Post budget stock picks - Alexander Chia, Head of RHB Research

RHB Research Institute
2
October 2014
Post Budget Stock Picks
MALAYSIA
Ensuring fiscal sustainability

3
Strategy put forth to ensure a smooth transition to the 11th Malaysia Plan (11MP) and advance up the value chain.
Developing human capital & entrepreneurship.
Encouraging research and innovation.
Nurturing the growth of SMEs.
Promoting the growth of the services sector.
Indeed, a new approach known as the Malaysia National Development Strategy (MyNDs) is being formulated and will be a key basis to planning and preparation of programmes and projects under the 11MP.
Emphasis on using limited resources optimally.
Focus on high-impact projects and programmes at low cost.
Efficient and rapid implementation.
11MP will cover the final crucial leg in the country’s transformation into high-income nation by 2020.
2015 Budget: Strategy to move up value chain

4
A well-balanced 2015 Budget combining commitments to achieve greater fiscal prudence but mindful of the impact of the higher costs of living.
Greater fiscal prudence will be achieved with the introduction of GST in April 2015 that will broaden the tax and partially help to bring down the fiscal deficit to 3% of GDP.
The impact of higher costs of living will be cushioned with a proposed reduction in income tax by 1-3% from YA2015 and corporation income tax by 1% from YA2016, a MYR300 hike in BR1M handouts to MYR950, and a new petroleum subsidy mechanism in the pipeline
A multi-tiered fuel subsidy rationalisation scheme to cut fuel subsidy and contain operating expenditure.
Good progress in the implementation of the Economic Transformation Programme and building economic resilience.
The budget specifically mentioned several expressways coupled with MRT2 (MYR23bn) and LRT3 (MTR9bn), as well as the Pan-Borneo Highway (MYR27bn).
The property and sin sectors (brewery, tobacco and gaming) are spared this time, while pump-priming efforts will continue with a 15% increase in gross development expenditure to MYR48.5bn.
2015 Budget: Pro growth and ensuring fiscal sustainability

5
Federal Government’s financial position
2013
20141
20152
MYRbn
% change
MYRbn
% change
MYRbn
% change
Revenue
213.4
2.6
225.1
5.5
235.2
4.5
Total Expenditure
253.5
0.4
263.3
3.9
271.9
3.3
Operating Expenditure
211.3
2.8
221.1
4.7
223.4
1.1
Gross Development
Expenditure
42.2
-10.1
42.2
0.03
48.5
14.9
Less: Loan Recoveries
1.5
0.9
1.0
Net development
expenditure
40.7
-8.2
41.3
1.4
47.5
15.0
Overall Balance
-38.6
-37.3
-35.7
% to GDP
-3.9
-3.5
-3.0
Sources of financing:
Net domestic borrowing
39.5
37.6
-
Net external borrowing
-0.2
-0.4
-
Change in assets
-0.7
0.2
Debt to GDP %
54.7
54.1
53.1
1: Revised estimates by MOF
2: Budget forecasts, excluding 2015 tax measures
Note: Total may not add up due to rounding
Source: Economic Report 2014/2015, Ministry of Finance

6
Revenue boosted by GST MYR23bn
A sharp increase of 15% in development expenditure in 2015 (+1.4% estimated for 2014), which has a larger multiplier impact on the economy.
Housing, education, trade & industry and transportation.
Operating expenditure being contained at a marginal rise of 1.1% in 2015 (+4.7% estimated for 2014)
Rationalising fuel subsidies.
Federal Government financial position
Operating expenditure moderating but still at uncomfortable level
Operating expenditure will still take up 95% of government revenue in 2015 (98.2% in 2014).
Step in the right direction, but still at an uncomfortable high level.

7
… 2015 Budget’s Impacts

8
Consumer spending growth though slowing, remains resilient
GST will add to compliance cost and push up inflation.
Reeling from the impact of policies over the last 2 years.
Measures to rein in household debt (86.8% of GDP in 2013).
Measures to cool down property speculation.
Fuel subsidy rationalisation and fiscal consolidation.
Domestic demand growth is on a moderating trend
Source: Department of Statistics
A revitalisation of investment
-30
-20
-10
0
10
20
30
40
50
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015f
% y-o-y
Fixed capital
formation
Private investment

9
2012 responsible lending - Based on net income instead of gross
Promote a sound and sustainable household sector in July 2013
Personal loans – max 10 years
Property loans – max 35 years
No pre-approved personal loans
Measures to control household debt
Source: Bank Negara Malaysia
Rising household debt a concern
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
02
03
04
05
06
07
08
09
10
11
12
13
% of GDP
RMbn
(RHS
(LHS
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
09
10
11
12
13
J-A14
% change
Approved consumption loans

10
A sharp slowdown in housing loan approvals
RPGT to be raised to 30%
Foreigner can only buy property above RM1m
Display detailed sales prices
Ban developer interest bearing scheme
Property cooling measures in 2014 Budget – The effect will be felt more significantly in 2015
Growth of outstanding housing loan holding up
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
J10
M
S
J11
M
S
J12
M
S
J13
M
S
J14
M
% yoy
Limit on L-T-V ratio
Macro prudential
Macro prudential measures
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
08
09
10
11
12
13
J-A14
% change
Approved housing loans

