Investment Highlights

• Private sector to mostly fund NIMP. The Prime Minister's recently announced New Industrial Masterplan 2030 (NIMP) requires an estimated total investment of RM94.7bil (1.3x 2022 foreign investment of RM74.6bil) over the next 7 years to propel the country's economic growth. The investment would be mainly from the private sector of which 64.5% from equity (multinational companies, Bursa listings, government-linked investment companies, equity crowdfunding and venture capital/private equity) and 26.8% from debt (banks, bonds/sukuk, peer-to-peer financing).
  Carbon capture, utilisation & storage (CCUS) would account for the largest share of 38% of total investment, followed by wafer fabrication at 25% and specialty chemicals (10%). Hence, half of the investments are likely to be funded by Petronas. 8.7% of the investments would be allocated by the government to help catalyse and incentivise these investments via the NIMP Industrial Development Fund and the NIMP Strategic Co-investment Fund (Exhibit 3).

• Building long term sustainable industrial capacity. NIMP targets to build Malaysia's industrial capacity and resilience for long-term and sustainable growth by adopting a mission-based approach to galvanise the entire manufacturing ecosystem and drive the country’s industrial transformation. This involves the following:
  I.Advance economic complexity where industries will be encouraged to innovate and produce more sophisticated products, which will integrate into other value chains such as (i) advanced inspection solutions and implantable devices for medical device sector; (ii) EV chips, superchargers and smart sensors for automotive, and (iii) active pharma ingredients, biologics and solvents for pharmaceuticals.
  II.Embrace technology and digital transformation to dive into innovating and enhancing productivity via advanced automation and robotics, AI, cloud computing and additive manufacturing (rapid prototyping of new products).
  III.Push towards net zero through sustainable practices and green initiatives such as renewable energy and storage, energy efficient technology/processes, electrification, use of sustainable raw materials, waste recycling/reusage and CCUS.
  IV.Safeguard the economic security and inclusivity via enabling supply chain security. This involve building industrial clusters and integrating supply connectivity to strengthen domestic industrial linkages and elevate Malaysian industries holistically in the global value chain.
  The Prime Minister revealed that mission-based projects (MBPs) have been identified, which will accelerate the development of an inclusive ecosystem to integrate small medium enterprises (SMEs) into the value chain. The 5 priority sectors identified are aerospace, chemical, electrical & electronics (E&E), pharmaceutical and medical devices (Exhibit 1 &2).

• Expanding value-add, employment and salaries. NIMP aims to increase manufacturing value-add by 6.5% annually to RM587.5bil by 2030 or +61% from 2022, which will encompass high-impact sectors in E&E, chemical, electric vehicle, aerospace, pharmaceutical and advanced materials (minerals and metal).
  This will drive a projected employment growth at 2.3% annually, providing a livelihood for 3.3mil persons by 2030 with the creation of high-skilled jobs as the country advances towards higher value-added activities and improvement in automation and technological advancements. This will also expand the median salary in the manufacturing sector by 9.6% annually, to more than double to RM4,510/month by 2030 from RM1,976/month in 2022. This is currently below the national average despite the sector’s dominant role in the national gross domestic product.

• Hinges on execution capabilities. We believe a single point one-stop centre may be established to provide prompt, efficient and transparent services to investors, to shorten and simplify administrative procedures and guidelines to remove bottlenecks faced by both local and foreign investors in establishing and running businesses in Malaysia. The introduction of a progressive wage system could also increase corporate/SME production costs unless accompanied by productivity improvements and clear governmental guidelines to address investor concerns.
  Pending further NIMP investment allocations and incentive details which will be announced during the tabling of Budget 2024 on 13 October, we do not expect a substantive near-term rerating response by the equity market given that the new mission-based framework requires strong long-term execution capabilities and collaborative partnership between government agencies and the private sector.

• Long-term positive on NIMP. We view that Malaysia has a strong chance of a successful NIMP implementation given the country’s strategic location in the middle of busy East-West trade routes, high standard of English-speaking talent, established governance structure, abundant natural resources, quality infrastructures and existing industrial/commercial ecosystem.
  Hence, we are long-term positive on NIMP to underpin Malaysia’s structural transformation with neighbouring countries such as Thailand, Indonesia, Vietnam and Philippines jostling for foreign investment inflows against the backdrop of multinational corporations recalibrating for US-China trade tensions via reshoring and friend-shoring strategies. Together with the recentlylaunched Madani economic framework, these NIMP initiatives will have a positive impact on all sectors of the country (See Exhibit 4 for our sectoral impact assessment).

• We maintain base-case end-2023 FBMKLCI target at 1,570 pegged to an unchanged 2024F P/E of 15x – at a slight discount to its 5-year median of 15.2x albeit at 3 standard deviation below pre-pandemic 2017-2019 median of 17x. Notwithstanding the vagaries of foreign equity flows, we expect domestic institutions to largely continue a buying position towards the end of the year on ample local liquidity, below-median valuations, highly compelling dividend yields, window dressing activities against the backdrop of improving corporate earnings growth for next year, moderating political noises, 16-year foreign shareholding trough of 19.9% currently and prospects of a normalising ringgit.
  A best-case scenario from an abrupt US Federal Reserve policy reversal and better-than-expected global economic growth would underpin an end-2023 FBMKLCI target of 1,645, pegged to 2024F P/E of 15.7x at a 25% premium to its 5-year median.
  The worst-case scenario from a global recession, new pandemic-driven lockdowns and worsening geopolitical conflicts translates to an end-2023 FBMKLCI target of 1,222, pegged to 2024F P/E of 11.7x at 1.5 standard deviation below its 5- year median (SDB5YM). We do not discount global equity volatility from more US rate hike surprises, bank failures and fresh geopolitical/trade tensions.
• OVERWEIGHT on banks, oil & gas, autos, consumer, power, property, REIT and healthcare sectors with top picks being CIMB, RHB Bank, Alliance Bank, Tenaga Nasional, Telekom Malaysia, Dialog Group, Inari Amertron, Sunway REIT and DuoPharma BioTech (Exhibit 9). We also like small-cap stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer and niche agrichemical producer Ancom Nylex, as well as grossly undervalued companies such as Deleum (Exhibit 9). Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Westports Holdings, Inari Amertron, Sunway Holdings, Sunway REIT and Gamuda (Exhibit 8).

Source: AmInvest Research - 4 Sept 2023