Unpacking the Demand Pulse
In the third edition of MQ Research’s survey, MQ Research turns its focus towards consumer behaviour as Malaysia transitions to an endemic strategy. Pent-up demand is driving substantial revenge spending, but MQ Research’s survey suggests it will wane. Only 24% of respondents were spending more on non-essentials (Question 5). Meanwhile, respondents are substantially prioritising disposable income for rebuilding savings (Question 7). Big ticket items like upgrading vehicle/house or a holiday ranked at the bottom. MQ Research will continue to monitor these trends, as consumer appetite may yet improve in line with economic sentiment.
But on a positive note, Malaysians appear to be embracing the endemic strategy. Perceived safety (Question 1) continues to improve on the back of >90% vaccination rates (adults), and support for economic reopening remains well over two-thirds. However, tolerance remains low for high-risk discretionary activities like opening the borders for international tourists (Question 12; 32% support) and holding a general election (Question 13; 19% support).
From Heath to Wealth
Attention is quickly shifting away from public health with cost of living now the number one issue (Question 15). MQ Research has flagged food inflation as a key pressure point for policymakers in the coming months, with certain basic foods prices like chicken up +40% already. Though indicators were mixed, MQ Research thinks the survey suggests government popularity could be relatively fragile (only 29% support for PM, Question 23), especially if the economy underperforms. MQ Research sees policy risk persisting, at least until the government secures a clear mandate via elections. As MQ Research has pointed out, the Prosperity Tax may be one-off, but the need for tax revenue is not.
Sectoral Read-thru
Digitalisation: ~32% of respondents preferred online over physical retail. The pandemic has accelerated digitalisation of the economy, and is MQ Research’s top thematic for domestic companies. MQ Research’s top picks here are TM, My E.G. Services (MYEG) and GHL.
Big ticket items: While MQ Research’s expect super-cycle sales in 4Q, property and auto could see demand taper off by 2Q22 once pent-up demand is exhausted.
Tourism:
MQ Research worries stringent SOPs imposed on tourists may be a deterrent to volumes, while underlying outbound demand may prove tepid outside of the initial post-reopening rush. Remote working also reduces need for business travel. MQ Research is forecasting 65%/80% passenger traffic recover by FY22/23.
Author:kltrader | Publish date: Tue, 9 Nov 2021, 9:34 AM
Macquarie Equities Research (MQ Research) released a report with further details on the implications of Budget 2022. MQ Research is of the view that domestic clients are willing to look past the one-off Cukai Makmur / prosperity tax impact to fundamentals but see stamp-duty as more problematic, while there is a little more downside risk from further foreign selling as the implications of Budget 2022 are still being digested. MQ Research thinks that banks risk more foreign selling and reiterates preference for exporters/tech/thematics.
Budget 2022 post-mortem: One-off or overhang?
It is clear the market overwhelmingly views Budget 2022’s tax measures as negative. The key question now, is how will the market price in the impact? It appears that the post-budget correction in valuations is correlating well with MQ Research’s sector-by-sector estimates for the one-off tax impact. Furthermore, current valuations ascribe roughly half of the -6.5% FY22E net profit (NP) impact, landing somewhere between MQ Research’s base case and best case assumptions:
Base case: A -6.5% hit to earnings results in a -6.5% hit to market valuations, assuming market multiple remains unchanged.
Best case: Intrinsic value destroyed equals gross incremental tax of RM6bn; implies -0.4% downside vs RM1.4tn market cap.
Feedback from domestic clients suggests a majority of funds may be willing to look past the one-off tax, being far more preoccupied with the impact of the stamp duty increase/cap removal. Bulk of domestic institutional selling appears concentrated at the start of the week, and tapering off after. Based on feedback, MQ Research thinks domestic funds will exercise restraint from further selling, especially with valuations correcting ~half-way to MQ Research’s base case.
Foreign flows have been slower to react to the news, and MQ Research thinks that selling may accelerate going forward. Feedback from foreign clients suggests most are still digesting the news. And in stark contrast to domestics, they were more concerned about the one-off tax (stamp duty stings less due to lower churn), primarily from the perceived increase in policy risk going forward. Notably, the tax disproportionately hurts banks, which has been a sector to benefit from the recent foreign buying interest. In turn, it faces the most downside short term (ST).
