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Economic Research, Strategic Management Thursday, June 29 2017 / 5 Syawal 1438H

Economic review in 1H2017 The uncertainties on policy shift in the US and the ongoing Brexit negotiation in the UK are yet to have material effect to the global growth. In fact, the economy appears to have accelerating in the first three months of this year (see Table 1). Meanwhile, the US Federal Reserve has maintained its course to remove the excessive monetary policy accommodation. In its latest move on 14 June, the US Federal Open Market Committee (FOMC) decided to raise the Federal Fund Rate (FFR) by 25 basis points to between 1.00% and 1.25%. Meanwhile, the UK economy saw their inflation rate rising above the 2.0% threshold for four consecutive months since February. As of May, inflation rates stand at 2.9% y-o-y from 2.7% in the preceding month. Despite that, the Bank of England (BOE) remains mindful on their possible next step as conventional wisdom would suggest that the next move would be a rate hike. In their statement on 14 June, the BOE indicates that the imported inflation rate has been instrumental in driving up price level while wage growth continued to moderate although the unemployment rate has declined to 4.6%, the lowest in 40 years. Similarly, the Bank of Japan (BOJ) remains committed to adhere and implement its Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve control in order to achieve the 2% inflation target. Thus far, the headline inflation rate was marginally higher at 0.4% y-o-y in April from 0.2% in the preceding month. Table 1: Regional GDP growth y-o-y%

Source: Bloomberg

The main take away from this is that the global central banks are expected to be supportive to growth and therefore, it will set the stage for improving economy going forward. Signals from the equity markets as well as business sentiment seems to be in agreement with such statement.

1Q 2016 2Q 2016 3Q 2016 4Q 2016 1Q 2017

US 1.6 1.3 1.7 2.0 2.0

UK 1.6 1.7 2.0 1.9 2.0

Eurozone 1.7 1.6 1.8 1.8 1.9

Japan 0.5 0.9 1.1 1.6 1.3

China 6.7 6.7 6.7 6.8 6.9

India 9.1 7.9 7.5 7.0 6.1

Thailand 3.1 3.6 3.2 3.0 3.3

Philippines 6.9 7.1 7.1 6.6 6.4

South Korea 2.9 3.4 2.6 2.4 2.9

Singapore 1.9 1.9 1.2 2.9 2.7

Indonesia 4.9 5.2 5.0 4.9 5.0

Malaysia 4.2 4.0 4.3 4.5 5.6

Dr. Mohd Afzanizam Abdul Rashid | Chief Economist | 03-2088 8075 | [email protected]

Economic Outlook for 2H2017 - Cautiously Optimistic



The MSCI World Index has gained 9.6% on year-to-date basis while MSCI Asia Pacific Excluding Japan Index has shot up by 17.7%. While Global Purchasing Managers Index (PMI) for manufacturing sector remained above 50 points during the year, a sign that businesses are generally feeling optimistic. Chart 2: Global equity indices

Source: Bloomberg

Chart 3: Global Purchasing Managers Index (PMI) for manufacturing sector

Source: Bloomberg

In Malaysia, the economy has demonstrated resiliencies amidst domestic challenges. The 5.6% y-o-y GDP growth in the 1Q2017 was clearly beyond expectation. In particular, spending among the consumers has accelerated to 6.6% from 6.1%. Such performance came despite inflation rate at 4.2% in the first five months of the year. Meanwhile, the external sector exhibited commendable performance with export growth averaged at 21.2% in the first four months of 2017. This was propelled by exports of key products such as Electrical & Electronics (E&E) which grew by 19.4% in 4M2017 from 3.5% in the same period last year. Commodities related exports such as Palm Oil, Liquefied Natural Gas (LNG) and Crude Oil were also posted a strong growth of 33.9% (4M2016: 6.9%), 16.6% (4M2016: -30.8%) and 59.6% (4M2016: -21.8%).

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MSCI World Index (LHS)

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Similarly, the Industrial Production Index (IPI) recorded an average growth of 4.3% between January and April 2017 led by 5.9% growth in the manufacturing output. In view of this, the unemployment rate was slightly lower to 3.4% in April and March after rising to 3.5% (November 2016: 3.4%) between December 2016 and February 2017. Foreign investors appeared to be more receptive with inflows from abroad showed further improvement especially flows in the equity markets. Between January and May 2017, net inflows into the equity market rose to RM10.5 billion. As a result, the FBMKLCI has reached its highest level for the year at 1,792.35 points on 14 June. Similarly, MYR/USD appreciated to as high as RM4.258 on the same day. In the fixed income market, foreign flows have turned around to RM6.8 billion in April and RM10.1 billion in May after seeing an exodus of funds totaling RM62.7 billion between November 2016 and March 2017. Consequently, the 3-year MGS yield fell from as high as 3.54% in early April to 3.30% on 28 June. Likewise the 10-year MGS dropped 32 basis points to 3.89% on year-to-date basis. All in all, this has resulted BNM’s international reserve assets rose to USD98.7 billion as of 15 June from USD94.6 billion at the end of last year. Chart 4: Net equity fund flows in RM million (Foreign institutional)

Source: CEIC

Chart 5: Net fund flows in RM million (Foreign) – fixed income market

Source: CEIC

15,226

2,236

13,817

2,995

(6,611)

(19,380)

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(20,000)

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(3,385)

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(8,392)

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(19,893)

(5,355)(3,896)

(7,287)

(26,225)

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(30,000)

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Chart 5: BNM international reserve assets (USD billion)

Source: Bloomberg

Economic outlook 2017 We have revised our 2017 GDP growth forecast from 4.4% to 4.9%. This was largely on account of the expected improvement in the external sector as well as higher investment activities from both public and private sector. Despite that, the growth momentum would experience some form of moderation in the 2H2017. The appreciation of ringgit as well as economic uncertainties is likely to keep businesses to be mindful with their production activities while consumers would remain cautious in their spending plan. Additionally, the appreciation of ringgit could also act as a dampener to export-oriented industries as product prices become expensive from importers point of view. The following are the key reasons why we think the economy would do better in the 2H2017:

US FFR – the gradual increase would ensure a smooth transition from easy money

condition to slightly tight liquidity. Additionally, the Fed is in no hurry to jack up the rates

as inflation is still well below than the 2% target. This will allow the global economy to

register a decent growth and therefore, would stimulate sustained demand from the US.

