Summary

• Donald Trump “ELITES” assembles could be a wild card for the US economic outlook. However, we expect persistent tariffs, imposing on China, corporate tax cuts, and reduced government spending going forward.

• Dollar index will be elevated at least for the near term, which will benefit exportdriven sectors like Technology and Gloves in Malaysia.

• Moreover, we expect the data center and AI theme will continue as the investments from MNCs has just started in 2023-2024, and will book earnings going into 2025 onwards. Thus, we favour stocks in the Construction, Building Materials, Property, Utilities.

• Besides, we like selected O&G, Finance and Renewable Energy stocks, the latter will be riding on the NETR blueprint and electric tariff hike by the TNB recently.

Seasonality Analysis

• FBM KLCI: Window dressing to the rescue. Despite a weak October due to foreign fund outflows and US election results, the FBM KLCI may see December gains. Historically, December has closed positively 22 out of 24 years, with an average return of 2.1%. The index remains above the 1,600 level, supported by local institutional buying.

• Small Caps: Recovery underway. Small-cap stocks rebounded post the Yen Carry Trade incident, driven by December's historical up/down ratio of 1.7. We believe values have emerged following 3Q24’s significant correction.

US Economic Review and Outlook

• Fed turning hawkish… Despite market pricing in 7 rate cuts earlier this year, the Fed only made 3 cuts (25bps each). Also, with the anticipation of trade war policies like higher tariffs imposed on China by Donald Trump, the Fed is expecting inflationary pressure to persist going forward. Hence, this pushed back the easing interest rate cycle in 2025-2026, suggesting that the Fed is relatively more hawkish now.

• …stronger dollar environment. With Donald Trump being a pro-US corporates characteristic, funds were deploying their capital back into the US. Hence, the dollar index has pushed through the 2-year high to around 108. With Donald Trump policies supporting the US corporates, coupled with lesser rate cuts by the Fed, the dollar is likely to stay strong into 2025.

• Inflation stabilising but remain sticky. Key inflation indicators such as CPI, PPI, and PCE have been gradually moving towards the Fed's target of 2%, but we believe the Fed could be pricing in Trump’s trade war policies, and it may provide elevated inflationary pressure going into 2025

• US GDP still in expansionary mode. Real GDP grew by 2.8% YoY in 3Q24, supported by consumer spending, exports, federal government spending, and non-residential fixed investment.

• US job market and unemployment. In November, non-farm payroll has increased by 227k, while the unemployment rate stood at 4.2%. Mainly, the job addition was noticed within the healthcare, leisure and hospitality, government and social assistance, while retail trade observed a decline.

US Outlook

• MAGA 2.0 from Donald Trump. The anticipated return of President Donald Trump, with his "Make America Great Again 2.0" agenda, suggests potential deregulation, tax reforms, and a focus on domestic manufacturing; where Trump will continue to renegotiate trade agreements and increase global competitiveness. However, these policies may benefit some sectors, but tensions between US-China may persist.

• The “ELITES” assembles. Donald Trump has gathered the team where the combined wealth amounts to over $313bn, in contrast to Biden’s cabinet of over USD118m. Elon Musk, JD Vance, and Vivek Ramaswamy are some of the names that are being appointed. Thus, we expect policies related to reducing corporate tax, empowering American workers and potentially reducing government spending.

• From data centers, AI to Quantum Computing. In 2024, Data Centers, AI and LLMs were the catalysts, but we believe this theme may shift towards quantum computing that may drive the US economic activities as quantum computing may be the key of breakthroughs in drug discovery, material science, and cybersecurity, providing a competitive edge and revitalizing industries. Traders may look into these themes for investment opportunities.

Malaysia Economic Review and Outlook

• 3Q24 Malaysia GDP expanded 5.3% YoY, supported by (i) a strong increase in overall investment activities, (ii) higher exports of goods and services, and (iii) expansion in household spending amid positive labour market conditions. Despite lower O&G production amidst maintenance activity, BNM and MOF expect the economy to remain on track for a a 4.8-5.4% growth rate in 2024.

• Stable tourist arrivals and Visit Malaysia Year 2026. Tourist arrivals continue to hover around 2.0 million in Sep-24, on par with pre-pandemic levels. The 12-month average tourist arrivals also stood at 2.0 million, which was supported by visa-free travel policies for China and India. Furthermore, the upcoming Visit Malaysia Year 2026 is expected to attract 35.6 million international tourists, generating an estimated RM147.1bn in tourism revenue.

