thoughts &



【Budget 2019】 Sectors – the Biggest Winners & Losers

The most anticipated budget (Budget 2019) in Malaysian history was tabled and announced on 2nd November 2019 by the newly formed administration’s finance minister Mr. Lim Guan Eng. Budget 2019 is cautious and prudent with the interest of the Malaysian people in mind as it is expansionary in nature, aiming at facilitating the economy, enhancing the nation’s competitiveness through sound fiscal and monetary policies on top of ensuring better and efficient income distribution to cater for specific target groups. Despite being exposed to external risks such as trade tensions, monetary policy normalisation in the US, financial market volatility and geopolitical risks, the newly formed government is optimistic that the economic growth will remain at moderate pace.

We really would not know the true winners or losers in terms of companies in its respective industries as each companies’ business model and management strategies is individualistic. Budget 2019 does have its impacts on various sectors in the Malaysia economy which will be discussed further.

Global Outlook

China’s economy is expected to grow at moderate pace however maintain above 6%year-on-year. The growth momentum continues as external trade performance remains stable. However, the economy still surrounded with downside risks such as escalating trade tension, rising inflationary pressure and volatility in commodity prices. The International Monetary Fund (IMF) forecast China’s economic growth at 6.6% (2018) and 6.2% (2019) respectively.

Meanwhile, strong domestic economy is likely to keep the US on the rise at least in 2018 before experiencing a moderation in 2019. Downside risks to the US economy are rising inflationary pressure, business uncertainties and flip-flop trade policies. IMF anticipates US economy to grow by 2.9% in 2018 (2.2% in 2017) before moderating to 2.5% in 2019.

Economic Conditions at Home

Malaysia’s economy is showing resilience and continues to perform however at moderating pace. In the 1st half 2018, the economy expanded by 4.9%, less than 5.6% in the same period last year. Domestic demand remains the backbone of the economy. Private consumption grew 7.4% in the 1st half 2018 higher than 6.9% in 2017. Among others, low and stable inflation, supportive policy changes such as stabilized retail fuel prices and zero-rated GST, stable job market and healthy wage growth which preserve purchasing power are key fundamental factors to support domestic spending. Meanwhile, private investment is likely to moderate amid postponement and cancellation of infrastructure projects. In the 1st half 2018, private investment increased 3.3% compared to 10.2% in 2017.

We also view that the heightening trade war tension will also drag down domestic business activity especially in the manufacturing activity. Exports remain a significant contributor to the economic growth in the medium term despite its moderating growth. The real exports of goods & services grew by 2.9% in 1st half 2018 (9.6% in 2017).

Here are key sectors in Malaysian economy that will be significantly be impacted by Budget 2019:

1. Property Sector

a. The stamp duty on the transfer of property valued more than RM1mil will increase from 3% to 4% effective 1st Jan 2019. The increase in stamp duty rate expect to negatively impact property developers with exposure to properties above RM1mil such as Eco World Development, E&O and Sunway Berhad.

b. Increment of Real Property Gains Tax (RPGT) after the fifth year from 0% to 5% for citizens and those with Malaysian PR and 5% to 10% for companies, non-citizens and non-PR holders. The RPGT increment is a relatively negative to property developers as it may see weaker buying interest from buyers who purchase property for investment purpose. This will further discourage property transaction in secondary market given the current sluggish property market conditions.

c. Exemption of stamp duty on property transfer letter for first house purchase for houses priced between RM300,001 and RM1mil for the period of six months starting from Jan 1, 2019. Furthermore, property price discount of up to 10% will be offered to buyers for completed projects and new projects. The stamp duty exemption is a short-term surprise to property sector as it helps to address the property oversupply issue. This will impact property developers with properties selling at RM300k-RM1mil and high buyer profile of first-time home buyers such as Mah Sing Group. Nevertheless, property price discount of up to 10% is expected to narrow margin of developers slightly.

d. Introduction of peer-to-peer (P2P) financing framework as an alternative source of financing for first time home buyers. The crowdfunding will be headed by the private sector. These exchange platforms will be regulated by the Securities Commission. These platforms are expected to be rolled out in 1st quarter 2019. We are uncertain on the property crowdfunding pending further details on the peer-to-peer lending regulations and execution.

The crowdfunding may help to overcome issue of loan rejection of homebuyers which will may eventually positive to property developers. However, will this trigger a sub-prime bubble as borrowers with weak credibility are able to obtain financing given these applicants are usually rejected by the more prudent banks and conventional lenders.

Figure 1: Government is addressing property oversupply issues and encouraging affordable housing through various measures in Budget 2019.

2. Banking Sector

a. A fund will be set up by Bank Negara Malaysia for the purchase of affordable housing for up to RM150,000. Starting in 1 January 2019, the funds are available at AmBank, CIMB Bank, Maybank, RHB Bank and BSN. Low financing rates as low as 3.5%. This will reduce the amount of monthly instalment of financing by the borrower to own a home, and thus easier to get the funding. Available for two years or until the allocation is fully utilized.

