The 'old economy' still ticks

AS expected, February saw a market rebound, particularly for some smaller caps which posted strong earnings. Going forward, we expect market volatility to continue for the next few months, with March likely to be the month for some key announcements, the most important being be Malaysia's New Economic Model (NEM).

However, we expect the NEM to be long term in nature and highlight a few hot spots in the Old Economic Model that have led to significant foreign direct investments (FDIs) benefiting the CONSTRUCTION [], steel and oil and gas (O&G) sectors.

For March, our top buys are gradually shifting to defensive stocks, in line with our view of continued volatility. Pending the details on the NEM, we highlight three hot spots which have drawn almost RM30 billion in FDIs to Malaysia, thus benefiting our favourite sectors of construction, steel and O&G.

Going slightly more defensive. Our February top buys outperformed the market, with CIMB, Mudajaya, Supermax and KPJ all announcing sterling results. Only Lion Industries underperformed the KLCI, probably because it announced its results only on the last day of the month. For March, given the envisaged market volatility, we introduce some defensive stocks which are also situational plays.

Other than keeping CIMB, which may benefit should there be an interest rate hike and Lion Industries, which may move on its strong results, we keep defensive stock KPJ and introduce defensive plays Petronas Gas (possibly getting a more favourable contract with Petronas) and Malaysia Airports (looking to raise funds).

Upgrades galore during results season. While we will be publishing today a full review of the results released in February, we note that the results announced up to Feb 24 had been very strong and would appear to have overall exceeded our expectations. This has led to far more upgrades as good results were announced by a wide range of companies. Notable upgrades included Petronas Gas, ahead of the revision of its contract with Petronas, Malaysia Airports ahead of its RM2.5 billion fund raising exercise, CSC Steel on better prospects for steel companies and Litrak as more defensive buys may come into demand.

Outlook: Old economy still works
Eventful month. With February largely fulfilling our expectations of being a volatile month but with the smaller caps outperforming, we expect continued volatility in March. We note as well that the many key events in March include Bank Negara's Monetary Policy Committee meeting on March 4 to decide on the Overnight Policy Rate (OPR) and Statutory Reserve Requirement (SRR) for banks, the possible announcement of higher gas and electricity prices and possible award of the remaining two contracts for the LCCT. We have raised our forecast of the OPR to 2.25%, we believe there is still strong possibility that the government will first raise the SRR before making a move on the OPR, similar to what China has done since the start of 2010.

Most investors will be keeping an eye out for the announcement of the NEM, which will be announced during the Invest Malaysia conference on March 30 and 31. We believe that although higher power tariff prices may still be announced in March, given the current fluid political scenario, we would not be surprised if there is a further delay.

Three locations where DI is increasing. There has been an outflow of direct investment (DI) from Malaysia since 2006 with the outflow appearing to accelerate in recent years.

The outflow has been apparent to the man on the street with numerous multinational companies (MNCs) shutting down their operations in industrial centres in the Klang Valley as well as Penang while local companies have increasingly ventured abroad, such as CIMB, Maybank, AirAsia, Genting and YTL.

In the midst of this doom and gloom, we note three bright sparks where DI seems to be flowing in well and healthy, namely: the Manjung area in Perak, Tanjung Langsat Industrial Park in south Johor and Samalaju Industrial Park in Similajau, Sarawak.

Manjung: Malaysia's next steel hub
When we first heard rumours that Vale International, the world's second largest diversified metals and mining company and Latin America's largest company by market cap, was looking to set up a transshipment hub and iron ore pelletising plant in Manjung, Perak, we were somewhat sceptical.

We had asked what Manjung has to offer to an international giant. However, a visit by our Research Team revealed that the deepwater port at Manjung, which currently caters to the TNB's coal fired Janamanjung plant, would allow Vale to send Very Large Ore Carriers (VLOCs) which could unload iron ore to be then resent using smaller ships, thus making a iron ore distribution centre for Southeast Asia feasible.

With 166ha of land acquired by Vale with a further option of 306 ha of land plus a transshipment services agreement signed with Integrax, the operator of Lumut Port, we believe there is potential for Manjung to draw RM9 billion of investment for a transshipment hub and iron ore pelletising plant.

This RM9 billion will definitely transform sleepy Manjung and will go a long way towards addressing the outflow of DI from Malaysia. We expect the winners of this latest development to be the Malaysian steel sector, Integrax and YNH Property, the major developer in the region.

Tanjung Langsat: The quiet success story of Iskandar
As a house, we have never been particularly optimistic on the Iskandar Malaysia development corridor. We believe there are still challenges to beef up Malaysia's services sector while the targeted investors from the Middle East and Singapore will need a lot of courting before they can be convinced to come over.

So we were pleasantly surprised when we visited the Tanjung Langsat Industrial Park (TLIP) which sits just east of Pasir Gudang as we noted that it has quietly attracted some RM1.5 billion in investment for the Tanjung Langsat port zone itself, with more than RM1 billion in the other areas in TLIP within the last two years.

Key investors in TLIP are:

• Acerinox: A Spanish steel company building a stainless steel plant;
• Technip Asiaflex: A French O&G giant building a flexible O&G pipe plant;
• Trafigura: Global commodities trader invested in two oil tank farms;
• Kiswire: Korean company making steel rope for the O&G industry;
• EEW: German company making structural steel pipes for the O&G industry.

We believe that beneficiaries from the DI in TLIP include Dialog Group, which owns a tank farm in the port as well as Tanjung Langsat Port itself, which will be injected via a corporate exercise into Damansara Realty.

Similajau: 'SCORE'ing in Sarawak
As opposed to our initial doubts over Iskandar Malaysia, we have always felt that the Sarawak Corridor of Renewable Energy (SCORE) stood a good chance of success as it was based on manufacturing with subsidised energy, which we felt would more easily attract investors.

With the SCORE now having two planned aluminium smelters by Rio Tinto and Chalco with their respective local partners and planned capex of some RM13 billion, coupled with Tokuyama's solar panel manufacturing facility with a capex up to RM2.4 billion, SCORE would seem to be the biggest winner in terms of planned FDI in Malaysia.

While some may say that the smelters are still at the preliminary stage, Tokuyama of Japan has already announced concrete plans on its solar manufacturing facility and we believe it is only a matter of time before the smelters take off as electricity from Bakun will be available come 2011 and works for the Bakun-Similajau transmission line contract has been awarded.

With plans for another two large dams, namely Baram (1,000MW) and Baleh (1,400MW), construction companies and those involved in steel and power cables will be major beneficiaries in SCORE. Companies we like are Naim, Hock Seng Lee and Leader Universal.

We believe that the construction, steel and O&G sectors, which are among our top sector choices, will be major beneficiaries of these three hot spots for investment in Malaysia. In the interim, we maintain our KLCI fair value at 1,345 points.

A gradual shift towards defensives. For March, given that we continue to see volatility in the market, our top picks will gradually shift towards defensives although we do not advise a totally defensive strategy as yet. As such, our top picks comprise defensive and situational plays including:

• CIMB: We retain this cyclical blue chip given that BNM may indeed raise its OPR in March which would benefit banks' net interest margin in the short term;
• Petronas Gas: We introduce this defensive stock as its contract with Petronas is up for renewal by March 31, and we hope the new contract terms maybe more positive;
• Malaysia Airports: We introduce this defensive stock as its planned capital raising exercise may see some excitement in its share price;
• Lion Industries: We retain this small cap higher beta play as its strong results may jump-start its share price; and
• KPJ Healthcare: We retain this small cap defensive stock.