11
Has moderated from 3.5% y-o-y in Fed-March 2014 to 3.2-3.3% in July-August.
Effect of the upward adjustments in administrative pricing started to taper off and a higher base effect set in.
The 9.5-10% increase in retail petrol and diesel prices with effect from 2 Oct could add about 0.7ppt to headline inflation in the immediate term (full-year impact: <0.2ppt), but this will likely be subdued by the higher base effect.
Headline inflation to spike up in 2015
Inflation accelerating
Full-year 2014 inflation likely to be around 3.4% (2.1% in 2013).
The 6% GST will add about 1.8ppts to inflation; 9-month impact for 2015: +1.4ppts. 2015 headline inflation is likely to be close to 4.2%

12
Expand scope of goods and services that are not subject to GST
Electricity consumption exempted from GST to be increased from first 200 to 300 units
No GST on retail sales of RON95, diesel and LPG
Restructure individual income tax for year of assessment 2015
Individual: reduced by 1-3%
Tax payers with family & income of MYR4,000/month: no tax liability
Maximum rate of chargeable income: increased from exceeding MYR100,000 to exceeding MYR400,000
Current maximum tax rate: 26% reduced to 24%, 24.5% & 25%
Increase tax reliefs for certain categories
Reduce income tax rates for Companies (2016), SMEs (2016) & Cooperatives (2015) by 1-2%.
Provide incentives & assistance to businesses on training, & purchase of equipment and software relating to GST
Mitigating the impact of GST

13
Strengthen food supply chain, establish 65 permanent farmers’ markets; 50 fish markets (2015 – 2017)
Provide intercity bus services to those residing outside of but working in KL with 30% discounted monthly fare
Financial assistance for poor families, children, senior citizens & OKU
Increase living allowance for fishermen MYR200-300 per month
Half month bonus to civil servants; MYR250 for pensioners
MYR100 to all primary and secondary students;
MYR250 1Malaysia Book Voucher
Bantuan Rakyat 1Malaysia (BR1M) Programme
Consumer spending to be cushioned by BR1M
Category
Monthly Income
BR1M Value
Household
Below MYR3,000
MYR950 (2014: MYR650)
MYR3,000 -MYR4000
MYR750 (2014: MYR450)
Individual
MYR2,000 and below
MYR350 (2014: MYR300)

14
PR1MA:
Construction of 80,000 units: MYR1.3bn
Rent-To-Own scheme
Extend 50% stamp duty exemption on instruments of transfer and loan agreements and increase purchase limit to MYR500,000 until 31 Dec. 2016
Improve Skim Rumah Pertamaku under Cagamas
Youth Housing Scheme
Monthly assistance MYR200 for 2 years to ease installments burden
50% stamp duty exemption on instruments of transfer and loan agreements
10% loan guarantee to get full financing
Housing in 2015 Budget to help lower income group

15
Construction/upgrading of infrastructure projects:
Sungai Besi – Ulu Klang Expressway (SUKE): MYR5.3bn
West Coast Expressway from Taiping to Banting: MYR5bn
Damansara – Shah Alam Highway (DASH): MYR4.2bn
Eastern Klang Valley Expressway (EKVE): MYR1.6bn
East Coast railway line: MYR15mn
MRT Line 2 from Selayang to Putrajaya (56 km): MYR23bn
LRT 3 linking Bandar Utama to Shah Alam & Klang: MYR9bn
Pengerang Integrated Petroleum Complex (PIPC): MYR69bn
Build Pan-Borneo Highway (MYR27bn): Sarawak (936 km), Sabah (727 km)
High-Speed Broadband (HSBB) - Build 1,000 new telecommunication towers & lay undersea cables: MYR2.7bn
Construction of Air Langat 2 Water Treatment Plant: MYR3bn
Sustainable Mobility Fund to develop the electric vehicle manufacturing industry: MYR70m.
More infrastructure spending to support private investment

16
Income tax exemption for industrial area management
100% exemption for less developed areas (5 years)
70% exemption for other areas (5 years)
Capital allowance to increase automation in labour-intensive industries
High labour-intensive industries: 200% on the first MYR4m expenditure (2015-2017)
Other industries: 200% on the first MYR2m expenditure (2015- 2020)
Introduce customised incentive package to increase MNCs global operation centres
Setting up Services Sector Guarantee Scheme: MYR5bn
Reintroducing Services Export Fund (SEF): MYR300m
Export duty exemption for CPO extended until December 2014
Regulatory price mechanisms for rubber smallholders (MYR100m allocation)
Some incentives for business in 2015 Budget

17
The Central Bank might have done with the rate hike for the year.
Policy shifted to focus on the strength of the economic growth.
Still a challenging global economic environment.
Inflation will spike up after the GST comes into effect from April 2015 with real interest rates turning more negative. No rush but another 25bps rate hike cannot be ruled out in 1Q2015.
Raising the OPR will provide some support to the ringgit and enable the Central Bank to manage a more orderly outflow of short-term capital at a time when domestic consumer spending will likely spike up ahead of the GST implementation.
No rush for monetary tightening

18
… External front fraught with challenges

19
Global ISM new orders and industrial production on a rising trend
Stall-speed recovery in the major world economies, although the broad picture still points to sustained, albeit uneven growth in the period ahead.
Supported by the uptrend in global ISM new orders and industrial production.
And the fact that ECB has responded with significant policy measures to revive growth, while Japan and China have room for policy easing.
Advanced economies in a “stop-and-go” recovery mode
Source: Bloomberg
Source: Bloomberg
Advanced economies in a “stop-and-go” recovery mode
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-8
-6
-4
-2
0
2
4
6
8
10
12
11
12
13
14
% annualised
US (LHS)
Japan (LHS)
Eurozone (RHS)
UK (RHS)
% annualised
-100
-80
-60
-40
-20
0
20
40
60
80
100
30
35
40
45
50
55
60
65
70
05
06
07
08
09
10
11
12
13
14
Index
%, y-o-y
ISM new orders (LHS)
Global Industrial Index (RHS)

