The PM announced new movement restrictions, which includes MCO for 6 states (66% of GDP) from 13-26 Jan. While undoubtedly negative economically, MCO2.0 should be less painful than the first as it is not nationwide and more industries are allowed to operate. We estimate that 2 weeks of MCO would shave off 0.9ppts from our current 2021 GDP forecast of 6.0% and reckon there is now a higher chance for a 25bps OPR cut in 2021 (but unlikely in Jan). While MCO2.0 is a setback, we reckon that the vaccine driven recovery thesis is intact, albeit delayed. There is some downside risk to our 2021 KLCI earnings growth forecast of 21% and KLCI target of 1,780 (19.3x PE tagged to 2021 EPS).

NEWSBREAK

Yesterday, PM Tan Sri Muhyiddin Yassin announced the implementation of new movement restrictions, effective 13-26 Jan, as follows:

• MCO: Penang, Selangor, Federal Territories (KL, Putrajaya and Labuan), Melaka, Johor and Sabah.
• CMCO: Pahang, Perak, N.Sembilan, Kedah, Terengganu and Kelantan.
• RMCO: Perlis and Sarawak.

The restrictions for the MCO areas include: (i) prohibition of all social activities, (ii) 10km travel radius from home, (iii) essential sectors allowed to operate are industrial & manufacturing, construction, services, trading & logistics and farming & commodities, (iv) only 30% of management roles in these essential sectors are allowed at the workplace, (v) those not classified as “essentials” are required to fully work from home (WFH), (vi) no dine-ins allowed and (vii) supermarkets, healthcare related and banks allowed to operate with strict SOPs. In addition to the above, all interstate travel is banned throughout the country.

HLIB’s VIEW

A necessary pain. The MCO’s reintroduction is not entirely a surprise us, we flagged this possibility in our report last Fri (8 Jan). Based on yesterday’s total active cases of 28.6k, this has almost hit the country’s Covid-19 patient bed capacity, which stood at 28.7k as of end-2020. With daily cases escalating to new highs, we feel the implementation of MCO2.0 is a necessary economic pain that must be done to relief some pressure off the healthcare system.

Gauging the possible impact. Estimating the impact of these lockdown measures is never an easy task; however we can take some cues from the first MCO (18 Mar to 3 May). Using data from Google Mobility Report, movement of people in Malaysia (a barometer of economic activity) during MCO1.0 fell from the pre-Covid baseline by an average of -77.6% for transit stations, -77.4% for retail & recreation, -59.1% for workplaces and -44.7% for grocery & pharmacy. On GDP, while 1Q20 (about half month MCO impact) managed to stay in positive territory at +0.7%, this plunged to a worst on record -17.1% in 2Q20. For HLIB’s coverage universe, (i) core earnings fell - 41.7% QoQ and -59.8% YoY in 2Q20 while the 1H20 sum declined -46% YoY and (ii) the proportion of companies that were in the red rose from 6.4% in 4Q19 to 16.7% in 1Q20 and 32.1% in 2Q20. Sentiment readings also took a beating, albeit at differing timelines: (i) plunge in CSI happened in 1Q20 to 51.1 (from 82.3 in 4Q19) while the steep drop in BCI took place in 2Q20 to 61.0 (from 83.0 in 1Q20).

Hopefully less painful than MCO1.0. While the economic and financial impact of MCO2.0 will be undoubtedly negative, we believe it wouldn’t be as painful as its predecessor. Firstly, it appears that more industries can operate this time around; list by MITI has not been released at time of writing. Secondly, MCO2.0 is not nationwide unlike the first one; the 6 MCO areas collectively accounted for 66.4% of GDP in 2019.

Downside risks to 2021 GDP. While we maintain our 2021 GDP forecast at +6.0% YoY for now (MOF: 6.5-7.5% YoY), using MCO1.0 estimated impact on GDP and adjusted for the 6 states (not nationwide like before), we anticipate that 2 weeks of MCO2.0 could remove -0.9ppt off GDP growth. Nevertheless, from our understanding, MCO 2.0 may not be as stringent as more industries are allowed to operate under current guidelines. In addition, the expectation of a strong rebound from the rollout of the vaccine could also lift recovery. We reckon there is now a higher change of BNM reducing the OPR by another 25bps in 2021 (our current assumption assumes no change for the year). Nonetheless, for the next MPC meeting on 19-20 Jan, OPR is likely to stay pat until the extent and impact of renewed lockdown is known with greater clarity.

Sectorial impact. Most of the potentially impacted sectors under our coverage are still waiting for the guidelines on their operations during the MCO. Regardless, it would be negative for sectors related to the typical consumer basket: auto (closure of sales outlets), aviation (domestic air travel halted), consumer staples (decline in purchases by eateries but partially offset by higher home consumption), gaming (visitor decline for Genting Highlands and NFOs not allowed to open), healthcare (delay of non-critical treatments), media (lower adex), property (sales galleries closed) and REIT (impact on retail and hotels). As a broad based economic proxy, MCO2.0 is also negative for banks. However, there could be some positives for telco (higher demand for fixed broadband as people are stuck at home) and logistics (specifically for courier from a substitution to online shopping).

In addition, with more people “locked down” at home, this could prompt retailers to enter the market in a more aggressive manner. This phenomenon (strange as it may sound), was witnessed during the previous MCO where retail participation rose from 27.1% pre-MCO (Jan to mid-Mar) to 31.5% (mid-Mar to end-Apr). This, coupled with the reinstatement of RSS could bode well for overall ADV (on back of heightened volatility). Bursa (BUY, TP: RM11.45) is an apt proxy to ride on this play.

Delayed but not derailed. On a brighter note, the MOH announced that it has signed a deal to buy an additional 12.2m vaccine doses from Pfizer. Based on inked agreements, Malaysia has now locked in vaccine supplies for 57.9% of the population. While the implementation of MCO2.0 presents a setback, we reckon that the vaccine driven recovery thesis is intact, albeit delayed. Nonetheless, opposing news flow between vaccine rollouts and a still rising Covid count will bring about much volatility along this path, perhaps also exacerbated by fluid politics and RSS reintroduction.

Downside risk to KLCI target. With the onslaught on MCO2.0, there is now some downside risk to our KLCI earnings growth forecast of +20.8% for 2021 (2020f: - 17.4%). That said, our KLCI EPS forecast is already -19% lower than consensus. Our existing KLCI target of 1,780 is based on 19.3x PE (+1SD above 5Y mean) tagged to 2021 EPS. Lowering our ascribed “recovery premium” from +1SD to +0.5SD (18.5x PE) would reduce our end-2021 KLCI target to 1,710. Our KLCI target and top picks are under review pending clarity on the MCO’s “essentials list” and earnings adjustments at the individual stock level.

Source: Hong Leong Investment Bank Research - 12 Jan 2021