Monday, August 13, 2018

3 BIG themes in the long short and medium term - Corporatisation Malaysia, Trade War, SST

The past 3 - 6 months have seen huge movement in the policies and changes locally as well as internationally which should change how we are investing in the market here in Malaysia.

Short to Medium Term - no SST on construction materials will benefit construction companies

The exemption of Sales and Services Tax on some of the construction materials will benefit the construction sector immediately. Although the new Pakatan Harapan government has terminated or postponed several mega projects, construction is still a big contributor to the country's economy. Construction is not sexy at all, but is needed to oil the economy - pretty much in most countries. Many projects have continued and some of these projects such as the MRT2, highways which was awarded last few years are still continuing. The exemption on SST towards construction materials will definitely benefit the construction companies whom have secured large contracts immediately.

I see the larger construction companies such as Gamuda, IJM, Gadang, MRCB, Kerjaya Prospek to benefit from here.

The new government is also looking at opening up tender for projects. With this, I would think the companies that have capabilities but all this while have remained second tier will probably get more jobs due to their inherent capabilities rather than connections.

As for the property companies, although it will allow their cost of building to ease, to me the overhang will still see some challenges for this sector. Some of these property companies however has been cheap and their valuation has been much below book value. To decide to invest into this sector however, will need patience.

As for toll highways, the idea for its abolishment is postponed as answered by YB Baru Bian, the Works Minister in this video. Apparently, the RM400 billion total to buyback all the toll highways is quite consistent is almost all the figures which have been shared.

The US - China Trade War

As one know, Malaysia is a huge trading nation in comparative to our size of economy. The Trade War between China and US, if prolonged will have impact to Malaysia and it is not easy to figure out how it works for Malaysian companies. I would think, in the shorter term, as long as Malaysian manufacturers can accommodate some of the demand shifts from Chinese to Malaysian companies, those companies will immediately benefited.

Some of these companies that would have benefited are the electronics manufacturers especially the Electronic Manufacturing Services and Precision Engineering companies. Examples of these are companies like Globetronics, KESM, Salutica.

Whether the Trade War will cause a global inflation and recession, it remains to be seen.

In the longer run, the continuous reduction on dependence on foreign labor will impact some of these manufacturers.

Tun Dr Mahathir as I can see is also a supporter of the technology based companies. Overall, this sector will see some revival, and for me the best way to invest in this sector is to diversify as it is quite hard to pick particular winners. Do be particularly careful though on the ones which are overdependent on certain company as well as those that have been overvalued.

Corporate Malaysia

There could be a major shift when comes to what type of companies to buy - GLICs or privately controlled. In the last 20 years, Malaysian GLICs has outgrown private companies, and I see that is going to be reversed. Firstly, there is a smaller room for these companies to grow further as whatever that can be monopolised or oligopolised would already be done. There is a very few new sectors for these companies to monopolised anymore and where the previous government's policies would not have done so.

In the next 10 or more years, many of these policies is to reverse this. And it started with Telekom Malaysia and Bernas (not listed). I foresee companies like MAHB, TNB to be affected as well. A large part of investments in Malaysian is done by EPF. They probably now have between 15% to 20% of Malaysian stocks in market capitalisation. The only way for them to continue to perform in the past was to continue to buy the large GLICs, and these companies are not cheap. For many years, they have been expensive.

The way forward to buy Malaysian stocks is to look for well run smaller to mid-sized companies and it is more so in the coming years as we try to disentangle ourselves from having large GLICs.

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