20
US capital goods new orders and equipment investment bouncing back
On a steadier recovery path.
Shale gas revolution.
Sustained jobs creation.
The strength hinges on the US economy
Source: FHFA (Federal Housing Finance Agency)
Source: Bureau of Labour Statistics
US : Sustained manufacturing & services activities, but on a weakening bias
Housing price recovery.
Lack of a fiscal drag by itself is a big plus.
US housing price on recovery path
Sustained jobs creation critical for consumer spending and growth
Source: Bureau of Labour Statistics
Source: US’s Institute for Supply Management (ISM)
100
110
120
130
140
150
160
50,000
60,000
70,000
80,000
90,000
100,000
110,000
05
06
07
08
09
10
11
12
13
14
USD bn
USD bn
Capital goods (RHS)
Equipment investment (LHS)
-1000
-800
-600
-400
-200
0
200
400
600
05
06
07
08
09
10
11
12
13
14
m-o-m, thousand
12-mth MA
6-mth MA
(Private non-farm)
-10.0
-5.0
0.0
5.0
10.0
15.0
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
% y-o-y
(House price index)
48
53
58
63
12
13
14
Index
ISM
manufacturing
ISM Non-manufacturing

21
Eurozone’s inflation below target
Economy ground to a halt in the 2Q.
ECB has responded twice on 5 June and 4 Sept – to counter the downtrend of the economy.
Cutting interest rates.
Providing cheap funds to spur bank lending.
Buy asset-backed securities and covered bonds issued by Eurozone banks.
Draghinomics countering the Eurozone’s deflation threat
Source: European Central Bank
Source: European Central Bank
Economic recovery in the Eurozone stalled in the 2Q
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
2011
2012
2013
2014
% q-o-q
0.0
(Q2)
-1
0
1
2
3
4
5
05
06
07
08
09
10
11
12
13
14
% y-o-y
CPI
Core CPI

22
Japan’s manufacturing activities and retail sales bouncing back
Fear of consumption tax hike derailing the economic recovery.
Abenomics has brought down unemployment to just 3.8% and the GDP deflator has narrowed to close to zero.
Beginning to make headway in its “Third Arrow” in implementing the fundamental restructuring of the economy.
Abenomics’ structural reforms have just started
Source: Markit Economics
Source: Japan Statistics Bureau
Japan’s economy plunged into a sharp contraction after a sales tax hike
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
05
06
07
08
09
10
11
12
13
14
% annualised
-7.1%
(Q2)
-6
-4
-2
0
2
4
6
8
10
12
40
42
44
46
48
50
52
54
56
58
11
12
13
14
Index
% y-o-y
Retail sales
(RHS)
PMI
Manufacturing
(LHS)
PMI Services (LHS)

23
China industrial production, fixed asset investment and retail sales slowing down
Still struggling with its debt burden while undergoing transformation.
But there is a strong political will to steer its economy for a soft landing.
Selective policy easing.
Managing debt burden relatively well.
Tail risk could potentially emerge from the large commodity-dependent economies, but will unlikely degenerate into another major crisis, in our view.
China start-stop economy creates jitters, but growth will likely hold up
Source: China’s National Bureau of Statistics
Source: China Federationof Logistics & Purchasing (official PMI), Markit Economics (HSBC PMI)
China’s HSBC and official manufacturing PMIs still weak
47
48
49
50
51
52
53
54
55
2011
Jul
2012
Jul
2013
Jul
2014
Jul
Index
Official
PMI
HSBC
PMI
15
17
19
21
23
25
27
29
31
33
35
0
5
10
15
20
25
05
06
07
08
09
10
11
12
13
14
%, y-o-y
%, y-o-y
Retail sales (LHS)
Industrial production (LHS)
Fixed asset investment (RHS)

24
Reflected in divergent trends of PMI new orders and manufacturing activities of the major world economies.
Causing another cycle of disinflation in 3Q 2014, led by the absence of inflation in the Eurozone.
Advanced economies, nevertheless, will unlikely be able to transition from a recovery to an economic boom anytime soon
Divergent trends of manufacturing activity in the major world economies
Source: Markit Economics
44
46
48
50
52
54
56
58
60
2012
Jul
2013
Jul
2014
Jul
Index
US
Japan
China
Euro

25
Policies in the major world countries will remain very accommodative and supportive of equities.
The inability of the developed countries to transition from a recovery to an economic boom suggests that there is no risk of significant policy tightening that will cause the uptrend in global equities to reverse course anytime soon.
It is just that it is more susceptible to a short-term setback due to the occurrence of an unexpected event.
What is also worth highlighting, in our view, is that in a subdued growth environment, corporates do not have much pricing power and with weak demand, inflation will well behave.
The good news is:

26
Source: Dept. of Statistics
The bad news is:
Exports started to turn sluggish in July-Aug, partly ex-rate factor partly high base effect (MOF forecast 2.1% in 2015 vs 3.5% in 2014)
Dragged down by uneven global economic growth
Geopolitical tensions in Eastern Europe and the Middle East
Uncertainty over global interest rate normalisation and policy adjustments in advanced economies
Slower growth in emerging economies
Malaysia’s exports moderating in the 2H