• Brent oil declined below USD75. Despite earlier production cuts by OPEC+, weaker demand from China and other global markets has kept oil prices under pressure. Moreover, without the risk premium from geopolitical tension, we expect the Brent oil to stay around USD70-75/bbl at least in the near term.

Market Performances and Review

• MSCI World and S&P500 are trading at premiums, with P/E ratios of 22.4x and 27.2x, respectively as compared to their 10Y average P/E of 20.0x and 21.5x. This is largely supported by the prevailing AI theme and burgeoning growth of data centers.

• The FBM KLCI is currently trading at a discount with a P/E ratio of 14.8x, lower than its 10Y average of 17.2x. We believe the situation will improve, and the FBM KLCI will eventually catch up to its historical average. This optimism is fuelled by increased FDIs flowing into Malaysia, outperforming the Southeast Asian peers. Also, the growing data center theme is expected to drive growth across various sectors within the Malaysian economy.

• Significant foreign funds outflow. In 4Q24, the foreign funds witnessed an outflow of RM7.85bn, completely reversing the RM4.0bn inflow recorded in the 9M24. This outflow can be attributed to profit-taking activities following the ringgit’s strengthening in 3Q24 and the shifting focus of investors back to the US market due to the US election in November. YTD, foreign outflow stood at -RM3.87bn.

• Mixed market sentiment. In 4Q24, the FBM KLCI rose 3.7%%, while both the FBM Small Cap and FBM ACE declined 10.0-10.3%, respectively. Sectoral wise, Healthcare, (+14.6%), and Technology (+10.3%) were the best performing sectors, while Consumer (-4.3%), Telco & Media (-4.2%) underperformed.

1Q25 Strategy

• Ringgit direction will be crucial. The ringgit’s significant appreciation from RM4.70- 4.80/USD to around RM4.10/USD at end-Sep 2024 positively impacted domestics sectors like Consumer and Manufacturing. However, in with the ringgit weakening towards RM4.50/USD in 4Q24, we anticipate a potential increase in buying pressure in the export-driven stocks like Technology and Gloves in 1Q25.

• Data center theme will be relevant… With a stable political environment, strategic geographical locations and business-friendly policies, Malaysia is well-positioned to attract FDIs from MNCs. Malaysia has been a leader in Southeast Asia in attracting FDI, with RM141.72bn received in the first 10 months of 2024, according to Knight Frank. This influx of FDI is expected to boost construction activities, benefiting the Construction, Building Material, Utilities, and Property sectors.

• …with MNCs putting more investments. Companies like Google, Nvidia, and Microsoft have invested in Malaysia, reflecting growing confidence in the country’s economic potential. Also, the KL20 summit and the National Semiconductor Strategy position Malaysia as an prominent player in the global semiconductor industry, which may benefit the Technology sector, including EMS players.

• From construction to AI, Security and Cloud services. We believe the scope of the data center ecosystem will extend beyond construction, encompassing AI, security, and cloud services. This expansion will create opportunities for software-related companies specialising in cybersecurity, cloud service providers and other related areas within the Technology sector.

• NETR and NIMP blueprints to support growth. The government aim to increase the renewable energy (RE) generation from 40% to 70% by 2050, as outlined in the NETR, is expected to unlock significant investment opportunities in the Natural Gas, Renewable Energy, and Water sectors. Meanwhile, the NIMP 2030 is expected to create opportunities in the smart and semiconductor factories, electric vehicles (EVs), and chemical industries, benefiting the Manufacturing and Technology sectors.

• Tourism and Medical Tourism. With the stable tourist arrivals, we anticipate growth in the medical tourism sector. Malaysia remains a preferred destination due to its highly skilled doctors, well-equipped hospital, and attractive tourist spots. We maintain a positive outlook on the Healthcare segment despite the recent insurance premium hike incident.

• Net cash companies with stable dividend yields. We recommend investors to focus on companies with solid balance sheet and consistent dividend yields track records. In this context, the REIT and Consumer sectors appear to offer defensive and attractive investment opportunities. “Trump” card will be a wild card. However, the inauguration of a new US administration in January 2025 may introduce heightened market volatility. If any newly implemented policies deviate significantly from market expectations, global markets could experience some knee-jerk reactions.

