noname

Investment Research

Thematic Report

ETP Much Ado About Nothing

Date: 30 September 2012

Executive Summary
Of late, the ETP has become the basis for sector upgrade for the investment community. It has been claimed that various sectors ranging from oil and gas to construction to property will stand to benefit from ETP. In effect, ETP has now become an investment panacea of sort. Our view is that the ETP, far from being a panacea, is not even a well thought out plan. On the contrary, the ETP is characterised by ill-conceived and hastily developed EPPs along with indiscrimate credit taking. The ETP, instead of being a comprehensive and robust roadmap, is no more than an awkward collection of random premature ideas that falls apart quickly under scrutiny. Furthermore, Malaysia would achieve, on her own, a GNI per capita that is higher than ETP target of RM48,000 based on just historical growth rates. The ETP is thus irrelevant. In fact, growth in nominal GNI per capita is actually forecasted to decline and not increase in the period under ETP. In summary, the ETP is a non-event and does not warrant a place in the investment decision making process. ETP will not make house prices go higher, ETP will not create a massive infrastructure demand and ETP will most certainly not have any material impact on any industries at all. ETP will not do all the above because ETP does not require Malaysia to continue growing at the rate beyond what she has been growing in the past.

John LEE
john@nonameresearch.com

nonameresearch.com | 30 September 2012

Table of Contents
Overview of ETP ......................................................................................................... 3 Much Ado About Nothing........................................................................................... 7 Ill-conceived and hastily developed EPPs ............................................................... 7 Obtuse forecasts and economic models ................................................................ 9 Indiscriminate credit taking .................................................................................. 10 What Exactly is the Government Role? .................................................................... 12 Investment is actually projected to be lower under ETP ..................................... 12 We will get there on our own even without the ETP ........................................... 13 Conclusion ................................................................................................................ 14

nonameresearch.com | 30 September 2012

Overview of ETP
Objective is to become a high income economy. The Economic Transformation Programme (ETP) is intended to build on the direction outlined 10MP and is part of the government broader agenda which includes 1Malaysia, Government Transformation Programme (GTP) and New Economic Model (NEM). The projects and initiatives identified in the ETP are expected to transform Malaysia into a high income economy. Nominal GNI per capita to grow from RM23,700 (USD6,700) in 2009 to RM48,000 (USD15,000) by 2020. The USD15,000 target was chosen based on World Banks definition of a high-income economy GNI is expected to increase to just over RM1.7tn in 2020 compared to RM660bn in 2009 Of the GNI growth, 31% is expected to be delivered by Entry Point Projects (EPP), 10% through multiplier effects, 33% through business opportunities, remaining 26% from other non-NKEA sectors 3.3 million jobs are expected to be created during this period

Based on inflation assumption of 2.8% and population growth assumption of 1%, the real growth rate required to achieve ETP objective is 6% per annum over 10 years.
Figure 1: Real growth of 6% required to achieve high-income nation status

Source: ETP

nonameresearch.com | 30 September 2012

Figure 2: NKEA is expected to create 3.3 million jobs over 10 years

Source: ETP

ETP jargons. Some of the key terms used in ETP are as below: National Key Economic Areas (NKEA) - An NKEA is defined as a driver of economic activity that has the potential to directly and materially contribute a quantifiable amount of economic growth. 12 NKEAs have been selected (11 industry sectors and 1 geographical sector) and will receive prioritised government support including funding, top talent and Prime Ministerial attention. In addition, policy reforms such as the removal of barriers to competition and market liberalisation will be targeted at the NKEAs Entry Point Project (EPP) Initiatives are classified as either EPPs or business opportunities. EPPs are projects that should generate big result fast. They are clearly defined initiatives that have potential investors identified, a well-developed implementation plan and clearly articulated funding requirements Business opportunities Business opportunities capture the potential of the sector to grow organically. Some business opportunities will be triggered by the successful execution of EPPs

Key characteristics. The initiatives under the ETP are structured around the 12 NKEAs which are further divided into 131 EPPs. The 12 NKEAs are inherited from 10MP and are basically areas of focus of the ETP. The 12 NKEAs are: Oil and gas Palm oil and related products Financial services Wholesale and retail

nonameresearch.com | 30 September 2012

Tourism Information and communications technology Education Electrical and electronic Business services Private healthcare Agriculture Greater KL (not an industrial sector but a geographical sector)

Cumulative incremental GNI of RM800bn and jobs of 3.3m. Out of the 12 NKEAs, the Greater KL NKEA differs from the remaining 11 NKEAs as it is expected to encompass some of the other NKEAs contribution. Excluding Greater KL/KV NKEA, the remaining NKEAs are expected to generate RM800bn in GNI and 3.3m in jobs over a 10 year period from 2010 to 2020. The top four GNI contributors are expected to be: Oil and Gas (RM131bn) Palm Oil (RM125bn) Financial Services (RM121bn) Wholesale & Retail (RM108bn)