Elections Needed to Ease Policy Overhang
Policy risk remains elevated. The “Prosperity Tax” was simply a quick fix for 2022, which could be implemented on short notice. But what about 2023? This paves the way for other taxes (e.g. capital gains taxes, windfall taxes) that simply are not practical to implement quickly (too complex) or too sensitive (e.g. GST) ahead of a possible 2H22 election. MQ Research sees rising food inflation risks (not well addressed in Budget), coupled with 2Q22 peak in reopening demand surge as key catalysts for more policy risk in 2022. MQ Research reiterates its preference for exporters/tech/thematic to avoid policy risks. See banks and exporters/tech/thematic companies under MQ Research’s coverage below.
Author:kltrader | Publish date: Wed, 3 Nov 2021, 10:20 AM
The banking system data for September 2021 released by Bank Negara Malaysia (BNM) recently was encouraging with consumer indicators such as credit card spending rising 12% month-on-month (m-o-m), up three months in a row, while loan applications for housing loan and hire purchase are up by 31% m-o-m and 90% m-o-m, respectively. Despite an increase in overall loan applications, working capital contracted in September, which Macquarie Equities Research (MQ Research) views as a negative signal for non-consumer banks.
Inflection
The economic reopening that accelerated significantly in September is highly evident in the month’s banking system data; generally, the takeaways are positive. Consumer indicators improved as credit card spend (a proxy for consumer spending) rose a third consecutive month (+12% month-on-month (m-o-m)) to within ~5% of pre-COVID levels. At the same time, pent-up consumer loan applications were unleashed with a +32% m-o-m bounce. Loan applications were led by housing (+31% m-o-m) and hire purchase (+90% m-o-m). However, the stronger applications have yet to translate to sector loans growth due to lag effect; consumer loans grew +3.2% y/y (+1% m-o-m) only vs non-consumer loans growth of +2.6% (+1.5% m-o-m) that was recovering off a low base.
Loan repayments are a useful indicator for underlying asset quality stress. Headline loan repayments improved 3% m-o-m, led by consumer (+7% m-o-m) vs non-consumer (+2% m-o-m). Overall, this trend is encouraging given the announcement of the interest waiver in mid-September that raised concerns of increased loan moratoria applications; the interest waivers have since been substantially toned down.
Loan impairment recognition continues to be distorted by generous repayment assistance programs. Notwithstanding, headline gross-impaired loans (GIL) ratios improved to 1.57% on the back of recoveries in the non-consumer book. Gross GIL improved by 5% m-o-m, led by a 17% m-o-m reduction in agriculture sector GIL and a 19% improvement for manufacturing GIL; respectively making up 7% and 22% of non-consumer GIL.
Lacklustre working capital applications a concern
MQ Research thinks asset growth should be a key focus going forward. Despite a 12% bounce in overall loan applications, working capital loan applications actually contracted by -12% m-o-m. This has a negative read-through for non-consumer banks. Banks should be lending more to businesses as the economy reopens, especially with the high liquidity in the system: loan-to-deposit ratios improved further to 86% while current account savings account (CASA) ratios remain near record highs at 32%. System capital adequacy remains ample at 14.4% common equity tier 1 (CET1).
Broadly Positive for 3Q21
For 3Q21, MQ Research expects the focus will be on the recently announced “Prosperity Tax” of Budget 2022, which incentivises banks to halt pre-emptive provision recognition in FY21. The positive asset quality read-through from the bank stats would support the move, especially with economic reopening underway. The data continues to support MQ Research’s preference for consumer banks. MQ Research’s top sector picks are RHB Bank, Hong Leong Bank, and Public Bank.
Author:kltrader | Publish date: Tue, 2 Nov 2021, 9:50 AM
Malaysian stocks fell yesterday as investors reacted to the Budget 2022 announcement just last Friday evening, with the most notable piece of corporate news being the Cukai Makmur, a one-off prosperity tax on companies with annual taxable income of more than RM100mil – the usual 24% income tax will be implemented on the first RM100mil income, while the excess will be subjected to a 33% income tax.