Factors/ Elements/ Theme for 1Q25 Sectors and Stock Picks

CLOUDPT – IT Solutions Provider for the Data Center

• CLOUDPT is an IT solutions and digital applications provider, offering a full suite of IT lifecycle solutions and services, encompassing Data Center and Hybrid IT Infrastructure, Wired and Wireless Networking, Cybersecurity, and many others.

• Recently awarded with a ServiceNow contract worth RM33.6m, boosting its orderbook to record high of RM133.6m. This significant contract is expected to provide consistent earnings for at least the next 1-3 years.

• Acquired 75% stake in Unique Central Group (UCG) for RM27m, with a profit guarantee of RM14.25m over the next 3 years. This acquisition will enable CLOUDPT to offer more comprehensive solutions and position itself to capitalise on the booming data center market, particularly in Johor.

EG – Margin Expansion Via Optical and AI Modules For 5G

• EG is an EMS player that has expanded its capabilities into 5G technology, AI modules and optical components, via the collaborations with Cambridge Industries.

• Scheduled for completion in 2025, the upcoming Smart Factory 4.0, with 45% expansion in total built-up area and enhances output capacity is expected to boost EG’s earnings potential.

• 5G optical modules. EG is anticipated to focus on high margin products, producing cutting-edge 1.6T photonics optical modules for 5G wireless networks, enabling high speed data transmission crucial for automation and AI applications.

KGB – Riding the Semiconductor Segment Growth

• KGB is involved in ultra-high purity (UHP) delivery systems, process engineering and general contracting. The company commenced maiden production of LCO2 in 4Q19.

• Global semiconductor outlook remain robust, driven by the proliferation of AI and a diverse range of disruptive technologies and emerging applications. According to SEMI World Fab Forecast report, 103 new fabs are expected to come online until 2027.

• As of Sep-24, KGB has solid order book of RM1.45bn, with majority in the UHP segment and is actively tendering for projects valued at over RM2.62bn.

• Ace Gases acquisition. KGB will have 100% equity control of Ace Gases and consolidate 100% of its profit starting from Dec 2024 onwards.

NATGATE – Localisation of AI GPU Servers

• NATGATE is an EMS player specialising in assembling and testing electronic components and products across various sectors, including networking and telecommunications, consumer electronics, automotive, and semiconductors and many others.

• NATGATE has become the first company in Malaysia to manufacture AI servers locally. It will be collaborating with industry leaders, including NVIDIA, to integrate cutting-edge technologies into its AI server offerings.

• Record high quarter earnings. The company recorded strongest quarterly net income of RM46.6m in 3Q24 since its listing. Given the anticipated boom in the data center market over the next 3-5 years, we expect the group’s earnings to grow.

VITROX – One of the Key Players in the AI and Robotics Segment

• VITROX is a Malaysian technology company that specializes in the design and development of machine vision and electronics.

• Key player in edge AI and robotics. In June 2024, NVIDIA CEO Jensen Huang highlighted ViTrox during his COMPUTEX Taipei keynote as a key player in edge AI and robotics within Foxconn Industrial Internet's factory ecosystem.

• Khazanah partnered with ViTrox’s co-founders to invest in the Cambrian Fund, focusing on IR4.0 technologies such as machine vision and robotics, aiming to transform Malaysia’s semiconductor and advanced manufacturing sectors.

MNHLDG – Tagging the Growth in NETR and Data Center Boom

• MNHLDG is involved in providing underground utilities and substation engineering services in the power industry in Malaysia.

• Solid orderbook stood at RM763.7m. With the recent win of contract worth RM162.7m for hyperscale data center, the solid order book will provide strong earnings visibility to the group for the next two years.

• Record quarterly earnings. In 1Q25, it registered its strongest quarterly earnings of RM7.1m since its listing, driven by the substation engineering segment and substantial progress on major projects. We believe the group is well positioned to capitalise on the growth prospects within the power sector, riding the growth in NETR and data center boom.

SCGBHD – Higher Demand Seen for Cables With Power Boom

• SCGBHD is a leading manufacturer of cables and wires for various applications, including power, communications, and industrial use.

• 10 consecutive quarters of growing earnings. The group managed to grow its earnings fuelled by rising demand for cables and wires amid power infrastructure boom globally, with a portion of its products exported to the US market.

• Orderbook increased to RM872m after bagging a contract worth RM172.6m. This should keep them busy at least for the next 1-2 years.

