Investment Highlights

• 17 new 12MP measures to accelerate socioeconomic development. The Prime Minister announced the Mid-Term Review of the Twelfth Malaysia Plan (12MP) yesterday and introduced 17 new measures as catalysts to accelerate the government’s efforts to reform the socioeconomic development in line with the Madani economic framework. These encompass developing high growth high value (HGHV) industries, enhancing fiscal sustainability, retargeting subsidies, accelerating energy transition, advancing digitalisation and technology through Government Technology (GovTech), empowering micro, small and medium enterprises (MSMEs), reforming social protection, acculturating MADANI society, improving access to healthcare services, housing and public transportation as well as reforming labour market and wages towards ensuring future ready talent (Exhibits 1-3).

• 12MP measures revolve on 3 key themes – i) resetting the economy to restore growth via strategic and high impact industries, including MSMEs, ii) strengthening security, wellbeing and inclusivity, and iii) advancing sustainability. The enablers encompass developing future talent, accelerate technology adoption and innovation, enhancing connectivity and transport infrastructure as well as strengthening public service delivery.
  The review identified 6 challenges:
  1) Slow structural economic transition due to low level of high valued added activities, inadequate quality investment, slow adoption of advanced technology/digitalisation, lack of facilitative business ecosystem, low productivity and shortage of skilled talent.
  2) Continued growth disparity between regions and states, resulting in ineffectiveness in maximising development opportunities and regions/states (including border areas), inadequate basic infrastructure in less developed states and lack of private sector participation in subregional cooperation.
  3) Ageing population which translates to slower economic growth, declining working age population and increased fiscal burdens of healthcare and social protection.
  4) Global supply chain disruptions which slowed export growth, deepened economic fragmentation between nations and low leverage in trade agreements.
  5) Elevated inflation for global commodities, food supply shortage and volatile foreign currency movements.
  6) Limited fiscal capacity due to narrow revenue base, inefficient subsidy allocation, ineffective management of federal expenditures, debt and liability.

• Focused on 5 HGHV industries as follows:
  1) Energy: implementing the already announced National Energy Transition Roadmap (NETR), creating an electricity exchange system to enable cross-border renewable energy (RE) trading, increasing solar, hydro, bioenergy and hydrogen capacity, introducing natural gas roadmap, accelerating regulatory framework preparation for carbon capture, utilisation and storage (CCUS), formulating long-term low emissions development strategy, implement carbon pricing and accelerating ESG adoption;
  2) Technology/digitalisation: rollout GovTech, accelerate National Digital Identity implementation and national-level digitalisation leadership/upskilling programmes, strengthen tech start-up ecosystem with angel investors/seed funding and INNOVATHON programme;
  3) Electrical and electronics (E&E): Strengthen front-end manufacturing ecosystem towards higher value chain, emphasise on high value-added services in integrated circuit design, engineering and wafer fabrication and quality investment in advanced technology;
  4) Agriculture/agro-based: adoption of smart farming technology, diversify agro-based industries, adopt low carbon practices and implement farmer programmes to enhance food supply chain; and
  5) Non-radioactive rare earths: Comprehensive business model for up, mid and downstream, detailed mapping of rare earth resources in states and revising national mineral policy as well as enhance research, development, commercialisation and innovation.

• Hinges on effective execution and collaboration with private sector. 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. Hence, further clarity on 12MP progress lies in long-term effective execution capabilities and collaborative partnership between government agencies and private sector.
  Meanwhile, we await further details on investment allocations and incentive details which will be announced during the tabling of Budget 2024 on 13 October.

• High likelihood of improving economic growth from 12MP. As highlighted in our review on the New Industrial Master Plan, which was announced earlier this month, we view that Malaysia has a strong chance of better economic growth even if not all the objectives of 12MP are achieved. This stems from the country’s strategic location in the middle of busy EastWest 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 the 12MP to underpin Malaysia’s structural transformation with neighbouring countries such as Thailand, Indonesia, Vietnam and Philippines competing 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 recent NIMP initiatives, 12MP 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, tail end of US interest rate upcycle, below-median P/E valuation of 14x, highly compelling dividend yields, year-end window dressing activities against the backdrop of improving corporate earnings growth for next year, moderating political noises, 16-year foreign shareholding low 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 - 12 Sept 2023