Other major central banks will remain at status quo – although there are signs that

monetary policy accommodation needs to be removed, we believe that the BOE, ECB

and BOJ will likely maintain their existing policy supports such as asset purchases and

negative interest rates. Again, lower inflation rate is the key reason why they are

hesitant to increase the policy rates.

Crude oil prices - this factor could work both ways. Lower crude oil prices would mean

inflation should be under control. But oil-exporting countries would suffer given that it

may have significant implication to the Oil & Gas industry and government’s revenue. In

the case of Malaysia, the government has managed to diversify its revenue stream and

the introduction of Goods and Services Tax (GST) has managed to provide the significant

buffer to the loss of revenue from oil related activities. The only concern that we have is

how it may affect the Oil & Gas industry considering there is massive excess capacity.

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According to Petronas, there are eight fabrication yards in Malaysia, but the requirement

for Petronas is only three at the current juncture. Additionally, there are 3,700 Oil & Gas

players registered with Petronas whereby Norway, which has similar-sized oil deposit as

Malaysia, has just around 700 players. We have revised our average Brent crude prices

for 2017 from USD50 per barrel to USD48 per barrel in view of the ongoing additional

supply coming from the Shale Oil in the US. At the current juncture, the rig counts in the

US continue to rise from 525 at the end of December 2016 to 758 as of 23 June.

Despite that, event risks such as conflict in the Gulf Cooperation Council (GCC), general election in Germany, US administration economic policies (infra spending & protectionism) will intermittently affect market sentiments and the general economy. As for Malaysia, issues surrounding rising cost of living, house ownership and higher unemployment among graduates will be the key factor for policy consideration. Nonetheless, the government appears to be committed to adhere its fiscal consolidation program. Therefore, we should expect public spending to be kept at minimum level in order to reduce the budget gap which is expected to reach 3.0% of GDP in 2017 from 3.1% in 2016. The latest announcement by S&P on 22 June showed that the rating agencies continue to reaffirm Malaysia’s sovereign rating at A- with stable outlook. The rating agencies believed that Malaysia will remain to be prudent in its finances. Nevertheless, it raises concern on political challenges in relation to the corruption allegation of 1MDB and the looming general election, citing that it may have implication to the cost of refinancing the external liabilities and foreign holdings in government debts. While the S&P seems perturbed, the economic resilience to terms-of-trade shock in late 2014 and ongoing move to cut subsidies as well as the introduction of the new tax are the main comfort to the prevailing rating.

Table 1: Bank Islam macroeconomic forecast

Source: Strategic Management, Bank Islam

Macro variable 2015 (A) 2016(A) 2017(F)

GDP 5.0 4.2 4.9

CPI 2.1 2.1 3.9

OPR 3.25 3.00 3.00

MYR/USD Mean: RM3.91 Mean: RM4.14 2H 2017: RM4.10 - RM4.20

CPO (RM per MT) Mean: 2166 Mean: 2652 Mean: 2800

Brent (USD per barrel) Mean: 54 Mean: 45 Mean: 48



Sectoral Outlook 2017 Healthcare – Positive Major players are taking a cautious stance in expanding their capacity in view of the prevailing economic condition. Major players such as KPJ Healthcare Berhad have seen the number of hospital in operations maintained at 25 between 2014 and 2016. Similarly, the number of IHH Healthcare Berhad (Malaysia) hospitals was kept at 14 for 2015 and 2016. In addition, rising cost of living experienced by most Malaysians may have deterred households to seek treatment in the private hospitals. During 2016, the total number of outpatients for KPJ Hospital fell to 2.46 million people from 2.48 million people in the preceding year. Meanwhile, the number of inpatients was rather flat at 279,794 people in 2016 compared to 279,419 people in the previous year. However, other players such as IHH Healthcare Berhad has recorded higher number of inpatients in 2016 to 193,113 people from 183,265 in 2015 with Average Revenue Per Inpatients Admission stands at RM6,185 in the 1Q2017 (see Chart 7 & 8). This perhaps reflects different client segment as IHH is deemed to command higher premium relative to KPJ. The latest financial results indicates positive revenue growth in the 1Q2017 with both KPJ and IHH reported 6.7% and 8.5% growth to RM793.9 million and RM2.68 billion. Major healthcare providers are of the view that revenue from the matured and new hospitals will continue to improve as these hospitals would complete its gestation period. As such, the positive rating is retained premised on demographic profile (aging population), the proliferation of medical insurance and healthcare tourism which would translate into stable demand for healthcare services. Chart 6: Number of hospitals – KPJ Healthcare Berhad

Source: KPJ Annual Report

20 20

21

23

25 25 25

15

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19

21

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27

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Chart 5: Number of outpatients – KPJ Healthcare Berhad