Residential mortgages are the highest contributor for the banking system’s total loans book, 33% or RM548.6b as at end September 2018. We construe this measure more akin to an interest rate subsidy scheme, which will lower the affordability level for mortgages, hence may potentially increase approval rate.

However, this measure will impact a select group of home buyers, i.e the B40 group. This may limit the impact to loans growth. While it could possibly increase the risk to asset quality, we believe that the loans will be covered and housing being a necessity, borrowers will ensure performance of the loan. We believe the low financing rate will not have significant impact to net interest margin as it may be addressed via the fund.

Figure 2: Mortgage will be a key driver in loans growth

3. Glove Sector

a. The Government will continue to provide Rubber Production Incentive with an allocation of RM50.0m to protect the effects of the fall in rubber prices for smallholders. The smallholders would receive supplemental income from the fund when rubber prices fall below RM2.20/kg. This measure does not have any material impact on large rubber glove companies ie. Hartalega, Topglove and Kossan as the incentive is meant to protect the income of the smallholders.

b. Minimum wage increased to RM1,100 starting Jan 1, 2019, which is higher than the RM1,050 announced previously. The increase in minimum wage is still manageable for most manufacturers considering that their plants have considerably high level of automation such as Hartalega’s Next Generation Integrated Glove Manufacturing Complex (NGC) in Sepang.

Figure 3: Hartalega NGC is a highly automated glove manufacturing facility

The resilient global demand for gloves will continue to support the sales volume for the glove manufacturers. In addition, the stronger USD vs MYR rate will further boost revenue growth. However, we expect on the near-term prospects for the glove industry in view of the lower ASPs as a result of the: (i) lower raw materials price especially natural rubber latex and; (ii) increase in supply resulting from the resilient global demand is attracting gloves manufacturers to increase production. These will stabilize profit margins.

4. Gaming Sector

Genting Malaysia Berhad’s casino, hotel and leisure conglomerate with operations in Malaysia, UK, US and Bahamas but its main revenue comes from Genting Highlands with 10,500 rooms over 7 hotels feeds the country’s only casino. Genting Malaysia Berhad stock was hammered on 5th November 2018 closing at a low that has not seen past 3 years after the government hiked the duties and license fees such as high casinos duties by up to 35% from the 25% currently on gross gaming income. Higher gaming machines duties to 30% from 20% currently on gross collections and higher annual casino license fees with a hike of RM30mil to RM150mil. And that’s not all machine dealers license fees were also hiked to RM50,000 a year from RM10,000 currently.

Well, we have a final quarter of 2018 which is always exciting for casino operators and typically spill over to the new year. It supposed to be a particularly good period for Genting Malaysia as its integrated tourism program expansion story is expected to bear fruits. Genting’s non-gaming segment has also improved recently following the opening of Sky Avenue Mall early last year as well as its Genting Highland Premium Outlet last June. Plus, there’s also the opening of the brand new 20th Fox Century theme park which should happen on the first half of next year.

Figure 4: Genting Malaysia Integrated Tourism Program to bear fruit starting 2019

5. Consumer Sector

a. Bantuan Sara Hidup (BSH) cash handout to B40 group to aid low household income of RM2,000 to RM4,000. With regards to measures that will increase disposable income of the B40, we think that BSH coupled with the reduction in transportation and housing cost will have an immediate impact in stimulating consumer spending from the B40 category. We expect spending on consumer staples to be stable and hence, this benefits companies that have sizeable market share and diverse product range such as Nestlé (Malaysia) Berhad and F&N Holdings Berhad.

In addition, the current stiff competition among local consumer staples companies will minimise the increase in retail price. In addition, we also expect consumer discretionary spending to moderate in 2019 as tax holiday (from June to August 2018) has lifted retail trade in 2018. As such, we expect downward pressure on consumer retail spending post tax free period. This is expected to affect pure retail companies such as Padini Holdings Berhad as it will negatively affect its same store-sales growth.

Figure 5: Consumer retail spending expected to face some pressure post tax free period

b. According to the National Diabetes Institutes (NADI), Malaysia has the highest rate of diabetes in Asia and one of the highest in the world. We opine that the additional tax on drinks with high in sugar will discourage consumers to purchase sugary drinks and opt for healthier beverages. In-line with the awareness in sugar consumption, beverage manufacturers are also constantly introducing healthier range of beverages, while at the same time retaining their respective beverages trademark taste. Premised on this, we believe that for the beverage manufacturers which are still heavily reliant on sugar, the excise duty impact will be partially mitigated by the low refined sugar price.

We opined that Budget 2019 has the optimal mix of stimulus, incentives and safeguards needed to navigate what is expected to be another challenging year ahead. Being value investors at heart, we should always focus on the fundamentals and economic moat of businesses instead of short-term market fluctuations which usually is emotion based. It is wiser to analyse in depth on whether strong companies are able to weather through any changes in government policies. Investors must be cautious of certain impacts are just short lived and will eventually normalized in the long run.