27
200
250
300
350
400
450
500
550
600
650
1-Jan-08
1-Apr-08
1-Jul-08
1-Oct-08
1-Jan-09
1-Apr-09
1-Jul-09
1-Oct-09
1-Jan-10
1-Apr-10
1-Jul-10
1-Oct-10
1-Jan-11
1-Apr-11
1-Jul-11
1-Oct-11
1-Jan-12
1-Apr-12
1-Jul-12
1-Oct-12
1-Jan-13
1-Apr-13
1-Jul-13
1-Oct-13
1-Jan-14
1-Apr-14
1-Jul-14
Index
End of QE3 in the US.
Complicated by changing expectations of the timing and speed of US rate-hike cycle.
Strength of the major world economies.
Risk of a geopolitical shock.
When will the US raises interest rates?
QE 3 (Sep12 -31Oct14)
QE1
(Dec 08-Mar10)
QE2
(Nov10-Jun11)
MSCI Asia ex-Japan index corrected both after end of QE1 and QE2
Source: Bloomberg

28
Foreign holdings in equity remain high
High foreign ownership of MGS and money market instruments
Foreign ownership of equity trending down
Susceptible to US interest rate hike
High foreign holdings of financial assets in Malaysia
Source: Bursa Malaysia; * estimates
20
21
22
23
24
25
26
27
28
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
*Sep-14
%
High foreign holdings of MGS and
short-term money market papers

29
High foreign holdings of financial assets
Could weaken back to around MYR 3.30/USD or even exceeding that level temporarily in the short term.
When expectations of a US rate hike build up.
Will eventually strengthen back to around MYR 3.15/USD when the situation normalises, in our view.
Ringgit still susceptible to capital flow
* Up to August 2014; Source: Bank Negara Malaysia, Bursa Malaysia
Source: Bloomberg
MYR/USD: Recovered some lost ground before weakening back
20
21
22
23
24
25
26
27
0
10
20
30
40
50
60
70
80
90
2008
2009
2010
2011
2012
2013
2014*
%
%
MGS (LHS)
Money market (LHS)
Equity (RHS)
2.90
2.95
3.00
3.05
3.10
3.15
3.20
3.25
3.30
3.35
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
MYR/USD
3.2585

30
Low risk of it falling into a deficit over the next 1-2 years.
Current account surplus in the balance of payments bouncing back with export recovery
Current account surplus in the balance of payments
Source: Department of Statistics Malaysia
-25
-20
-15
-10
-5
0
5
10
15
20
25
0
5
10
15
20
25
30
35
40
45
05
06
07
08
09
10
11
12
13
14
% y-o-y
MYR bn
Exports
(RHS)
Current account
balance

31
Slower economic growth in the 2H and 2015 is to be expected
Real GDP growth accelerated to 6.3% y-oy in 1H2014, lifted by strengthening export growth.
Growth, though resilience, is envisaged to slow to 5.3% y-o-y in the 2H, but the full year growth of 5.8% is still likely to be the strongest in the SEA region.
2015 growth is projected to be weaker at 5.3%
GDP by expenditure components (at constant 2005 prices)
MOF
RHBRI
2012
2013
2014 (p)
2015 (f)
2014 (e)
2015 (f)
2016 (f)
(% growth in real terms)
Domestic demand1
10.6
7.4
6.4
6.2
6.4
5.8
6.1
Consumption
Public Consumption
5.0
6.3
2.1
3.8
4.0
3.1
3.9
Private Consumption
8.2
7.2
6.5
5.6
6.8
5.2
5.3
Fixed capital formation
19.2
8.5
8.3
8.5
6.9
8.2
8.5
Public Investment
14.6
2.2
2.6
4.7
0.4
3.4
4.0
Private Investment
22.8
13.1
12.0
10.7
11.2
11.0
11.0
Exports2
-1.8
0.6
3.5
2.1
4.5
4.8
4.4
Imports2
2.5
2.0
3.5
4.0
4.8
6.4
5.0
Gross Domestic Product
5.6
4.7
5.5-6.0
5.0-6.0
5.8
5.3
5.5
1Excluding stocks 2Goods & non-factor services
(p): Preliminary (f): Forecasts
Source: Economic Report 2014/2015, Ministry of Finance

32
A Fiscally Responsible Budget 2015
Well balanced Budget – Fiscal prudence but people centric
Commitment to fiscal reform – the Government has adhered to its pledges
New GST regime in April 2015
Limited impact on the market
Income tax and corporation tax rate reductions are not new and already announced last year
Initiatives to increase the BR1M handouts were largely expected
The property and sin sectors were unscathed
Infrastructure and construction projects were strongly featured

33
Commitment to fiscal reform
Government’s promise to maintain fiscal prudence has been kept
Fiscal deficit to be cut to 3% of GDP in 2015
GST regime to broaden the tax base will be implemented as scheduled in April 2015
Commitment to introduce a targeted petroleum subsidy mechanism in 2015 (no details as yet)
Minimal risk of a sovereign rating downgrade

34
A people centric Budget
GST exemption list was widened
Reduction in income tax rates by 1-3 ppts
Chargeable income subjected to the maximum rate will be increased from MYR100,000 to MYR400,000
 The current maximum tax rate at 26% will be reduced to 24%, 24.5% and 25% based on three tax bracket tiers
Increase in BR1M handouts (payable in three installments)
Various affordable housing initiatives
Half month bonus for civil servants