Source: KPJ Annual Report

Chart 7: Number of hospitals – IHH Healthcare Berhad

Source: IHH Healthcare Berhad Annual Report

Chart 8: Average revenue per inpatients admission (RM) – IHH Healthcare Berhad

Source: IHH Healthcare Berhad Annual & Quarterly Report

1,978,669

2,231,992

2,388,205

2,444,308 2,475,3712,534,052

2,476,7962,464,704

1,500,000

1,700,000

1,900,000

2,100,000

2,300,000

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2,700,000

Y09 Y10 Y11 Y12 Y13 Y14 Y15 Y16

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6,500

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Manufacturing: Rubber gloves – positive Raw material prices such as Standard Malaysian Rubber 20 (SMR20) were generally higher in the first two months of 2017 which could potentially hurt profit margins. For instance, Top Glove Corporation Berhad financial result for 2QFY17 ending February saw its net profit declined by 20.7% y-o-y to RM83 million. Similarly, Kossan Rubber Industries Bhd posted 9.3% lower in net profit to RM46.5 million for 1QFY17 ending March. Nonetheless, efficiencies gain at Hartalega Holdings Berhad was quite apparent as the company managed to record 44.8% y-o-y higher net profit to RM89.4 million for 4QFY17 ending March. Higher sales volume was key to Hartalega’s performance in the 4QFY17 owing to strong production capacity following the commissioning of new production plant. While threats of higher input cost remains, the industry is seen to have the pricing power. This is especially true when Rubber Glove Manufacturers Association (MARGMA) has announced that both latex and nitrile glove Average Selling Prices (ASP) will be raised as a means to mitigate the rise in raw material cost. The upward adjustment in ASP will varies among the manufacturers. In general, industry players have indicated that 10% to 15% increases in ASP were enacted since December 2016. The recent trend showed that rubber prices have corrected quite substantially. As of 28 June, SMR 20 prices closed at RM601.5 per kg from RM 627 per kg at the end of May. This should translate into better earnings in the immediate terms as input costs have decline. Already, Top Glove’s 3QFY17 financial results ending May showed 24.5% y-o-y higher in net profits to RM77.8 million which mostly attributed by higher ASP. Therefore, the positive rating will be maintained in view of industries ability to pass on the additional cost to the clients as well as its close association with the healthcare sector. The expansion in production capacity would also ensure that the industry players will be able to meet demand although in the intermittent period could results in oversupply condition that could affect ASP. Chart 9: Rubber price SMR 20 – RM per KG

Source: Bloomberg

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Chart 10: Projected effective capacity at year’s end

Source: Affin Hwang

Manufacturing – Semiconductor (Positive) We have upgraded the sector from Neutral to Positive in view of the commendable performance of export growth in the semiconductor related product. For the first four months of 2017, the export growth for Electronics Integrated Circuits rose by an average of 25.7% compared to 1.7% contraction in the same period last year. Similarly, export growth for Thermionic Valves & Tubes, Photocells etc. stands at 21.5% in the first four months of 2017 from 1.2% last year. Such performance was very much in tandem with the financial results of the key players. For instance, Inari Amerton Berhad recorded 139.1% y-o-y increases in net profit to RM51.2 million for the 3QFY17 ending March. Similarly, Globetronics Technology Berhad and Malaysian Pacific Industries net profit grew by 26.9% and 10.8% to RM4.7 million (1QFY17 ending March) and RM43.2 million (3QFY17 ending March). The announcement of new product launches by the major players in the smartphone segment is expected to benefit the local semiconductor companies. In addition, further integration of semiconductor products into other sectors such as automotive and medical devices would sustain the demand for the industry. The World Semiconductor Trade Statistics (WSTS) has revised up the 2017 Global Semiconductor Sales (GSS) growth from 6.5% to 11.5%. Sensors and Integrated Circuits (ICs) saw sizeable revision to 13.9% (previously: 9.0%) and 12.6% (previously: 7.1%) respectively (see Table 2). This should bode well with Malaysian semiconductor companies given that they have expanded their production capacities in the past few years. Therefore, companies in this segment should be able to take on big orders from customers. Meanwhile, weaker ringgit against the US dollar would enhanced the appeal of Malaysia’s products.



Table 2: World Semiconductor Trade Statistics (WSTS) forecast summary

Source: WSTS

Construction – Neutral The pace of contract award is extremely slow in the 1Q2017. A total 706 projects were awarded in the 1Q2017 valued at RM12.9 billion. This represents 54.1% y-o-y decline in total number of projects awarded and 71.1% contraction in value terms. All sectors recorded massive decline in total number of projects awarded led by infrastructure (-58.9%) and non residential property (-53.7%) followed by residential (-52.2%) and social amenities (-49.1%). The supply glut in the commercial and residential properties have led to large declines in the total number of projects award. Meanwhile, projects in the infrastructure space would likely to be centered on Light Rail Transit line 3 (LRT 3), East Cost Rail Link (ECRL) and High-Speed Rail (HSR). Mass Rapid Transit 1 (MRT1) which covers Sungai Buloh- Kajang Line has been completed and will commence full operations in mid-July. As for the MRT2 (Sungai Buloh-Serdang-Putrajaya Line), 90% of the awards totaling RM29 billion have been dished out since 2014. There seems to be an uptick in the construction activities based on the national account with total output for the sector grew by 6.5% in the 1Q2017 after dipping to as low as 5.1% in the preceding quarter. Additionally, financing activities for the sector have been on the rise to 7.2% y-o-y in April from 6.2% previously. As such, the year of 2017 would be a year of implementation and execution. Apart from that, the input costs such as steel, cement and labour are on the rise. This would have significant impact to the players’ profit margins. Against such backdrop, the sector rating has been downgraded from positive to neutral on account of higher input costs and slower project awards.



Table 3: Number and value of projects awarded by category

Source: CIDB Malaysia

Chart 11: Job awards to listed companies in RM billion

Chart 12: Average Building Material Cost Index (without steel)

Source: HLIB Sources: CEIC & Bank Islam

Automotive – Neutral After declining by 13% in 2016, the Total Industry Volume (TIV) for vehicle sales rose 7.4% y-o-y to 234,186 units during the 5M2017. The upcoming Hari Raya festivities were the key factor for this as dealers stepped up their sales campaign. Both National and Non National vehicle recorded positive growth of 4.5% and 7.2% respectively in the 4M2017. Within the National vehicle segment, Perodua sales posted 4.1% growth to 64,643 units, commanding 35.2% market share. Meanwhile, Proton sales jumped 13.6% to 24,992 units during the first five months of 2017 with a market share of 13.6%. The recent news on the sale of 49.9% interest in Proton to China’s Geely should be positive for the company as this will allow higher utilisation rate in Tanjung Malim plant which has the capacity to produce 1 million cars per annum. At the moment, the average sales for Proton are about 129,283 units per annum in the last 10 years. In the meantime, sales within the Non National segment was led by Toyota with total sales recorded at 16,004 units in the 4M2017. The high-end brand sales were quite mix. The likes of BMW and Mini posted sales growth of 22.5% and 7.3% to 3,038 units and 293 units respectively.

