Budget 2010 Report From HWangDBS

Budget 2010: Moving up the value chain
• Budget 2010: measures to transform into a high-income economy. Forecast for 2-3% GDP growth and lower than expected deficit of 5.6% in 2010.
• Possibly more stake disposals under Ministry of Finance/ Khazanah’s stable of listed companies.
• Imposed 5% property gains tax, liberalization of stockbroking industry, higher individual tax relief to help spur consumer spending.

Towards a knowledge-based economy, driven by innovation and high value-added activities. Measures to stimulate investment, promote R&D activities and jumpstart new growth sectors (green technology and creative industry) were proposed during the tabling of the 2010 Budget.
Lower deficit; sharp cut in operating expenditure. The Government revised its GDP estimate to -3% (from -4 to -5%) for 2009 and +2 to +3% for 2010. DBS expects -2.9% for 2009 and +4.5% for 2010. The deficit forecast was lower than expected at 7.4% for 2009 and 5.6% for 2010. For 2010, the reduction would be largely due to a projected 13.7% cut in operating expenditure (lower supplies & services, subsidies and “others”) and 4.5% reduction in development expenditure to RM50.6bn, which is lower than expected. The general message for the construction sector in Budget 2010 appears to lean on the government encouraging more private sector participation. IJM Corp (Buy), in our view, will be a key beneficiary given its foothold in the private sector and strong reputation in the public sector.

“Second wave of privatization” The government intends to “privatize” companies under the Ministry of Finance (MOF) and other viable government agencies. This could mean more stake disposals under MOF/Khazanah’s stable of listed companies. Given that components of the KLCI are free-float weighted, lower government stakes could lift the weighting of GLCs in the index. Higher free floats could also help to lift liquidity and valuations of these companies. Potential candidates include Malaysia Airports (Buy), PLUS Expressways (Buy; TP: RM3.80), Pharmaniaga (Not Rated) and UEM Land (NR).

Negative bias for developers, brokers. The government surprisingly imposed a 5% property disposal tax. We reduced target prices for SP Setia (Buy; TP: RM4.45), E&O (Buy; TP: RM1.40) and DNP (Buy; TP: RM2.25), and downgrade Sunrise and Sunway City to Hold, respectively (from Buy). The government also liberalized the commission-sharing arrangement in the stockbroking industry. TA Enterprise (Buy; TP: RM2.10) could see lower broking income
given the Group’s large retail base.