SMRT – Strong IoT Player With Solid Growth

• SMRT via its subsidiary, N’osairis Technology Solutions (NTS) offers fully managed IoT solutions to enterprise customers, covering the utilities, financial services and retail sectors, which include Tenaga, Air Selangor and PLN in Indonesia.

• Grown by leaps and bounds. They were only managing near to 600 sites in 2016 and has expanded to over 25k sites to date. We believe this is a testament to its strong execution and significant growth potential going forward.

• SMRT expanded into Philippines. SMRT has been granted a project by Pito AxM Platform Inc (PAPI) in the Philippines, involving the deployment of managed ATM infrastructure solution across designated sites across Luzon for a 3-year period.

SSB8 – From Construction to Data Center

• SSBB is a construction management specialist for high-rise and residential buildings and civil infrastructure. With the recent acquisition of M&E specialist, SJEE, the company has expanded its presence in the rapidly growing data center space

• SJEE will provide a profit guarantee of not less than RM15m over 3 years and possesses a healthy order book of RM73.5m for data center projects with an additional RM450m tenderbook. The acquisition is expected to be completed soon with earnings consolidation into SSBB starting from 2QFY25.

• Total outstanding orderbook stood at RM1.1bn, providing strong earnings visibility for the group over the next few years.

SENDAI – Realising Strong Order Book Into Earnings

• SENDAI specialises in structural steelworks and energy projects, with operations spanning SEA, India, North Africa, and the Middle East. Its expertise includes structural steel design, fabrication, erection, and mechanical installations for power plants, oil and gas facilities, and offshore platforms.

• Record order book of RM6.7bn, driven by the new contract wins worth RM1.1bn in India, Singapore and Saudi Arabia.

• SENDAI to supply steel beams for Trojena Ski Village Project in Saudi Arabia. The first steel structure was installed on 20th Jun, and met the first contractual milestone. Project progress is expected to accelerate from Nov-2024, leading to increased revenue and profit contributions for SENDAI in 2025.

OSK – Firing Up in All Business Segments

• OSK engaged in property development, financial services, construction, industries and hospitality business. Also, OSK owns 10.27% of RHBBANK, which provides a steady stream of dividend income for its shareholders.

• OSK to acquire Universal Cable. In Sep-24, OSK has entered into S&P agreements with Universal Cable acquiring 2 manufacturing plants for RM85m (total NBV stood at RM146.0m). Universal Cable primarily manufactures and sells telecommunication and power cables, complementing the existing products portfolio of Olympic Cable (97.47%-indirectly owned), which produces copper, aluminium, fire-resistant, solar DC, fibre optic and transmission cables.

• All business segments are recovering. We believe after the Covid-19 pandemic, its financial services, hospitality and property developments segments are poised for strong recovery, driving significant growth in 2025.

HARTA – Recovering Earnings and Demand and Higher Tariffs

• HARTA is one of the leading glove manufacturers in Malaysia.

• The imposition of higher tariffs on China products by the US is expected to boost demand for Malaysian gloves.

• Earnings are recovering. While earnings have not yet fully recovered to pre-Covid levels, the company is on the right track with inventory normalisation and consistent demand from the healthcare sector.

• Elevated interest rate will boost USD strength, which will benefit glove manufacturers like HARTA as an export-oriented company.

ARMADA – Exploration of Offshore Business With MISC

• ARMADA is a leading Malaysian offshore energy facilities and services provider, specialising in EPCC of FPSO, FSU, and OSV, operating across Asia, Africa, and Latin America.

• FY24 earnings grew significantly… 9M24 earnings grew 44% to RM717.8m as compared to RM497.5m in 9M23, due to higher contribution from Armada Kraken FPSO and Armada Olombendo FPSO

• Solid orderbook of RM10.2bn as of 9M24 with additional optional extensions of up to RM9.5bn will be supporting the earnings visibility going forward.

PEKAT – Benefiting From Electricity Tariff Hike and NETR Blueprint

• PEKAT is a leading EPCC service provider in solar photovoltaic (PV) systems, earthing and lightning protection systems, and other renewable energy solutions.

• TNB’s tariff hike to expedite solar PV adoption. TNB has announced electricity tariff hike for 2025-2027 and it makes solar energy an even more attractive alternative for businesses and households looking to manage rising energy costs.

• Boost from NETR Blueprint. PEKAT stands to benefit from initiatives such as the removal of the 85% demand cap under the SelCo program and expanded solar deployment opportunities on land and water.

Source: Mplus Research - 30 Dec 2024