Total Total

number Project Number RM m Number RM m Number RM m Number RM m

of projects Value (RM m)

1Q 2015 1,833.00 37,171.60 566.00 15,597.35 663.00 12,423.37 170.00 1,081.82 434.00 8,069.06

2Q 2015 1,878.00 29,845.26 492.00 13,652.48 713.00 10,703.13 167.00 1,217.42 506.00 4,272.23

3Q 2015 1,939.00 33,047.28 548.00 12,445.38 668.00 10,506.60 186.00 1,874.54 537.00 8,220.76

4Q 2015 1,828.00 40,668.78 469.00 11,755.69 616.00 19,031.81 200.00 1,337.19 543.00 8,544.09

1Q 2016 1,539.00 44,474.08 435.00 8,427.42 551.00 9,333.86 159.00 2,332.90 394.00 24,379.90

2Q 2016 1,945.00 42,470.38 503.00 10,998.80 667.00 8,929.36 174.00 2,118.95 601.00 20,423.27

3Q 2016 1,635.00 45,103.08 460.00 10,956.36 535.00 9,924.78 165.00 2,012.03 475.00 22,209.91

4Q 2016 1,428.00 44,215.84 359.00 9,154.42 546.00 12,190.61 155.00 1,757.19 368.00 21,113.62

1Q 2017 706.00 12,874.07 208.00 2,825.05 255.00 6,257.57 81.00 692.76 162.00 3,098.69

Residential Non residential Social amenities Infrastructure

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However, Mercedez, Porsche and Audi were down by 1.6%, 16.7% and 56.4% to 3,649 units, 130 units and 186 units respectively. In view of cautious sentiment among the consumers, the sector is accorded with a neutral rating.

Table 4: Top 10 vehicle sales by brand in 4M2017

Source: CEIC

Power – Neutral Electricity consumption has been lower in the first two months of this year by 0.6% y-o-y in February to 11,208.3 MWH. This was largely due to the decline in electricity consumption by domestic users for two consecutive months. Consumption by domestic users fell by 0.9% and 5.7% in January and February this year to 2,453 MWH and 2,424.9 MWH respectively. Weather related condition is seen to be the main contributing factors. The prolonged hot temperature in the early part of 2016 has resulted higher demand for electricity by the domestic users. This has caused higher utilisation of air-conditioners as El Nino weather phenomenon produced heatwave and a spike in temperatures. However, the situation was not repeated in 2017, leading to decline in electricity demand. Such situation was reflected in Tenaga Nasional Berhad financial results where revenue growth moderated from 3.6% in the 1HFY16 (September 2015 – February 2016) to 2.3% in the 1HFY17 (September 2016 – February 2017). In addition, the industries profitability was also impacted by the rise in energy mix prices such as coal. This has resulted higher production cost among the power producers. Based on Tenaga’s latest announcement, coal prices have increased to USD70.2 per MT in the 1HFY17 from USD57.7 per MT in the 1HFY16. Nonetheless, the implementation of Imbalance Cost Past Through (ICPT) which would see possible adjustment in tariff rates every six months, would minimise the rising input cost for Tenaga. Therefore, we ascribe neutral rating for the sector.

Growth Volume Mkt share

Toyota 56.4% 16,004 8.7%

Subaru 50.9% 1,343 0.7%

Renault 40.0% 189 0.1%

Honda 39.7% 34,566 18.8%

Chery 36.8% 78 0.0%

Kia 25.9% 1,496 0.8%

BMW 22.5% 3,038 1.7%

Mini 7.3% 293 0.2%

Proton 5.4% 24,992 13.6%

Perodua 4.1% 64,643 35.2%



Chart 13: Electricity demand y-o-y%

Source: CEIC

Chart 14: Coal prices USD per MT

Source: Tenaga Nasional Berhad

Plantation – Neutral The CPO prices have corrected quite substantially in the recent months where prices went up to as high as RM3,348 per MT in mid February and has come down to around RM2,619 as of 28 June. The decline in prices is very much expected in view of higher CPO production which typically rises at a fast clip during the 2Q and 3Q of the year. Already, we have seen Fresh Fruit Bunches (FFB) yield per hectre increased to 1.46 ton in May from 1.14 ton in February this year. In addition, higher production of Soy bean oil is likely to keep lower premium against CPO. According to the US Department of Agriculture (USDA) Prospective Plantings issued on 31 March 2017 (based on a survey of approximately 83,300 farmers), US farmers will likely plant 89.482m acres (+7.3% y-o-y) in 2017, higher than market estimates of 88.214m acres. Therefore, higher stockpiles for Soybean would limit the rise in CPO prices. Thus far, the spread between Soybean Oil and CPO is around USD132.9 per MT which is still lower than the 5-year average of USD147.3 per MT (see Chart 16). The industry’s soft spot has always been in the environmental issues and this has been regularly highlighted by the European community. The Roundtable Sustainable Palm Oil (RSPO) is supposed to be the mitigating factor as the standard outline in these initiatives would allow growers to be more aligned with the environmental concerns arising from the CPO production.