35
Key initiatives:
Gross development expenditure for 2015 at MYR48.5bn, up 15% from the MYR42.2bn estimated for 2014, with the biggest recipients being rural infrastructure, water projects (including the MYR3bn Langat 2 water treatment plant), affordable housing and property/facility maintenance.
Implementation of several highways: Pan-Borneo Highway (MYR27bn), Sg Besi – Ulu Klang Expressway (SUKE) (MYR5.3bn), West Coast Expressway (WCE) (MYR5bn), Damansara – Shah Alam Highway (DASH) (MYR4.2bn) and Eastern Klang Valley Expressway (EKVE) (MYR1.6bn).
Implementation of MRT Line 2 (Selayang – Putrajaya) (MYR23bn), LRT Line 3 (Bandar Utama – Shah Alam – Klang) (MYR9bn) and upgrading of the East Coast railway line (Gemas - Mentakab, Jerantut - Sungai Yu and Gua Musang – Tumpat) (MYR150m).
Housing Facilitation Fund for 2015 at MYR1.3bn, up 30% from MYR1bn for 2014.
While the budget specifically mentioned several major expressway and rail projects, they are not recipients of the allocation. The expressways (other than the Pan-Borneo Highway) will be carried out on a build-operate-transfer (BOT) basis, while funding for MRT Line 2 and LRT 3 will come from special purpose vehicles (SPVs).
Specifically, construction names that are likely to benefit from the budget are:
i.Gamuda – MRT Line 2 is reiterated
ii.Protasco – Higher Housing Facilitation Fund
iii.AZRB – Langat 2 and EKVE reiterated.
We believe the current strong momentum of activities in the sector will sustain. We are not perturbed by the construction resources to be disengaged from the MYR23bn Line 1 of the Klang Valley MRT project on its completion in mid-2015. We believe they will find their homes in the MYR25bn Line 2 of the Klang Valley MRT project (scheduled to start work in mid-2016), or a host of other mega projects that have already hit the ground, particularly the MYR89bn Refinery And Petrochemical Integrated Development (RAPID) project in Pengerang, Johor, the MYR5bn WCE and various public housing projects, particularly, the PR1MA backed by a MYR1.3bn facilitation fund under the budget.
Overweight. Our three top themes and their proxies are: i) the Klang Valley MRT - Gamuda, ii) piling - Pintaras, and iii) public housing – Protasco.
Construction
Overweight

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Consumer
Key takeaways from the Budget 2015:
increased cash assistance (Bantuan Rakyat 1Malaysia or BR1M)
individual income tax reduction of 1-3ppts for all taxpayers for year of assessment 2015. chargeable income subject to the max rate will be increased to >MYR400,000 from >MYR100,000
a half-month bonus for civil servants and special financial assistance of MYR250 for government pensioners
High labour-intensive industries (such as rubber products, plastics, wood, furniture and textiles) are entitled to an automation capital allowance of 200% on the first MYR4m expenditure incurred within the 2015-2017 period
On GST. Favourable to F&B players, as most of their products are now zero-rated, allowing them to claim their GST input costs. For retailers, such implementation will be relatively insignificant as GST imposed will be passed on to consumers. However, they may see lower sales volume as prices of their goods becomes higher due to the GST, causing consumers to turn cautious on spending
While the proposals mentioned may lessen the burden of middle- to lower-income households, we believe they may be insufficient to offset the inflationary pressure arising from the: i) rising costs of living, ii) rationalisation of government subsidies, and iii) upcoming implementation of the GST. We remain UNDERWEIGHT on the sector due to: i) lofty valuations with limited earnings growth, ii) compressed dividend yields, and iii) earnings risk from a reduction in spending.
At this juncture, we prefer consumer packaging companies, such as SKP Resources (SKP MK, BUY, MYR0.85), Scientex (SCI MK, BUY, FV: MYR8.64) and Thong Guan Industries (TGI MK, BUY, MYR2.60).
Underweight

37
Key incentives:
The Government has extended the 50% stamp duty exemption on instruments of transfer and loan agreements and increase the purchase limit from MYR400k to MYR500k. The stamp duty exemption is only eligible for Malaysian who has never owned a residential property, and will be given until 31 December 2016.
The Youth Housing Scheme offers a funding limit for a first home priced below MYR500k. This is for married youth aged 25-40 years with household income not more than MYR10k. The maximum loan period is 35 years. The Government will also provide a 10% loan guarantee to enable borrowers to obtain full financing. Borrowers can also withdraw from EPF Account 2 to top up their monthly instalment and other related costs.
Affordable housing players are the key winners. Tambun Indah, Matrix Concepts and Hua Yang are the key beneficiaries.
The higher ceiling price of MYR500k is now more realistic given that house price has appreciated over the last 2-3 years, and hence more first-time home buyers can enjoy the 50% stamp duty exemption..
Based on our calculations, buyers for MYR500k worth of properties will be able to save about MYR5,750 or 1.15%, which could be a meaningful amount for middle-income earners
Maintain Overweight. No news is good news to the property sector, as we already mentioned that we expect neither more drastic measures to be imposed nor relaxation of policies.
Overweight
Property

