Last Fri, the NSC decided to implement a “total lockdown” (Phase 1) for the entire nation from 1-14 June. In our view, the restrictions are roughly similar to MCO1.0 but with a bit more operating leeway and scope. We cut our 2021 GDP forecast from 5.0% to 4.6% to reflect the impact of this lockdown. Using MCO1.0 as a cue on the potential market reaction, the KLCI fell -4.8% over the next 3 days after that was announced. To reflect the near term perils brought about by this “on/off” economy, we cut our PE multiple from 17.3x (mean) to 16.5x (- 0.5SD), lowering our end-2021 KLCI target from 1,740 to 1,660.

NEWSBREAK

Last Fri, the Prime Minister’s Office (PMO) released a media statement stating that the National Security Council (NSC) has decided to implement a “total lockdown” (Phase 1) for the entire nation from 1-14 June. This entails a closure of all social and economic sectors, with the exception of those deemed “essentials” (totalling 17 categories; see Figure #1). For the manufacturing sector, 13 categories are allowed to operate with a 60% workforce and 5 with a 10% workforce (see # Figure 2). Should Phase 1 be successful in lowering daily cases, the government would then rollout Phase 2 (for a period of 4-weeks) which allows reopening of other sectors that do not involve crowds and complies with social distancing guidelines. This will subsequently be followed by Phase 3 (no timeframe stated) which is similar to the current MCO3.0 guidelines.

HLIB’s VIEW

Necessary pain. With Covid-19 cases chalking new highs for 5 consecutive days (25- 29 May) and surpassing the 9k mark, we feel that this total lockdown is a necessary pain that must be endured. Malaysia’s R-naught reading has stayed consistently above 1.0 since 8 Apr and averaged 1.12 since (latest on 28 May: 1.15), indicating that the virus’ infectivity remains high. MOH projects that daily cases could hit 13k by mid-June if the R-naught reading increases to 1.20. Nonetheless, we are hopeful that this total lockdown will be able to tame the pandemic, judging from the similar experience during MCO1.0 (mid-Mar to Apr 2020) where daily cases eased from over 200 at its peak to below 50 in 2 months.

Slightly more leeway compared to MCO1.0. Based on the “essentials list” and permitted manufacturers allowed to operate (see Figure #1&2), we feel that this total lockdown is roughly similar to MCO1.0 but with slightly more operating leeway and scope (e.g. 60% operating capacity vs 50% during MCO1.0).

Vaccine driven recovery thesis still on, but delayed. While this total lockdown presents a near term setback, we believe the vaccine led recovery thesis is still in motion, albeit delayed. Although inoculation in Malaysia is still at a nascent stage (7.3% of vaccinable population have received at least 1 dose as of 28 May), this is expected to gain significant traction in 2H21 as >70% of vaccine deliveries are back loaded to then. On a brighter note, average daily vaccines administered have rose from 22.2k in Mar to 25k in Apr to 47.8k in May (high of 107.3k on 27 May). Also, vaccine signups on MySejahtera is now at 48.6% of vaccinable population vs the herd immunity target of 80%. The recent full take up the 2 “opt-in” AZ vaccine schemes in a matter of 1-3 hours is an encouraging sign that anti-vax sentiment is weakening.

Lowering 2021 GDP to 4.6%. Following the release of better-than-expected 1Q21 GDP figures of -0.5% YoY compared to our initial forecast of -2.5%, we ought to have upgraded our 2021 GDP forecast to 6.2% YoY from 5.0%. Nevertheless, we chose not to due to the fluidity of pandemic developments and possibility of strict lockdown due to the high case count and increasingly strained hospital resources. We expect 2021 GDP to be cut by -1.6ppt for every 2 weeks of total lockdown, assuming the economy operates at 60% capacity. Hence, we downgrade our 2021 GDP forecast to 4.6%. We note that this forecast is subject to further revision should SOP requirements change or if duration is longer than 2 weeks. On the policy front, the government stated they will announce a new package to assist the rakyat. We also do not discount the possibility of BNM reducing the OPR by another -25bps should the lockdown prolong beyond a month. For now, we maintain our forecast for BNM to retain the OPR at 1.75% (next MPC meeting: 8 July).

Near term market shock. From a market perspective, implementation of a “total lockdown” was certainly a negative surprise. This is considering that a week prior to that, the NSC had decided against such a move and chose to tighten SOPs instead. Gauging the near term market impact is never an easy task but we can draw some cues from last year’s MCO1.0’s experience. When MCO1.0 was announced on the night of 16 Mar 2020 (implemented on 19 Mar), the KLCI fell by -4.8% over the next 3 days. Note that the KLCI had already plunged -19.4% that year prior to the announcement of MCO1.0.

Broadly negative. It goes without saying, that the potential sectorial impact would be mostly negative: auto (closure of showrooms), aviation (continued air travel restriction), banking (asset quality risk), brewers, consumer staples (both will see lower “out of home” consumption), construction (restricted to critical works, key public infra and building works that have onsite accommodation), gaming (closure of NFO outlets and RWG), media (weak adex), property (showroom closure and slower progress billings), retail (outlet closure) and REIT (malls may have to accord rental assistance and low occupancy for hotels). 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).

Stimulus incentives may be extended. The reimplementation of a total lockdown has sparked calls for another economic stimulus to ease the burden of the rakyat. In this regard, there is a possibility that the blanket loan moratorium could be re implemented; however our banking analyst doesn’t think this will be the case as banks prefer the current “opt in” model to help genuine troubled borrowers. There could also be greater incentive to extend programs such as the Home Ownership Campaign (“HOC”; ends 31 May) and SST exemption/ reduction for cars (ends 30 June). The former would be positive for property developers and the latter for autos.

Lowering KLCI target to 1,660. To reflect the near term perils bought about by this ongoing “on/off” economy, we cut our PE target from 17.3x (5Y mean) to 16.5x (- 0.5SD), consequently lowering our KLCI year-end target to 1,660 (from 1,740). We note that our 2021 KLCI EPS forecast is already -14.8% below consensus, which should help limit relative downside. Pending completion of the ongoing May results season, our top picks and 2021 KLCI earnings growth forecast (23.9%) is unchanged.

Source: Hong Leong Investment Bank Research - 31 May 2021