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Despite that, export growth in key countries has been commendable in the past five months. Total export to the European Union (EU) countries which is second largest in terms of exports destination (11.3% of total CPO exports) after India (18.2% of total exports) grew by an average of 11.3% during the first five months of this year. This was in pale comparison to 1.0% contraction in the same period last year. Other countries such as China, Pakistan and Viet Nam were all recorded strong growth of 33.0% (5M2016: -38.7%), 28.4% (5M2016: -0.6%) and 11.9% (5M2016: -19.9%) between January and May this year. The neutral rating is premised on the expectation of lower Soybean premium, higher CPO stockpiles and Bio Diesel initiatives which are lacking in terms of direction and implementation. Chart 15: Crude Palm Oil (CPO) prices in RM per MT

Source: Bloomberg

Table 4: Crude Palm Oil statistics

Source: CEIC

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000 metric tonne Jan-17 Feb-17 Mar-17 Apr-17 May-17

Opening stocks 1,667 1,541 1,459 1,553 1,600

Production 1,277 1,259 1,464 1,548 1,654

Y-o-Y 13.0% 20.7% 20.1% 19.0% 21.2%

M-o-M -13.4% -1.4% 16.3% 5.7% 6.9%

Exports 1,287 1,107 1,266 1,284 1,506

Y-o-Y 0.6% 1.7% -5.3% 9.4% 17.4%

M-o-M 1.5% -14.0% 14.3% 1.4% 17.3%

Imports 72 40 102 54 47

Y-o-Y 95.4% -40.3% 36.9% 30.3% 137.0%

M-o-M 60.0% -43.7% 152.8% -46.6% -12.9%

Consumption 187 274 207 272 273

Y-o-Y -11.8% 71.2% -14.9% 8.4% 6.4%

M-o-M -24.4% 46.2% -24.5% 31.9% 0.4%

Closing stocks 1,541 1,459 1,553 1,600 1,558

Y-o-Y -33.3% -32.8% -17.6% -11.3% -5.6%

M-o-M -7.5% -5.3% 6.4% 3.0% -2.6%

Stock-to-usage 8.2 5.3 7.5 5.9 5.7



Chart 16: Soybean Oil (BO3) vs. CPO (KO3) spread (in USD per Metric Tonne)

Source: Bloomberg

Telecommunications – Neutral The intense level of competition amidst technological shift will continue to exert pressures on the industry’s profitability level going forward. Thus far, the level of profitability has been commendable with EBITDA margins for the three Mobile Network Operator (MNO) such as Maxis, Digi and Celcom Axiata stands at 52.5%, 45.0% and 36.5% in the 1QFY17 respectively. Nonetheless, spectrum fees for the 2600 MHz and 2100 MHz bands are both set for renewal in December 2017 and April 2018 respectively. Additionally, the 700 MHz band is also up for re-farming in 2018 as the free-to-air television migrates from analogue to digital. Therefore, requirement for cash is expected to be intensified given that spectrum fees could be easily in excess of RM1 billion. Additionally, competition from the Mobile Virtual Network Operator (MVNO) is likely to create stiffer competition although their existence is based on MNO infrastructure. There are about 18 MVNOs in the market. The latest news on U Mobile terminating their Network Sharing and Alliance Agreement (NSA) with Maxis indicates that MVNO could evolve and become the full fledge MNO. According to U Mobile, the company paid between RM200 million and RM300 million for the 3G Radio Access Network (RAN) for FY15. And some analyst estimated that U Mobile has contributed around RM335 million to Maxis revenue in FY16.



Going forward, demand for data will continue to accelerate in view of the proliferation of smartphones. In the 1Q2017, smartphone penetration rate for Maxis, Digi and Celcom Axiata stands at 78%, 68% and 77% respectively. We ascribe neutral rating for the sector given the expected sizeable cash outflows as a results of the spectrum fees which would keep the gearing level at elevated levels. In FY16, Maxis and Digi net debt-to-equity ratio stands at 1.94 times and 3.7 times while Axiata appears to be at the low end of 0.59 times. Chart 17: Smartphones penetration rate

Source: Telco’s analyst briefing

Chart 18: Telecommunication industry operational statistics

Source: Telco’s analyst briefing

30.0

40.0

50.0

60.0

70.0

80.0

90.0

S2 2014

S3 S4 S1 2015

S2 S3 S4 S1 2016

S2 S3 S4 S1 2017

Maxis

Digi

Celcom

Total Subscribers Postpaid Prepaid

000 Maxis Digi Celcom 000 Maxis Digi Celcom 000 Maxis Digi Celcom

1Q2015 12,192 11,691 1Q2015 2,823 1,758 1Q2015 8,992 9,933

2Q2015 12,214 11,815 2Q2015 2,796 1,771 2Q2015 9,068 10,044

3Q2015 11,956 11,675 3Q2015 2,784 1,776 3Q2015 8,850 9,899

4Q2015 11,579 12,125 4Q2015 2,765 1,840 4Q2015 8,520 10,285

1Q2016 11,164 12,336 12,075 1Q2016 2,696 1,902 2,840 1Q2016 8,196 10,434 9,235

2Q2016 11,015 12,347 11,235 2Q2016 2,660 1,954 2,897 2Q2016 8,108 10,393 8,338

3Q2016 10,903 12,249 11,154 3Q2016 2,678 1,994 2,869 3Q2016 8,007 10,255 8,285

4Q2016 10,851 12,299 10,556 4Q2016 2,712 2,099 2,960 4Q2016 7,946 10,200 7,596

1Q2017 10,673 11,776 10,246 1Q2017 2,744 2,189 2,946 1Q2017 7,754 9,587 7,300

Average Revenue Per User (ARPU) Average Revenue Per User (ARPU) Average Revenue Per User (ARPU)

Blended (RM) Postpaid (RM) Prepaid (RM)

