Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Country Assessment
2010 Budget: Shoring up growth
Expect lower deficit. The 2010 Budget will be presented in
Parliament on 23 October amidst a challenging economic
environment. The Prime Minister will need to steer the economy
towards robust economic growth while keeping the lid on a
ballooning fiscal deficit. We expect a lower deficit in 2010 at
6.8% of nominal GDP versus 8.5% this year on lower operating
expenses.
Higher development expenditure. To help shore up growth, we
expect a record allocation of RM55b-RM58b from RM53.7b in
2009. As pump-priming remains a cornerstone to drive
economic growth, there will likely be renewed emphasis on the
upcoming mega projects such as the LCCT, LRT extension and
Interstate Water Transfer – which should start latest by next
year-end. The focus should be on implementation of these key
projects and as such, we do not expect many other new mega
projects.
Likely another raise in tobacco tax this year. In our opinion, there
is good chance of higher excise duty for cigarette makers.
Historically, the government increased sin taxes for the tobacco
sector in eight out of the past eleven years. Our sensitivity
analysis based on excise tax increase of 10%-40% indicates that
the impact to BAT’s earnings would range from -1.7% to -
18.1% for FY10F (assuming full price pass through) and our fair
value would fall to a range of RM36.70 – 44.00 per share (from
RM44.80)
In our opinion, there is a possibility of small incremental
corporate tax cut, in line with the longer term objective to
attract foreign investment. However, we think chances of
individual tax cuts are low. The introduction of Goods and
Services Tax (GST), which will broaden the tax base, is also
unlikely next year given the economy is just recovering and
the required preparations for implementation. But this
budget could provide a timeframe for GST implementation
in the future.
In terms of GDP, we expect a contraction of 2.9% in 2009
with the manufacturing sector still in contraction mode. For
2010, we forecast 4.5% growth, driven by improvement in
all sectors and a big swing in manufacturing. As part of the
country’s longer term growth strategy, we also look for
incentives/measures to stimulate investments in R&D,
education and training. This will help upgrade our
manufacturing capabilities and drive growth in selected
services and sectors where we can achieve leadership, such
as Islamic banking/securities business. Potential beneficiaries
here would include CIMB, AMMB, Maybank.
Construction growth and development expenditure
RM billion
60
50
40
30
20
10
-
%
20
15
10
5
0
-5
-10
-15
-20
-25
-30
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Development Expenditure
2003
2004
2005
2006
2007
2008
Construction Growth
2009F
Source: Economic Report 2008/2009, Statistics Department
Page 93