The 12MP was unveiled yesterday with a DE sum of RM400bn (+61% from 11MP). Its GDP growth target of 4.5-5.5% seems reasonable, within the pre Covid average of 4.9% (2016-2019). Fiscal consolidation remains on the cards, at -3.0% to -3.5% by 2025 (2020: -6.2%). Despite being a long term positive, 12MP is unlikely to bring immediate market excitement which hinges on the reopening momentum. Carbon neutrality appeared to be a noticeable theme (benefitting RE and EV). However, construction – a favourite in past MPs – unfortunately saw no new mega projects. Policy developments on Bumi share ownership and foreign labour cap at 15% (long term goal) are key areas to eyeball on. Maintain KLCI target at 1,620.

NEWSBREAK

The government yesterday unveiled the 12th Malaysian Plan (12MP) which spans from 2021-2025 with a headline development expenditure (DE) allocation of RM400bn (11MP: RM248.5bn). The 12MP is anchored on 3 key themes focusing on (i) resetting the economy, (ii) strengthening security, wellbeing and inclusivity as well as (iii) advancing sustainability. Some of the 12MP’s selected targets include:

• Annual GDP Growth of 4.5-5.5% (11MP Actual: 2.7%).
• Average monthly household income of RM10k by end-2025 (as of end 11MP: RM7.2k).
• GDP per capita gap between Klang Valley and Sabah to be reduced to a ratio of 1:2.5 and with Sarawak to 1:1.2 by 2025.
• Reducing greenhouse gas emissions by 45% of GDP by 2030.

ECONOMIC VIEW

Towards a sustainable nation. Malaysia’s economy recorded an average growth of 2.7% p.a. from 2016-2020, dragged down by Covid-19’s impact in 2020. From 2016- 2019, the economy recorded average growth of 4.9% p.a., still lower than the original 11MP’s target of 5.0-6.0%. Hence, the 12MP target of 4.5-5.5% p.a. is in line with previous performances. Based on the 4.5-5.5% growth rate, income per capita is expected to increase to USD14.8k in 2025, breaching the current high-income threshold of USD12.7k.

Stronger exchange rate assumption. GNI per capita is expected to increase to USD14.8k in 2025 versus USD10.1k in 2020. In local currency terms, it will be RM57.9k in 2025 versus RM42.5k in 2020. This implies the use of USD/MYR exchange rate of 3.90 for 2025 against 4.21 implied for 2020.

Significantly higher DE allocation of RM400bn to propel growth. To achieve the national mission during the 12MP, the government has indicated that it will allocate RM400bn for DE, a significant increase of RM150bn (+60%) from the 11MP. Out of the total allocation, we expect the economic sector to receive the lion’s share of the pie similar to the 11MP at 58%, followed by social (26%), security (11%) and general administration (5%). Priority will be given to Kedah, Kelantan, Perlis, Sabah, Sarawak and Terengganu, similar to the geographical priorities in 11MP. This will translate to an average of RM80bn/year for DE spending, higher than 2016-2020 average spending of RM49.7bn/year. This is inline with the revival of pubic investment target of +2.6% p.a. in 2021-2025 from -7.9% p.a. in 2016-2020. With 2021 mired in MCO restrictions limiting construction activity, DE spending is anticipated to accelerate in 2022 onwards. As of 1H21, DE spending accounted for RM28.4bn, 41.2% of original target of RM69bn. While the headline target of RM400bn is ambitious, the actual spending depends on the implementation and environment over the next 5 years. In

Figure #3, it can be gleaned that in the previous years, actual development expenditure spending came in short of the original target.

Handful of key projects. We understand that the key development projects identified under the economic and social sectors would include (i) digitalisation and technology infrastructure, (ii) utility and public transport (e.g. roads, rails, water and electricity supply, ECRL, Gemas double track, Project Central Spine Road), (iii) education training, (iv) public healthcare facilities and programmes (hospitals, hospital beds, ICU equipment), (v) affordable housing and (vi) green technology. Most new infrastructure projects are expected to be implemented via the Public Private Partnership (PPP) method. Government announced that a specific facilitation fund for infrastructure projects will be established under the PPP3.0 model which will not involve any financial commitment from the government and will adopt the request for proposal approach. This model is expected to be announced in mid-2022.

A more gradual pace of fiscal consolidation. Due to the pandemic that affected global as well as the domestic economy, Malaysia experienced an increase in fiscal deficit to -6.2% of GDP in 2020. Going forward, government has targeted a narrower fiscal deficit to -3.0 to -3.5% of GDP in 2025 (11MP: -0.6% of GDP). Government spending will continue to be channelled towards enhancing capacity building of the nation and to obtain a higher multiplier effect. The government could continue to trim its operating expenditure while broadening the revenue base further. Therefore, we opine that a narrower budget target by 2025 remains achievable.

MARKET VIEW

Long term positive but lacks near term market excitement. In our view, the targets and measures of the 12MP are broadly positive in the longer term but are unlikely to cause much immediate market excitement as this still hinges on the near term economic reopening momentum. At the onset, the 12MP’s targets seem realistic but we are cognisant there could be longer term implementation risk as manoeuvring the next half decade in an endemic won’t be a walk in the park. Some of the notable market/ sector implications are as follows:

• Foreign labour. Long term goal for national workforce to be limited to a maximum 15% foreign labour. Sectors that are currently foreign labour dependent are construction, EMS, gloves, plantations and to a lesser extent, tech.
• Bumi ownership. To introduce safety net for sustainable Bumiputera equity ownership, where Bumi companies or shares are only sold to other Bumi consortiums, companies or individuals. Holdings and disposals of ownership in Bumi companies to be regulated by related ministries and agencies.
• Construction. Headline DE sum of RM400bn is a 61% increase from 11MP. While positive, this typically translates to smaller to mid-sized jobs as mega projects tend to be funded “off-budget”. There was also an absence of widely anticipated mega projects like MRT3.
• Property. The focus here was mainly on increasing supply of affordable housing (500k homes target under 12MP) and access to financing for buyers. This push should be beneficial for developers focusing on the affordable housing space (e.g. Matrix and Lagenda).
• Carbon neutral. Malaysia aims to achieve carbon neutrality by 2050. This should see more investments into RE (players in this space are Cypark, Solarvest, Samaiden, Pekat and Ipmuda – all not rated) while conventional power generation players (Tenaga and Malakoff) have been re-strategizing to reduce investments in coal plants and re-invest into RE. PetGas should benefit from the potential higher gas utilisation (in replacement of other carbon fuel energy). There is also a push for more EV vehicles – OEMs already offering EV and HEV, include BMW (Sime), Mercedes (DRB), Porsche (Sime), Volvo (Sime & MBMR), Honda (DRB), Hyundai (Sime) and Nissan (TCM). Both Toyota (UMW) and Mazda (BAuto) are expected to start introducing HEV models in the near term.

Maintain KLCI target at 1,620. Our end-2021 KLCI target is maintained at 1,620 (15.7x PE on mid-CY22 EPS). We continue to see near term upside bias to the market on back of a rather fast tracked economic reopening, effectively putting the country in Phase 4 of the NRP by late-Oct/ early-Nov.

Source: Hong Leong Investment Bank Research - 28 Sept 2021