Maxis Digi Celcom Maxis Digi Celcom Maxis Digi Celcom

1Q2015 53 46 1Q2015 96 81 1Q2015 38 39

2Q2015 51 45 2Q2015 97 82 2Q2015 36 38

3Q2015 53 45 3Q2015 98 81 3Q2015 39 38

4Q2015 54 44 4Q2015 102 80 4Q2015 39 38

1Q2016 55 42 39 1Q2016 102 80 76 1Q2016 39 35 29

2Q2016 54 42 39 2Q2016 102 82 76 2Q2016 38 34 29

3Q2016 56 41 41 3Q2016 100 80 76 3Q2016 41 34 30

4Q2016 57 42 43 4Q2016 104 81 80 4Q2016 42 34 31

1Q2017 57 40 43 1Q2017 102 79 81 1Q2017 42 32 30

EBITDA Margin Smartphone Penetration Rate

Maxis Digi Celcom Telekom Maxis Digi Celcom

1Q2015 50.9% 43% 1Q2015 62.0 53.2

2Q2015 53.1% 46% 2Q2015 65.0 57.1

3Q2015 51.6% 43% 35.5% 3Q2015 67.0 58.4

4Q2015 52.0% 41% 27.6% 4Q2015 69.0 59.2

1Q2016 54.5% 43% 40.7% 32.3% 1Q2016 70.0 61.3 61.0

2Q2016 49.0% 44% 38.2% 31.3% 2Q2016 70.0 62.0 72.0

3Q2016 53.9% 48% 35.1% 32.2% 3Q2016 74.0 63.7 72.0

4Q2016 54.6% 44% 38.6% 30.0% 4Q2016 76.0 64.7 76.0

1Q2017 52.5% 45% 36.5% 32.0% 1Q2017 78.0 68.0 77.0



Education – Neutral The sector has been the main point for contentions in view of the government aspiration to be developed economies by the year 2020. In particular, the recent cut for operational expenditure for the public universities was deemed substantial. According to national Budget 2017, allocation for 20 public universities will be reduced from RM7.57 billion in 2016 to RM6.12 billion for 2017. UiTM saw a massive budget cuts by RM563.07 million to RM1.67 billion in 2017, followed by UKM (-RM159.33 million) and USM (-RM151.74 million). Nonetheless, there are five public universities which saw higher allocation in 2017 – UTeM (+RM3.83 million), UUM (+RM5.34 million), USIM (+RM4.56 million), UMT (+RM9.69 million) and UPSI (+RM13.61 million). Given the budget cuts, public universities are expected to generate its own income in order to make up the slack. There seems to be an opportunity for the sector as public universities are endowed with land assets which can be monetized for income purposes. Based on our channel checks, UiTM has a land banking of no less than 5,000 acre country wide. While looks promising, bureaucracy and red tapes would present a major hurdle for asset development. Despite that, development expenditure for education and training was raised from RM3.9 billion in 2016 to RM5.9 billion in 2017. This suggests construction of training institute and refurbishment of the existing facilities perhaps are the key areas that will receive such allocation. We ascribe neutral rating for the sector on account of sizeable reduction in budget allocation.

Table 5: Public universities operating expenditure



Chart 19: Government development expenditure for education & training (RM billion)

Source: Economic Report 2016-2017

Property (Residential) – Neutral The sector remained a lackluster in 2016. The House Price Index (HPI) continues to moderate at 5.6% y-o-y in the 4Q2016 from 6.9% in the preceding quarter. Meanwhile, new launches in 2016 fell to 52,713 units from 70,273 units in the previous year. This represents 25% decline compared to 2015 new launches. At the same time, unsold units or overhang in the residential properties climbed to 14,792 units in 2016 from 11,316 units in the previous year. And such trend continued in the 1Q2017 whereby completed residential units and remained unsold rose to 17,809 units. Total property transaction was also lukewarm with total transaction stands at 76,163 units in the 1Q2017. This represents a decline of 4.8% on year-on-year terms. Transaction in residential properties accounted the lion share at about 61.6% and growth has fallen by 5.4% y-o-y in the 1Q2017. Commercial and Industrial are both accounted for 6.8% and 1.6% of total property transaction in the 1Q0217 and both property transaction fell by 4.0% and 5.6% respectively. In view of this, developers are taking a cautious stand on the new launches as buyers are also facing difficulties to secure end financing following rising incidences of impairment in the banking sector as well as higher indebtedness among households. The sector focus is now on providing affordable houses to the masses given that house prices have been generally out of reach for the average Malaysians whose median salaries are only at RM1,703 per month in 2016 (2015: RM1,600). Clearly there is a need for government intervention given the existing gap in the industries whereby the supply of houses is generally beyond affordable range. Private developers are anticipated to be more cautious for product launches as sentiments among consumers are still weak and the underwriting standards in the banking have been increasingly stringent following challenging outlook in the economy. Therefore, the neutral rating is retained.

