There’s no two ways about it, the impending stamp duty hike would drastically increase trading cost – up 45% at a trade size of RM1m. Larger traders (i.e. domestic institutions and foreigners) would be hit harder, impacting >60% of the local bourse’s demographics. HKX which announced their stamp duty raise earlier this year saw their monthly ADV fall -44% from Feb to Nov. The stamp duty hike would also make Bursa the most expensive exchange to trade within ASEAN-5. We cut FY21/22/23 earnings by -1%/-13%/-16% on back of lower ADV assumptions. TP is lowered from RM6.52 to RM5.95 but we upgrade our rating from Sell to HOLD as we reckon the negatives have been largely baked in.

Stamp duty headwind. To recap, the tabling of Budget 2022 on 29 Oct saw an increase in stamp duty for stocks from 0.1% to 0.15% and the RM200/contract cap abolished, both effective 1 Jan 2022. At the same time, SST (6%) on brokerage will be removed. There’s no two ways about it, this would imply a rather significant increase in trading cost. For illustration, assuming a trade size of RM1m and brokerage of 0.2%, total trading cost would increase from RM2.62k to RM3.8k or +45% (see Figure #1). The higher stamp duty which is further amplified by its cap abolishment, would only be marginally offset by brokerage SST removal – a token compensation at best, we feel.

Larger hit harder. When comparing pre and post-stamp duty restructuring, it’s not hard to see that the larger the trade, the harder the hit from higher trading cost (in percentage terms). This is because, larger traders (i.e. trade size >RM200k) currently benefit from the RM200/contract cap, putting a ceiling on stamp duty. Back to our previous example, trade sizes of ≤RM200k would only see trading cost rise by +11.1% vs +45% for RM1m, +50.8% for RM2m, +52.8% for RM3m, etc. – you get the picture. Intuitively, larger traders are likely to be domestic institutions and foreigners, while retailers are relatively smaller traders. For the 11M21 period, domestic institutions and foreigners made up 43.5% and 18.9% of traded value respectively (2020: 46.1% and 16.5%). This suggests that over 60% of the local bourse’s demographics could be hit by significantly higher trading cost.

The Hong Kong experience. To gauge the likely impact to ADV, we evaluate a rather similar experience in Hong Kong which earlier this year, announced a hike in stamp duty from 0.1% to 0.13% that came into effect on 1 Aug. We note that monthly ADV on HKX was on a general downtrend since the hike was announced on 24 Feb (see Figure #3) – falling from HKD233bn in Feb to HKD131.5bn by Nov, translating to a compounded monthly decline of -6.2%. While some reprieve in ADV was seen in July by +26.7% MoM (we’re guessing heightened trading before the hike), the downtrend resumed again from Aug to Oct, before stabilising in Nov (+1% MoM). It is worth noting that despite the decline, Oct-Nov ADV (weakest months YTD) are still above the pre-Covid figures of HKD106.9bn in 2018 and HKD87bn in 2019.

Most expensive in ASEAN. In response to the impending stamp duty increase, Bursa pointed out that it would be the most expensive market to trade in ASEAN. We ran a comparison of trading cost for the ASEAN-5 exchanges, assuming a USD1m trade size and homogeneous brokerage of 0.2%. Currently, Malaysia’s trading cost as a percentage of trade size is at 0.25%, at similar levels to Singapore (0.25%), Thailand (0.22%) and Philippines (0.23%) while Indonesia is the high est (0.33% assuming a sell trade). However, post stamp duty increase, Malaysia’s effective trading cost would become the highest in ASEAN-5 at 0.38%, by our estimates.

Implications to Bursa. The Hong Kong experience and comparison of trading cost within ASEAN-5 suggests that a contraction in ADV seems inevitable for Bursa once the higher stamp duty kicks in next year. Evidently, the quantum of the hike is also higher for Bursa (50bps vs 30bps for HKX) and is further exacerbated by the cap removal. Taking these into consideration, we now expect FY22 ADV to chalk in at RM2.48bn, representing a -30% YoY decline but still a tad above the pre-Covid highs of RM2.3-2.4bn in FY17-18. Our FY21 ADV assumption is relatively unchanged at RM3.54bn (-1% revision; 11M21: RM3.71bn).

Forecast. With the cut in ADV assumptions, FY21/22/23 earnings are reduced by -1%/-13%/-16% respectively. 

It’s in the price, upgrade to HOLD. Following the earnings cut our TP falls from RM6.52 to RM5.95 based on 20x PE (5Y mean) tagged to FY22 EPS. With share price falling -14.8% since news of the stamp duty hike (and our earlier Sell downgrade), we reckon the negatives have been largely baked in and thus, we upgrade our rating to HOLD. For sanity check, we note that the share price of Bursa averaged RM5.85 from FY17-18 when ADV was chalking RM2.3-2.4bn with earnings at RM223-224m – this is not too far off our TP of RM5.95 with FY22 ADV and earnings forecast of RM2.5bn and RM240m respectively. Any significant downside risk should be buffered by decent yields of 5.9%/4.2% for FY21/22.

Source: Hong Leong Investment Bank Research - 9 Dec 2021