The top four jobs contributors are expected to be: Wholesale & Retail (595,000 jobs) Education (536,000 jobs) Tourism (497,000 jobs) Financial Services (275,000 jobs)

Figure 3: Expected GNI (nominal) and jobs impact from ETP

Source: ETP

nonameresearch.com | 30 September 2012

Private sector led, government facilitated. In order for ETP to be carried out successfully, RM1.4tn of investment is required for the 12 NKEAs from 2010 to 2020. Private investment is expected to account for 92% (RM1.3tn or RM130bn per year). Out of the RM1.3tn, 73% is expected to come from domestic direct investment and 27% from FDI Public funding is expected to account for the remaining 8% (RM100bn or RM10bn per year). Public funding is to the government own admission currently constrained by the need to manage the country fiscal position

Implementation. In addition to existing regulators and government agencies, a new ETP unit under PEMANDU will be created to monitor and implement the initiatives under ETP. Broadly speaking, the regulators are tasked with carrying out the necessary amendment to regulations while the government agencies are tasked with facilitating the implementation of the EPPs. The main government agencies involved in the EPU are: EPU and MOF MIDA will play a supporting role to attract investment Talent corporation support EPP by executing programmes to attract and retain talent PEMUDAH and Productivity Corporation UKAS (Unit Kerjasama Awam Swasta) to facilitate PPP via Facilitation fund GLC such as Khazanah and PNB to provide funding support ETP unit under Pemandu architecting ETP, resolving issues in implementation

nonameresearch.com | 30 September 2012

Much Ado About Nothing

Ill-conceived and hastily developed EPPs
EPPs not well thought out. There is a lack of cogency in the 12 NKEAs and 131 EPPs. All the EPPs appear ill-conceived and hastily developed. Example: The Klang Valley MRT flip-flopping According to the ETP (introduced in Oct 2010), one of the key developments for Greater KL/KV would be the development of the MRT. The MRT, Malaysia largest infrastructure project ever, will cost RM36bn and will consist of one circle line and two radial lines (see Figure 4).
Figure 4: Proposed MRT lines as stipulated in ETP (Oct 2010)

Source: ETP

Fast forward to 1H11, less than six months later, the MRT as envisioned by the ETP has been replaced by something materially different altogether. The MRT now calls for a merger of the two radial lines (the red and green lines in Figure 4) into one single line (blue line in Figure 5) while the circle line has been neglected altogether. Furthermore, the cost of the one new line alone is now RM20bn compared to RM36bn for all three lines previously1.

The final incarnation of the MRT, approved on Jun 2011, is just the one blue line to be built at a cost of RM20bn.

nonameresearch.com | 30 September 2012

Figure 5: Govt proposed merging of Red and Green line in Dec 2010

Source: SPAD

So no sooner has the ink dried, the ETP planners decided to change the MRT from one radial line and two circle lines to just one radial line. The key milestone was not adhered to as well since the MRT was supposed to begin construction in 2Q11 (see Figure 6). At the time of this report in 3Q12, construction has yet to commence2.
Figure 6: Key milestones for Greater KL/KV (Oct 2010)

Source: ETP

Considering that the MRT, Malaysia largest infrastructure project ever, could suffer from not just hiccups but a complete revamp is indicative of how hastily the EPPs has been put together. Recall that, EPPs were described as projects that should generate big result fast. They are clearly defined initiatives that have potential investors identified, a well-developed implementation plan and clearly articulated funding requirements

Note also from Figure 6 that the Cabinet was supposed to decide on the High Speed Rail (HSR) system which will connect KL and Singapore. No such deliberation took place. The HSR is still in the feasibility study stage.

nonameresearch.com | 30 September 2012

Surely, that was not the case with the largest EPP of all, the MRT. And if Malaysia largest infrastructure project could suffer from such bad planning, rest assured that the other EPPs are equally bad.

Obtuse forecasts and economic models

Not clear how impact is derived. Under the ETP, for each NKEA, the GNI impact of the EPPs is first estimated by forecasting the GNI impact specific to the EPP (column A in Table 1 below). Subsequently, the EPPs are expected to generate even more GNI through multiplier effect (column B) and this is added to the GNI impact specific to the EPP to result in total GNI impact (column C). For example, under the Oil, Gas and Energy NKEA, the EPPs identified is expected to generate RM47bn in GNI and an additional RM84bn in other/multiplier effect for a total GNI impact of RM131bn. Our main criticisms are as below. Firstly, it is unclear how the expected GNI impact of the each EPP is derived (column A). They are simply pronounced as such in the ETP Secondly, even more obtuse is the derivation of other impact/ multiplier from the EPPs (column B). Subsumed under this category are multiplier effect and business opportunities. These business opportunities are particularly dubious as they are really unidentified initiatives that are expected to arise following the EPPs. How these business opportunities are aggregated to arrive at the sum shown in column B is a puzzle considering they are, by definition, yet to be identified Thirdly, the above expected incremental GNI impact (column C) are added to the 2009 GNI (column D) to derive 2020 GNI (column E). This is incorrect for the total GNI impact is expected to accrue over a period of 10 years to 2020. It should not be added to 2009 GNI on the basis of a simple sum as it would then imply that the GNI impact, instead of being incremental, is now recurring annually and thus grossly overstating the impact