6.4

4.94.8

3.9

5.9

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2013 2014 2015 2016 2017F



Chart 16: New residential property launches

Source: NAPIC

Chart 18: House Price Index (HPI) y-o-y%

Source: CEIC

Chart 19: Completed but unsold units – residential property

Source: NAPIC

47,698 49,290

57,162

62,376

86,997

70,273

52,713

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

80,000

85,000

90,000

2010 2011 2012 2013 2014 2015 2016

9.6%

5.6%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

4Q 13 2Q 14 4Q 14 2Q 15 4Q 15 2Q 16 4Q 16

12,597

11,491

10,181

11,816

9,840

8,784 9,747

11,316 12,268

13,438 14,193

14,792

17,809

8,000

10,000

12,000

14,000

16,000

18,000

20,000

1Q 14

2Q 14

3Q 14

4Q 14

1Q 15

2Q 15

3Q 15

4Q 15

1Q 16

2Q 16

3Q 16

4Q 16

1Q 17



Table 6: Property transaction

Source: NAPIC

Banking – Neutral Lending growth in the first four months of 2017 has been quite commendable as the economy continue to face challenges of higher impairment charges. Total loans grew by 6.1% as of April this year from 5.3% at the end of December 2016. Sources of growth were largely emanated from businesses which grew by 7.5% in April versus 5.3% in December owing to higher growth in lending for working capital (7.3% in April vs. 5.6% in December) which accounted for 23.9% of total loans. However, growth in households lending moderated further to 5.1% in April from 5.3% in December. Such trend has been quite consistent since the introduction of responsible lending guidelines in 2013 as BNM is committed to reduce households indebtedness which currently stands at 86.7% in the 1Q2017 (88.3% of GDP in 2016, 2015: 89.0% of GDP). However, Gross Impaired Loans Ratio (GIR) was higher at 1.66% in April from 1.61% in December due to higher impairment in the Mining & Quarrying (5.32% in April vs. 4.69% in December), Manufacturing (4.18% in April vs. 4.11% in December), Utilities (1.38% in April vs. 1.04% in December), Wholesale & Retail Trade (2.01% in April vs. 1.79% in December) and Finance, Insurance & Business Activities (3.38% in April vs. 2.87% in December). On the contrary, GIR for household sector sustained at 1.07% in April (December 2016: 1.07%), suggesting default rate among households are well contained. The BNM also indicated that the quality of household debt portfolio has remained intact with signs of further strengthening. The affordability assessments by lenders continued to improve as about 42% of borrowers with newly approved loans have debt service ratios (computed based on income net of statutory deductions) of less than 40%. Additionally, the share of borrowings by vulnerable borrowers (those earning less than RM3,000 per month) reduced further to account for 21.9% (4Q 2016: 22.2%) of total bank and nonbank lending to households.

Property transaction in units

Types of property 1Q 2016 2Q 2016 3Q 2016 4Q 2016 1Q 2017 Y-o-Y Q-o-Q Share

Residential 49,608 52,486 49,640 51,393 46,934 -5.4% -8.7% 61.6%

Commercial 5,412 6,249 5,801 6,284 5,196 -4.0% -17.3% 6.8%

Industrial 1,268 1,508 1,315 1,513 1,197 -5.6% -20.9% 1.6%

Agricultural 18,411 18,313 15,634 16,725 18,082 -1.8% 8.1% 23.7%

Development 5,307 4,956 4,058 4,591 4,752 -10.5% 3.5% 6.2%

Others 2 4 8 3 2 0.0% -33.3% 0.0%

Total 80,008 83,516 76,456 80,509 76,163 -4.8% -5.4% 100.0%

Property transaction in RM Million

Types of property 1Q 2016 2Q 2016 3Q 2016 4Q 2016 1Q 2017 Y-o-Y Q-o-Q Share

Residential 16,246 16,720 15,614 17,038 16,390 0.9% -3.8% 47.5%

Commercial 5,224 6,099 5,796 18,818 5,753 10.1% -69.4% 16.7%

Industrial 2,609 3,021 2,831 3,555 2,784 6.7% -21.7% 8.1%

Agricultural 3,678 2,660 3,075 4,526 3,536 -3.8% -21.9% 10.2%

Development 4,197 4,377 3,473 5,620 6,057 44.3% 7.8% 17.5%

Others 29 1 6 0 2 -93.9% 1520.3% 0.0%

Total 31,982 32,878 30,795 49,558 34,523 7.9% -30.3% 100.0%



Apart from that, the sensitivity of this group to changes in interest rates is to a certain degree buffered as close to half of their total borrowings are in the form of fixed-rate financing. We assigned neutral rating to the sector on account of higher compliance cost (LCR, NSFR and MFRS 9) and challenging economic prospects (higher loan-to-deposit ratio and rising unemployment) which would put pressure on net income margins (NIM). Chart 20: Lending growth y-o-y%

Source: CEIC

Oil & Gas – Negative The decision by OPEC and Non OPEC to reduce the oil production in November last year has resulted Brent crude prices to rise to as high as USD56.89 per barrel in early January 2017. Brent crude lingers at around USD55 per barrel in February but tumbled to as low as USD44.82 per barrel on 21 June. Clearly the motion to reduce oil productions have not yielded the desired result despite OPEC and Non OPEC member countries have agreed to extend such pact until March 2018. The threats from Shale oil was still prevalent as players continued to add the number of oil rigs and the resultant effect was none other than persistent rise in oil production in the US. As of 23 June, the total number of oil rigs in the US stands at 758 units compared to the lowest of 362 units on 1 April 2016. Such dynamics would pose a serious threat to the industry players especially when there is an obvious over capacity in the sector. Thus far, the call for industry consolidation has been very slow. According to Petronas, there are about 3,700 Oil & Gas companies that are registered with Petronas. However, Norway, a country which is deemed to have similar Oil & Gas deposits with Malaysia, has just around 700 players in the sector. Another example which point to excess capacity is the Oil & Gas fabrication yards in Malaysia which currently stands at about eight. However, Petronas requirement in the next few years are only in the region of two to three in order to ensure an optimum utilisation. In view of the over capacity and greater uncertainty in the oil prices, we downgraded the sector to negative from neutral.

5.1%

7.5%

6.1%

1.5%

3.5%

5.5%

7.5%

9.5%

11.5%

13.5%

Apr-15 Oct-15 Apr-16 Oct-16 Apr-17

Household Sector

Business loans

Total loans



Chart 21: Crude oil prices USD per barrel

Source: Bloomberg

Chart 22: Rig counts in the US

Source: Bloomberg

Chart 23: Crude oil production in the US (‘000 barrels per day)

Source: Bloomberg

20

30

40

50

60

70

80

90

100

110

120

Jun-14 Mar-15 Dec-15 Sep-16 Jun-17

WTI

Brent

1,609

316

758

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

8200

8400

8600

8800

9000

9200

9400

9600

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17



Property (Shop Units) – Negative There appears to be improving trends with regards to the number of overhang shop units. In the 1Q2017, the total number of overhang units for shop houses is 4,340 units. This is lower compared to 5,069 units in the preceding quarter. Shop houses priced between RM250,001 and RM500,000 and RM250,000 and less saw declining overhang to 1,414 units (4Q2016: 1,955 units) and 775 units (4Q2016: 1,197 units) in the 1Q2017. However, prices above RM500,000 showed an upward trend led by property prices of RM1 million and above. With regards to overhang by states, Johor remained at the top spot with total unsold units stands at 1,212 units in the 1Q2017. Despite that, the state has recorded a downward trend in the number of overhang units, suggesting that the developer has been concentrating to reduce the overhang stock. Similarly, overhang in Malacca was also reduced by a large magnitude in the 1Q2017 to 190 units from 647 units in the previous quarter. While the recent trend is encouraging, there are states which are still recording higher overhang such as Perak (+47 units q-o-q), Penang (+62 units q-o-q), Pahang (+175 units q-o-q) and Terengganu (+35 units q-o-q). Therefore, the cautious stance is still warranted as excess supply would take time to be cleared especially when uncertainties in the economy still prevails and weak business confidence would discourage further investment and demand for shop units.

