The Government decided to implement the Movement Control Order from 18 to 31 Mar 2020. This is a necessary pain to contain Covid-19 from further spreading. We take this opportunity to lower our 2020 GDP forecast from 4.1% to 2.3%, below MoF’s forecast of 3.2% to 4.2%. Our expectations for another - 50bps OPR cut in 2020 is unchanged. The “lockdown” is directly negative for most sectors: aviation, autos, consumer, construction, gaming, REITs and property. After earnings revision (largely from impending cut in banks and plantation), our KLCI target is lowered to 1,350 (14.6x PE; -2SD).

NEWSBREAK

Yesterday, the Government decided to implement the Movement Control Order from 18 to 31 Mar 2020. These include:

• Prohibition of mass movement and gatherings across the country including religious, sports, social and cultural activities.
• Overall restrictions of all Malaysians travelling abroad.
• Restriction of all tourists and foreign visitors into the country.
• Closure of all schools and education institutions, both public and private.
• Closure of all government and private premises except those involved with national key services (or essential services) namely water, electricity, energy, telecommunication, postal, transportation, irrigation, oil, gas, fuel, lubricants, broadcasting, finance, banking, health, pharmacy, fire, prison, port, airport, safety, defence, cleaning, retail and food supply.

HLIB’s VIEW

A necessary pain. With 125 new Covid-19 cases reported yesterday, bringing the country’s tally to 553 (worst in SEA), this drastic measure seems necessary to contain the virus from further spreading.

Lowering 2020 GDP to 2.3%. Following the spread of Covid-2019 and its effect on global and domestic economic activity, we downgrade our GDP forecast to 2.3% from 4.1%, below MoF’s range of 3.2% to 4.2%. This forecast is predicated on the assumption that growth will be negatively affected in 1H20 and will recover in the 2H20 as the spread of Covid-2019 gets contained. Nevertheless, we acknowledge there is large uncertainty depending on the virus’ evolution. We also expect BNM to reduce the OPR by 50bps to 2.0% in 2020 (as early as 1H20).

Sectorial impact. It goes without saying, that the potential impact will be rather wide spread. From a sectorial perspective, those that we would single out for a more direct impact include aviation (travel ban for locals and foreigners), autos (closure of sales outlets), consumer (panic buying for staples but weak demand for discretionary), construction (work halt), gaming (closure of Genting Highlands and NFO shops), REITs (closure of retail outlets) and property (closure of sales/showrooms). This episode should also see weaker loans growth for banks and lower electricity demand for Tenaga (BUY, TP: RM13.50).

Cut KLCI target to 1,350. With the impending cut in our earnings forecast for the index heavyweight banking and plantation sectors, we are reducing our 2020 KLCI earnings growth from +3.8% to -1.7% (marking the 3rd consecutive year of earnings decline). Our 2021 earnings growth forecast is at 3.9% (from 4.2%). With a much weaker GDP projected for 2020 coupled with weak sentiment, we lower our PE target from 16.3x (-0.5SD) to 14.6x (-2SD) to arrive at our revised target of 1,350 (from 1,590). Our top picks are under review, pending our 2Q20 outlook report.

Source: Hong Leong Investment Bank Research - 17 Mar 2020