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The Government will introduce a new shariah-compliant investment product in 2015 called the Investment Account Platform (IAP). IAP will provide opportunities to investors in financing entrepreneurial activities and developing viable SMEs. At the same time, IAP will be a platform to attract institutional and individual investors including high net worth individuals to invest in the Islamic financial market. Initially, IAP will be implemented with a startup fund of MYR150m. The Government proposes individual investors be given income tax exemption on profits earned from qualifying investment for three consecutive years. Additionally, there will be further tax deduction for expenses incurred for issuance of sukuk.
Our view: The IA platform will be an innovative product - linked to the banks’ financing portfolio like project and entrepreneurial financing - that provides customers of Islamic banks opportunity to earn investment returns and tax incentives.
The IA (a liability item in the banks’ balance sheet) will also benefit the Islamic banks with i) zero capital charges, ii) exclusion from SRR.
However, we are NEUTRAL on BIMB Holdings (BIMB MK, NEUTRAL, TP MYR4.75) despite the fact that it could spur its fee income stream. We are still concerned over the uncertainties on the implementation and the customers’ reception and the industry has yet to update on the possibilities of off-balance sheet accounting. Given that IA is not a form of deposit, it may affect the Islamic bank’s ability to retain depositors (and hence its LDR) who may switch to IA for potential higher returns. Ultimately, we expect operational costs to rise in the near term.
Neutral
Banking

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Investment strategy: An opportunity to accumulate
The current market sell off is a temporary retracement
We believe there will not be a major crisis to derail the global economic recovery
No significant risk of significant monetary policy tightening
Central banks in US, EU, China and Japan have the ability to do more to overcome deflationary risks
Market valuations are not excessive
Liquidity levels are still high
Domestic earnings growth to accelerate in 2015
Stock picking will be important
Identify growth stocks
Mid caps have the growth potential
Large caps with good fundamentals – Buy on weakness

40
Earnings growth is poised to improve from 2.8% in FY2014 to 7.6% in 2015 and trend higher in FY2016 on account of the 1% pt. reduction in corporate income tax rate.
Largely from capacity expansion, execution of new orders, M&As, etc.
Stronger earnings growth for FY2015 fairly broad-based, from construction, telcos, banking, gaming, healthcare and shipping.
Outlook improving:
Note: Excludes FBM KLCI stocks not under RHBRI’s coverage, i.e.,HLFG, PPB, Pet Dagangan, RHB Cap and YTL.
*Exclude MAS’ earnings for 2012-2015.
EBITDA Growth (%) 11.2 2.3 6.4 7.9 11.0 2.4 7.7 8.7
Pre-Tax Earnings Growth (%) 13.8 (2.0) 7.6 6.2 12.4 (1.0) 6.9 5.5
Normalised Earnings Growth (%)* 10.7 2.8 3.9 8.3 9.7 3.4 5.0 11.5
Normalised EPS (sen)* 42.6 42.9 44.1 47.5 29.6 29.4 30.2 33.2
Normalised EPS Growth (%)* 7.9 0.8 2.8 7.6 0.8 (0.7) 2.7 10.1
Normalised EPS Growth ex-TNB (%)* 3.6 1.4 1.1 7.1 (3.0) (0.5) 1.6 10.0
Prospective PER (x)* 18.0 17.5 16.8 15.5 17.8 17.2 16.4 14.7
Price/EBITDA (x) 10.0 9.8 9.2 8.5 9.9 9.7 9.0 8.3
Price/Bk (x) 2.5 2.3 2.2 2.0 2.4 2.1 1.9 1.8
Price/NTA (x) 3.2 2.8 2.6 2.3 2.9 2.5 2.3 2.1
Net Interest Cover (x) 16.6 12.0 13.0 13.8 11.9 11.6 11.4 12.4
Net Gearing (%) 28.3 34.5 31.6 30.9 33.4 31.8 30.1 32.7
EV/EBITDA (x) 7.3 7.4 6.9 6.4 8.2 8.3 7.8 7.2
Div Yld (%) 2.7 3.2 3.3 3.4 3.0 3.1 3.2 3.4
ROE (%) 14.1 13.3 12.8 12.9 13.3 12.3 11.8 12.3
COMPOSITE INDEX 1,767.77 FBM KLCI RHBRI BASKET 16th October 2014 2012A 2013A 2014F 2015F 2012A 2013A 2014F 2015F