Chart 24: Overhang in shop units

Source: NAPIC

5,642

5,069

4,340

3,000

3,500

4,000

4,500

5,000

5,500

6,000

1Q 12 3Q 12 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 1Q 17



Chart 25: Overhang in shop units by states

Source: NAPIC

Chart 26: Overhang shop units in Johor and Malacca

Source: NAPIC

Textile – Neutral Weak ringgit coupled with better external demand condition has been very supportive to the sector’s growth. Textile related exports such as Articles of Apparels & Clothing Accessories posted an average growth of 22.7% in the 4M2017 from 4.6% in the same period last year. Production activities in the sector are also encouraging with IPI growth for textile related industries sustained at 7.0% in 2017 (4M2016: 7.0%). Production of Rubber Footwear and Luggage & Handbags saw a double digit growth of 10.8% (4M2016: 7.9%) and 17.6% (4M2016: 44.6%) respectively. The sector appears to have gained its importance premised on its share to total exports which has risen from 1.4% in 2012 to 1.8% in 2016. The key trading partner includes the US, Japan, People’s Republic of China, Singapore and Turkey.

- - - 53 6 44

203 234

531

166 216 179

442 311

620

1,433

- - - 7 35 95 99

163 190 270 305 329

410 502

723

1,212

-

200

400

600

800

1,000

1,200

1,400

1,600 1Q 2016

1Q 2017

477 382

513 507 531 638 649 647

190

1,866 1,883

1,718 1,657

1,433 1,517

1,456 1,489

1,212

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17

Malacca

Johor



Malaysia, as one of the most popular contract manufacturers and investment destinations in Asia, has been favoured by many international fashion brands and foreign investors. High-end global brands such as Marks & Spencer, Guess, Tommy Hilfiger, GAP, Adidas, Nike, Burberry, and Ralph Lauren are already manufacturing in Malaysia. Daiyin Textile and Garment Group – one of the largest textile and apparel companies in China – just recently announced its plans to invest and to expand its operation in Malaysia. Therefore, improving global demand should benefit the sector while weak ringgit could also increase the appeal of Malaysia’s textile related products. Therefore, we have raised the sector rating from Avoid to Neutral.

Chart 27: Share of textile exports to total Malaysia’s export

Source: CEIC

Trading / Retail – Avoid Rising retail space in major cities are likely to be prevalent especially when there will be additional floor space coming onboard, owing to the completion of retail malls. In Klang Valley for instance saw a completion of 2.27 million sq ft in 3Q2016, resulting 146 shopping centers with total Net Lettable Areas (NLA) of 53.21 million sq ft. By 4Q2016, there would be another 2.03 million sq ft coming on stream which would add the supply glut in the markets. Notable megamalls near completion include Sunway Velocity, Empire City Mall and Mytown Shopping Center, each with more than 1 million sq ft. In Penang, the expected additional retail space is about 5 million sq ft in the next three to five years while in Iskandar Malaysia, an additional of 4.33 million sq ft of retail will add to the existing supply. Obviously, it is a buyer markets whereby business owners are spoiled with various choices in particular those with renowned brand would easily get a better deal. Therefore, location is the key consideration as this would ensure higher occupancy rates. In the case of Klang Valley, the occupancy rates have been quite encouraging in the past five years, lingering at about 89%. Nonetheless, the recent figure showed that the occupancy rate has fallen to 87.6% in 2016 from 88.5% in 2015 due to oversupply condition. As such, we remain wary about this sector given the persistent supply glut in the markets which would keep a lid on upside potential for rental yields.

1.7%

1.6%

1.6%

1.4%

1.5%

1.6%

1.7%

1.8%

1.7%

1.2%

1.3%

1.4%

1.5%

1.6%

1.7%

1.8%

2009 2010 2011 2012 2013 2014 2015 2016 1Q2017



Chart 28: Supply and demand of retail space

Source: CBRE / WTW Research

Steel – Avoid Steel prices have recovered in 2016 as China’s economy continues to cut their excess capacity in the industry. Total import growth for Iron and Steel Bars, Rod were generally declined by an average of 3.8% in the 1Q2017 (4Q2016: 22.5%), suggesting demand for steel has been satisfied via local production. This is a positive development in view of implementation of infrastructure projects which would result demand for steel related products to be higher. Consequently, some of the major players have recorded improving statistics. For instance, Ann Joo Resources Berhad have turned into profitability with net profit for FY16 stands at RM166.8 million from a net loss of RM135.5 million in the preceding financial year. Similarly, Malaysia Steel Works reported a net profit of RM6.0 million for FY16 from RM1.0 million previously. Nonetheless, Lion Industries Berhad losses widened to RM796.5 million for FY16 from -254.8 million previously. We are still wary about the prospects for the industry as the threat from China should not be underestimated. Therefore, we remain avoid for the sector. Chart 29: Steel prices – mild steel round bars 10 mm

Source: CEIC

1,850.000

1,950.000

2,050.000

2,150.000

2,250.000

2,350.000

2,450.000

2,550.000

2,650.000

2,750.000

2,850.000

May-13 May-14 May-15 May-16 May-17

East

Central

North



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applicable laws. All information, opinions and estimates contained herein have been compiled or arrived at based on sources and assumptions believed

to be reliable and in good faith at the time of issue of this document. This document is for information purposes only and has no regard to the specific

investment objectives, financial situation or particular needs of any specific recipient. No representation or warranty, expressed or implied is made as to

its adequacy, accuracy, completeness or correctness. All opinions and the content of this document are subject to change without notice and may differ

or be contrary to opinions expressed by other business areas or groups of Bank Islam as a result of using different assumptions and criteria. No part of

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