Table 1: ETP forecast of NKEA jobs and GNI impact No EPP 9 12 8 10 13 12 6 15 10 6 13 16 Additional jobs 553,000 52,300 41,600 275,400 595,400 497,000 246,000 157,000 43,163 181,000 535,000 74,600 GNI Impact (A) 193 47 47 29 40 28 37 35 17 20 19 18 Others/ multiplier (B) 199 84 78 93 67 38 23 18 19 15 15 11 Total impact (C) 392 131 125 122 108 67 59 53 36 35 34 29 2009 GNI (D) 258 110 53 59 57 37 20 37 22 15 27 20 2020 GNI (E) 650 241 178 180 165 104 79 90 58 51 61 49

NKEA (RM bn) 1 2 3 4 5 6 7 8 9 10 11 12 Greater KL Oil, gas and energy Palm oil Financial services Wholesale and retail Tourism Business services Electronics and electrical Comm, content, infra Healthcare Education Agriculture
Source: ETP

nonameresearch.com | 30 September 2012

How reliable really is all this forecasting? It would be helpful to take a step back and reflect on the forecasts included in the ETP. These forecasts attempt to capture expected GNI impact of the EPPs (both identified and yet to be identified) over a period of ten years. Even without probing into the details of the financial model used to forecasts these numbers, it is clear that there will be a significant margin of error involved. It is an uphill task to even forecast the revenue of a single company five years ahead. Hence, to forecast GNI for 11 industries over 10 years is essentially a futile exercise. You can be sure that the final GNI impact (or EPPs for that matter) will hardly resemble what is being forecasted today. In fact, the largest of all EPPs, the MRT, has already derailed from the plan that was outlined in the ETP just half a year ago.

Indiscriminate credit taking

Taking credit even when it is not due. As part of the ETP plan, the ETP unit under PEMANDU publishes regular updates on EPPs on both on their website and in the media. Reproduced in Table 2 below are some of the updates and as can be observed, the announced projects actually have little to do with the ETP. Instead, they can be broadly subdivided into: Projects that are normal part of business. Some of the projects are part and parcel of normal business plans and have little to do with government plans. Example includes TM RM418.5m investment in undersea cable to expand capacity, Air Asia plan to purchase three A330-200 aircraft and Mydin plans to open 14 more branches Projects that predates ETP. Some of the projects have already been finalised even before the conception of the ETP. Example includes MAHB plan to build LCCT and St Regis plan to build hotel in KL Sentral. Projects that have since been modified. The MRT comes to mind immediately. Post the announcement of the MRT, both the alignment and the cost of the project have changed significantly. Originally the MRT is to cost RM36bn and consists of a circle line and two radial lines. Now, the two radial lines have been merged into one radial line which is expected to cost RM20bn alone and circle line appears to be absent altogether

Since the first two categories encapsulate projects that are normal part of business and projects that predate ETP, no credit should be assigned to the ETP. ETP had no part to play in these investments at all. These projects came into existence as part and parcel of normal private investments in Malaysia without the ETP assistance. The third category encapsulates projects that have since been modified and should therefore count as ETP failure and not success. Why should projects such as the MRT, which has been significantly revised compared to when it was first announced, be counted as an ETP success rather than failure?

10

nonameresearch.com | 30 September 2012

Table 2: ETP update on selected EPPs

Investment: RM418.5 million

Investment: RM1.86 billion

Investment: RM486 million

Investment: RM1.2 billion

Investment: RM1 billion

Investment: RM36.6bil without land acquisition and rolling stock

Source: ETP website

11

nonameresearch.com | 30 September 2012

What Exactly is the Government Role?