41
Sector weightings and valuations
(MYRbn) (%) FY13 FY14F FY15F FY13 FY14F FY15F
* Exclude MAS’ earnings for FY 13-15
Note : RHB universe of stocks.
1,261.6 100.0 (0.7) 2.7 10.1 17.2 16.4 14.7
Covered Stocks MktCap Weight EPS Growth(%) PER(x) Recommendation
Utilities 125.6 10.0 (8.8) 14.7 4.6 18.7 16.1 15.2 Overweight Property 50.1 4.0 7.6 (6.1) 13.0 13.1 13.2 11.5 Overweight Rubber Products 44.3 3.5 6.9 4.9 19.1 18.6 17.5 14.7 Overweight Construction 26.7 2.1 3.5 15.7 17.6 16.4 13.2 10.8 Overweight Non-Bank Financials 22.8 1.8 19.9 1.4 8.0 14.3 12.2 11.3 Overweight Basic Materials 18.5 1.5 19.1 24.9 27.3 20.7 16.4 12.8 Overweight Logistics 3.0 0.2 1.6 7.0 5.2 8.7 8.1 7.7 Overweight Banking 268.7 21.3 5.6 0.3 7.2 13.2 12.6 11.4 Neutral Telecommunications 181.0 14.4 4.9 (0.9) 8.1 23.2 23.4 21.6 Neutral Plantation 136.2 10.8 (20.7) (7.1) (2.6) 17.4 18.7 19.1 Neutral Oil & Gas 97.1 7.7 7.7 17.3 12.6 16.6 14.1 12.4 Neutral Gaming 64.9 5.1 (11.5) (3.3) 11.7 15.0 15.5 13.9 Neutral Shipping 30.6 2.4 62.7 8.5 28.9 18.5 17.0 13.2 Neutral Property-MREITs 29.8 2.4 16.0 1.8 6.0 18.8 18.3 16.9 Neutral Auto 24.4 1.9 (8.1) 13.9 18.3 15.1 13.2 11.2 Neutral Aviation 20.9 1.7 (43.4) (90.8) 859.2 21.4 230.4 24.0 Neutral Media 20.2 1.6 1.8 5.50 14.24 25.1 23.7 20.7 Neutral Healthcare 13.3 1.1 21.0 21.4 45.0 52.3 41.5 28.0 Neutral Ports 12.2 1.0 13.9 11.2 4.9 20.5 18.4 17.6 Neutral Technology 5.1 0.4 19.2 74.2 15.4 30.3 13.3 10.0 Neutral Timber 3.8 0.3 (52.8) 56.4 26.0 27.2 17.4 13.8 Neutral Consumer 62.2 4.9 (1.1) 2.0 7.2 20.5 20.0 18.6 Underweight

42
Top picks
Stocks FYE Price Target Mkt Cap EPS Eps Growth PER P/BV P/CF NDY
(16/10/14) Price (sen) (%) (x) (x) (x) (%)
(MYR/s) (MYR/s) (MYRm) 14F 15F 14F 15F 14F 15F 15F 15F 15F
AMMB^ Mar 6.59 8.00 19,863 63.8 68.3 7.9 7.0 10.3 9.6 1.3 n.a. 4.3
SapuraKencana^ Jan 3.16 5.33 18,935 23.1 27.8 24.3 20.1 13.7 11.4 1.4 40.1 0.0
Bumi Armada Dec 1.37 2.24 4,163 14.5 15.1 (1.3) 4.0 9.8 9.4 0.6 2.8 2.7
Dialog Jun 1.48 2.25 8,430 4.2 5.6 16.9 32.3 37.3 28.2 5.1 33.7 1.4
E&O Mar 2.49 3.60 2,948 11.3 15.2 53.9 34.6 22.9 17.0 1.7 13.0 1.4
IOIPG Jun 2.47 3.38 8,000 13.1 15.4 (38.7) 17.0 18.8 16.1 0.7 11.1 3.2
CMS Dec 3.78 5.00 3,890 20.0 25.3 15.0 26.3 18.9 15.0 2.0 12.5 2.0
Press Metal Dec 4.90 8.30 2,592 49.6 68.4 +>100.0 37.7 9.9 7.2 1.3 3.6 2.5
Dayang Dec 2.75 4.80 2,269 25.7 30.5 76.2 18.7 10.7 9.0 2.4 10.3 5.6
Coastal Contracts Dec 3.50 5.90 2,071 32.6 37.3 32.2 14.7 10.8 9.4 1.6 5.5 2.7
Matrix Dec 2.70 3.93 1,262 36.2 40.1 (28.7) 10.7 7.6 6.9 1.7 8.6 5.8
Inari Amerton Jun 2.12 3.82 1,094 19.5 20.0 +>100.0 2.6 10.9 10.6 3.8 7.5 3.8
Tambun Indah Dec 2.06 3.00 839 24.1 28.0 46.2 16.1 8.5 7.4 1.9 10.4 5.0
Naim Dec 2.84 5.06 720 44.0 50.6 +>100.0 14.9 6.5 5.7 0.6 10.6 2.8
Pintaras Jaya Jun 3.85 4.92 616 33.1 36.2 19.7 9.5 11.6 10.6 1.8 10.5 3.9
SKP Resources^ Mar 0.58 0.85 522 5.3 8.3 59.3 56.6 10.9 7.0 1.8 1.0 7.2
^ FY14-15 valuations refer to those of FY15-16
Source: RHB Estimates