FBM KLCI Down 2% Yesterday
Yesterday morning, the Bursa Malaysia opened lower as investors continued to digest the Budget 2022 which was tabled last Friday evening. Investors had a knee-jerk reaction to the corporate tax rate of 33%, which may reduce FY22 earnings for companies with income over RM100mil, with financials and telcos potentially the hardest hit, and technology and healthcare being the least impacted. There will also be a stamp duty rate increase for share trading from 0.1% to 0.15% along with the removal of its RM200 per transaction cap, raising concerns that the trading volume on Bursa Malaysia may be impacted due to the higher trading costs.
Nonetheless, the RM12.2bil handouts that are allocated for Bantuan Keluarga Malaysia and welfare assistance, among others, should be positive for consumer spending as it may help to boost the economy for reopening momentum. Yesterday, the shares of Bursa Malaysia were down 5.6% to RM7.09 while the broader FBM KLCI fell 2.0% to 1,530.92 points.
Author:kltrader | Publish date: Mon, 1 Nov 2021, 11:12 AM
Following the Malaysian Budget 2022 that was tabled by the Finance Minister, Tengku Zafrul last Friday, Macquarie Equities Research (MQ Research) thinks that the corporate tax rate (also known as “Cukai Makmur” or “Prosperous Tax”) of 33% may reduce companies FY22 earnings by 6%. Meanwhile, the RM12.2bn handouts that are allocated for Bantuan Keluarga Malaysia and welfare assistance, among others, should be positive for consumer spending as it may help to boost the economy for reopening momentum. Read an excerpt of MQ Research’s report dated 1 November to find out MQ Research’s views and expectations on key potential beneficiaries as well as overall markets.
Banks, telcos, energy face the biggest risk to FY22 earnings
MQ Research’s anticipation of the government’s populist leanings was borne out by the announcement of the one-off “Cukai Makmur” or Prosperous Tax. MQ Research estimates a 6% hit to corporate earnings, based on a comprehensive screen of the top 100 companies (those expected to be profitable in FY22). The one-off tax will raise corporate taxes to 33% for income over RM100m for FY22. The design of the tax disproportionately hurts larger corporates that have a high proportion of domestic revenues. MQ Research estimates financials (-9%) and telcos (-8%) will be the hardest hit, with technology and healthcare being the least impacted.
Sector Takeaways:
Consumer: Total handouts of RM12.2bn: 1) Bantuan Keluarga Malaysia (BKM): RM8.2bn (+26% y/y), 2) e-start: RM300m, 3) welfare assistance: RM2.4bn, 4) special financing to civil servants: RM1.3bn.
Banks: Will get some returns on the higher taxes; stimulus measure for households/businesses will ease asset quality stress, especially the ~600k jobs to be created. Mandate for Khazanah to manage RM3bn rehabilitation fund for Covid-hit corporates will aid with exposures in aviation, tourism etc.
Vape/Sugar tax: Excise duties to be introduced for liquid/gel products containing nicotine, which are currently banned. Suggests legalisation may be around the corner. The sugar tax has been widened to encompass a wider product range, but MQ Research expects minimal impact to fast moving consumer goods (FMCG) prices.
Plantations. Windfall profit levy threshold has been raised to RM3,000/3,500mt from RM2,500/RM3,000mt previously in Peninsular/ East Malaysia. Levy rates for East Malaysia have been adjusted up from 1.5% to 3%. Mildly negative, with minimal (>2%) impact to bottom line.
Construction unexciting: General allocation for construction is down 2% year-on-year (y-o-y). No mention of KVMRT3 at all. Pan Borneo Highway Sabah will benefit from federal’s funds, but that is nothing new. In-line with low expectations.
Environmental, Social and Governance (ESG) developments: Voluntary Carbon Market will facilitate carbon credit trading (under Bursa Malaysia). Bank Negara Malaysia will introduce a RM1bn Low Carbon Transition Facility to help small-to-medium sized enterprises adopt ESG practices. Electric vehicles tax exemptions will spur adoption and catalyse charging infrastructure development.
Bleak short-term outlook but excessive selling could be an opportunity
MQ Research expects a strong negative reaction from markets as the impact of the one-off corporate tax hike is digested, likely amplified by foreign selling.
Excessive corrections could present buying opportunities, especially if sell-off exceeds MQ Research’s tax-impact estimates.
