News

• PM announced revised budget for 2015 to address headwinds that the country is facing (please refer separate Economic Update report for details and economic impact).

Comment

• We believe the latest development is neutral to slightly positive to the market given that the government is taking a pragmatic and balanced approach to address the headwinds faced by the country while still showing the will to exercise prudence and restrain in spending via cut in OE.

• It also strives to sustain domestic economic growth as the cut in OE (but maintaining DE) has limited impact on GDP. Moreover, despite higher budget deficit, it is still heading towards the right direction, as promised by the government.

• In view of the minimal impact on GDP, we are keeping our 2015-2016 FBM KLCI EPS growth of 6-7%. While there are still downside risks, we remained confident that it will remain in the positive territory, underpinned by growth in DE, greenlight for mega projects and slower but still growing economy. On the cost side, absence of electricity tariff hike coupled with lower pump prices should keep cost in check and help mitigate the impact of GST. Lastly, lower corporate tax rate will act as a buffer.

• Although Fitch said it will review Malaysia’s rating in 1H15 and may downgrade the sovereign, we believe current account will remain in surplus (albeit lower). Coupled with still lower yoy fiscal deficit (albeit higher than earlier expected), the country will mostly likely retain its status among rating agencies.

• However, sentiment will remain fragile in 1H15 in view of low oil price and uneven global growth. This could continue to induce volatility.

Target

• End 2015 FBM KLCI target maintained at 1,880 or based on 15x 2016 earnings.

Strategy

• Saving grace is valuations no longer stretched and below historic mean vs. peers as well as standalone basis.

• Thus, we remained focus on 5 major themes for stock selection to provide some downside protection with potential positive returns: 1) benefit from sector upturn; 2) resilient and/or visible earnings growth; 3) high yield with defendable earnings; 4) US$ and/or raw material beneficiaries; and 5) M&A.

• Top picks remained unchanged except for the inclusion of Air Asia which is one of the major beneficiaries of lower oil price.

Risks

• Global – Sooner-than-expected US rate hike, worst-thanexpected performance of major economies and geopolitical.
• Country specific – further plunge in oil price, foreign massive selldown on MGS, earnings disappointment, sovereign rating and government contingent liabilities.

Source: Hong Leong Investment Bank Research - 21 Jan 2015