43
High Yield Stocks Table
^ FY14-15 valuations refer to those of FY15-16 Source: RHB Estimates
Parkson 2.43 7.5 3.8 (40.6) 43.2 18.7 13.0 1.0 7.5
Quill Capita 1.14 7.5 7.5 9.3 8.6 11.8 10.9 0.8 7.3
Protasco 1.42 7.0 7.0 39.9 33.3 8.3 6.2 1.1 19.0
MCIL^ 0.86 7.0 7.2 (7.1) 4.1 10.1 9.7 2.1 21.9
Hektar REIT 1.50 7.0 7.2 (0.5) 5.5 13.1 12.4 1.0 7.8
Magnum Bhd 2.80 6.7 6.8 2.7 1.3 11.9 11.8 1.5 13.2
CapitaMalls 1.39 6.6 6.9 3.4 5.6 16.0 15.2 1.1 7.3
Paramount 1.43 6.3 6.3 7.4 (2.2) 8.4 8.6 0.7 8.2
UOA Dev 2.10 6.2 6.7 (14.4) 4.0 8.8 8.5 1.0 12.5
B-Toto 3.38 6.2 6.3 5.5 2.1 13.8 13.5 6.4 48.8
Maxis 6.50 6.2 4.9 0.2 5.2 23.3 22.1 10.3 45.8
Media Prima 1.94 6.2 6.9 (10.4) 13.3 10.9 9.6 1.2 17.2
Glomac^ 1.05 6.1 6.1 1.9 2.4 6.9 6.8 0.7 11.3
Hua Yang 2.04 6.0 6.7 (2.0) 11.6 5.8 5.2 1.0 21.5
Axis REIT 3.56 5.9 5.6 1.3 9.0 18.5 17.0 1.4 8.3
Padini 1.77 5.6 6.1 6.5 8.1 13.2 12.2 2.9 24.5
IGB REIT 1.25 5.6 5.9 4.7 3.4 19.6 19.0 1.2 6.3
Maybank 9.45 5.5 5.9 (1.0) 7.9 12.5 11.6 1.5 13.9
Carlsberg 10.70 5.5 5.7 (1.9) 3.8 18.3 17.6 12.1 68.6
Matrix 2.70 5.4 5.9 (28.7) 10.7 7.5 6.7 1.6 26.0
Pavilion REIT 1.44 5.4 5.6 4.0 4.6 19.4 18.6 1.2 6.6
Sunway REIT 1.50 5.2 5.6 (4.7) 10.2 19.7 17.9 1.2 6.7
VS Industry 2.29 5.2 5.8 +>100 12.0 8.0 7.1 0.8 11.5
Thong Guan 1.83 5.0 5.9 21.0 18.5 5.6 4.8 1.8 12.3
KLCCSS 6.46 5.0 5.2 2.5 5.7 18.2 17.2 1.0 5.7
Stocks Price NDY Eps Growth PER P/BV ROE (16/10/14) (%) (%) (x) (x) (x) (MYR/s) 14F 15F 14F 15F 14F 15F 15F 15F

44
Top 30 Laggard stocks on RHB Buy List
Source: RHB Estimates
Price Target Price % Chg in price (MYR/s) (MYR/s) 1Mth 3 Mth 6 Mth 12 Mth
Inari Amerton 2.12 3.82 (35.0) (35.0) (18.2) 69.5
Press Metal 4.90 8.30 (30.9) 10.1 50.8 108.5
Rev Asia 0.92 1.68 (30.3) (13.2) 10.2 38.3
OCK 1.24 1.65 (30.0) (17.9) (13.8) 54.0
Coastal Contract 3.50 5.90 (29.7) (31.4) (29.3) 19.0
Unisem 1.20 2.16 (29.0) (30.6) 1.7 37.9
Bumi Armada 1.37 2.24 (25.9) (31.8) (43.9) (43.2)
Naim 2.84 5.06 (24.9) (31.4) (30.4) (22.8)
Sapura Kencana 3.16 5.33 (24.8) (28.7) (25.8) (17.7)
Maybulk 1.33 2.00 (21.8) (30.0) (37.3) (27.7)
Dayang 2.75 4.80 (20.3) (26.1) (25.7) (18.3)
TASCO 2.73 3.90 (20.2) 4.2 7.5 36.5
Thong Guan 1.83 2.60 (18.7) (25.3) (15.7) 15.8
Hiap Teck 0.64 1.00 (17.4) (18.5) (16.3) 1.6
Tune Insurance 1.90 3.00 (17.0) (15.2) (14.0) (4.5)
Protasco 1.42 2.43 (17.0) (29.7) (26.0) 7.6
Matrix 2.70 3.93 (16.9) (8.2) (3.1) 40.5
Datasonic 1.52 2.50 (16.5) (21.2) 6.7 215.4
MRCB 1.43 2.05 (15.9) (14.9) (12.3) (3.4)
Dialog 1.48 2.25 (15.4) (21.7) (16.7) 5.8
Tambun Indah 2.06 3.00 (15.2) (18.6) 2.0 43.1
CMS 3.78 5.00 (15.1) (6.4) 13.4 118.1
MAHB 6.50 8.51 (14.7) (23.1) (19.6) (19.6)
Wah Seong 1.55 2.40 (14.4) (18.0) (16.7) (7.7)
Pintaras 3.85 4.92 (14.3) (11.5) 5.8 27.3
Perdana Petroleum 1.53 2.20 (14.0) (17.3) (20.7) 11.0
Hua Yang 2.04 2.74 (13.9) (14.3) 5.2 (10.9)
OldTown 1.65 2.15 (13.2) (25.7) (17.1) (15.1)
Kimlun 1.31 1.68 (12.7) (19.6) (22.0) (23.5)
DRB-Hicom 2.00 3.20 (12.7) (12.7) (21.9) (20.3)

45
IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report.
This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.
RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction.
“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.
This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.
The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
The recommendation framework for stocks and sectors are as follows : -
Stock Ratings
Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage
Industry/Sector Ratings
Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions of third parties in this respect.

46
Thank You

47
Key Contact Information
A member of the RHB Banking Group
RHB Research Institute Sdn Bhd
Lim Chee Sing
DL : +603 9285 9693
Email : cslim@rhbgroup.com
Alexander Chia
DL : +603 92077621
Email : alexander.chia@rhbgroup.com
Peck Boon Soon
DL : +603 9280 2163
Email : bspeck@rhbgroup.com

Post budget stock picks - Alexander Chia, Head of RHB Research

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