Investment is actually projected to be lower under ETP
92% of required investment of RM1.4tn from private sector. Due to the fact that public funding is to the government own admission currently constrained by the need to manage the country fiscal position, 92% of the required RM1.4tn of investments required for the 12 NKEAs from 2010 to 2020 under the ETP is expected to come from the private sector. In other words, approximately RM120bn worth of private investment per year is expected for the next ten years to 2020 in order for ETP to deliver on its promises. To put things into perspective, RM120bn is almost double the annual private investment of RM68bn per year in the last six years.
Figure 7: Required average annual private investment 2011-2020

Source: ETP

Is average RM120bn private investment realistic? Surprisingly, yes. The average of RM120bn may seem higher than the historical private investment of between RM50-RM80bn but a quick calculation would show that the RM120bn average for the next ten years is actually very much in line with past trends. Historically, private investment has grown of at a CAGR of 12% in the period 2003 to 2010. In Table 3 below, on an assumed annual growth rate of just 10%, the average private investment between 2010 and 2020 would already be RM138bn, higher than the ETP required investment of RM120bn.
Table 3: Scenario analysis: Private investment 2011-2020 RM bn Private investment Avg 2010-2020 2011E 87 2012E 96 2013E 105 2014E 116 2015E 127 2016E 140 2017E 154 2018E 169 2019E 186 2020E 205 138

* Assumed a growth rate of 10% per year

12

nonameresearch.com | 30 September 2012

We will get there on our own even without the ETP

ETP surprisingly assumed a lower growth rate compared to historical. For the period 2011 to 2020, in order to achieve the targeted RM48,000 GNI per capita in 2020, the ETP is forecasting 6% real GNI growth and 2.8% inflation (or a nominal GNI growth of 8.8% per year) and population growth of 1%. Historically, in the period 2003 to 2010, nominal GNI grew at a rate of 9.3%, higher than ETP expected growth of 8.8% for 2011 to 2020. This means, surprisingly, growth is expected to be lower under the ETP compared to the previous period without the ETP.
Table 4: Nominal GNI growth: Historical vs ETP CAGR Nominal GNI growth (forecasted ETP) Nominal GNI growth (actual 2003-2020) 8.8% 9.3%

ETP redundant, target would be reached without it. Based on ETP assumed nominal GDP growth of 8.8%, Malaysia would have actually achieved a higher GNI per capita of RM54,497 compared to ETP target of RM48,000 (see Table 5). In other words, even on the lower 8.8% growth compared to actual historical growth of 9.3%, the GNI per capita would have exceeded ETP RM48,000 per capita target.
Table 5: Scenario analysis: GNI per capita based on ETP assumptions RM bn Nominal GNI Population (m) Implied GNI per capita (RM) 2011E 806 28.5 2012E 877 28.9 2013E 954 29.2 2014E 1,038 29.5 2015E 1,130 29.9 2016E 1,229 30.2 2017E 1,337 30.5 2018E 1,455 30.9 2019E 1,583 31.2 2020E 1,722 31.6

28,247 30,387 32,688 35,165 37,828 40,694 43,776 47,093 50,660 54,497

This begs the question, what then is the governments or ETP role? What exactly is the ETPs contribution considering that even if successful, the initiatives under ETP will merely keep Malaysia in the trajectory that she is already on? It appears that unless Malaysia future growth will be lower than historical trend, Malaysia will achieve the RM48,000 per capita target even without the ETP.

13

nonameresearch.com | 30 September 2012

Conclusion
Of late, the ETP has become the basis for sector upgrade for the investment community. It has been claimed that various sectors ranging from oil and gas to construction to property will stand to benefit from ETP. In effect, ETP has now become an investment panacea of sort. Our view is that the ETP, far from being a panacea, is not even a well thought out plan. On the contrary, the ETP is characterised by ill-conceived and hastily developed EPPs along with indiscrimate credit taking. The ETP, instead of being a comprehensive and robust roadmap, is no more than an awkward collection of random premature ideas that falls apart quickly under scrutiny. Furthermore, Malaysia would achieve, on her own, a GNI per capita that is higher than ETP target of RM48,000 based on just historical growth rates. The ETP is thus irrelevant. In fact, growth in nominal GNI per capita is actually forecasted to decline and not increase in the period under ETP. In summary, the ETP is a non-event and does not warrant a place in the investment decision making process. ETP will not make house prices go higher, ETP will not create a massive infrastructure demand and ETP will most certainly not have any material impact on any industries at all. ETP will not do all the above because ETP does not require Malaysia to continue growing at the rate beyond what she has been growing in the past.

14

nonameresearch.com | 30 September 2012 Rating structure The rating structure consists of two main elements; fair value and risk rating. The fair value is derived based on assessments of the securitys underlying business fundamentals. The risk rating reflects the uncertainty associated with the security fair value and is derived based on assessments of various factors such as underlying business risks, contingent events and other variables. Both the fair value and risk rating are then used to form a view of the security potential total return. A Buy call implies a potential total return of 10% or more, a Sell call implies a potential total loss of 10% or more while all other circumstances result in a Neutral call.

Disclaimer This report is for information purposes only and is prepared from data and sources believed to be correct and reliable at the time of issue. The data and sources have not been independently verified and as such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this report. The information and opinions in this report are not and should not be construed as an offer, recommendation or solicitation to buy or sell any securities referred to herein. Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction.

15