Malaysia: Strategy
TPPA: What's In It For Us?
Analyst: Vincent Khoo, CFA Tel: (603) 2147 1998
Lester Chin Kent Lake Tel: (603) 2147 1970
Yesterday, Bank Negara hosted a briefing on the Trans-Pacific Partnership Agreement (TPPA), which provided optimism that TPPA would be beneficial to Malaysia. Although we understand that the TPPA would only be implemented in 2018 even should Malaysia ratify it in 2016, we highlight the key potential beneficiary sectors. They include export-oriented manufacturers (textile) and potentially, beneficiaries of the liberalisation of foreign ownership, such as convenience store retailers.
- The Trans-Pacific Partnership Agreement (TPPA) is understandably the most important trade negotiation since the World Trade Organisation in 1995, which would see 12 participating countries, including Malaysia. Collectively, these 12 nations have a population of more than 800m and account for 40% of global GDP.
What's New
- We attended yesterday's briefing on the "Implications and Benefits of Trans-Pacific Partnership Agreement" by key speakers Dr Sukhdave Singh, Deputy Governor of Bank Negara, and Datuk J. Jayasiri, Deputy Secretary-General of the Ministry of International Trade and Industry. On a whole, there is general optimism that the TPPA would present net economic benefits to Malaysia although these could be slightly offset by adjustment costs arising from heightened competition and cross-sectoral TPPA obligations.
- Parliamentary debate in Jan 16. The TPPA is set to be debated in the parliament in Jan 16. If passed, the TPPA will provide Malaysia access to four trading partners which Malaysia presently has no free trade agreements with - Canada, Mexico, Peru and the US. These four countries accounted for about 74% of the market size of the TPPA economic bloc, with a GDP of about US$21t as of 2014.
- According to a PwC study, Malaysia's non-participation in the TPPA would result in a cumulative GDP opportunity loss of US$9b-16b (RM67.36b) over 2018-27. Details remain scarce and the real implication of the TPPA would only be known upon its earliest implementation in early-18. However, we note that the tangible benefits would not come in until perhaps from 2018 onwards.
- Clear winners are export-oriented companies within the E&E and cost-efficient automobile component manufacturing sectors, which are set to benefit from the higher regional content value requirement and the opportunity to participate in direct government procurement, especially in the US. Similarly, textile manufacturers are set to benefit from the 'yarn forward rule' that requires TPPA nations' fabric production to use member-produced yarn in textiles in order to qualify for duty-free access.
- However, protected industries could face additional headwinds as the elimination of import tariffs promotes a higher degree of competition within the domestic market. Vulnerable sectors include steel manufacturing and national automobile assemblers. Nevertheless, the impact on the tobacco, brewery and pharmaceutical players would likely be muted in the near term as we understand that the period to achieve full liberalisation has been extended further from the standard 24-month threshold.
- Minimal impact on the financial sector. The TPPA is unlikely to have a significant impact on the banking sector's competitiveness and regulatory landscape as any further liberalisation remains subjected to various criteria. For example, under the TPPA, BNM will permit 100% foreign ownership of banks but subject to the "best interest of Malaysia" criteria. This is broadly similar to BNM's current flexibility on foreign shareholding limit granted to non-TTPA members but based on special government-to-government arrangements on the principal of reciprocity. To-date, no such agreements have been established as many member and non-member TPPA countries continue to have different regulatory limits and flexibility on foreign shareholdings on local banking entities.
TPPA IMPLICATIONS
| Sector | TPPA implications | Stock Impact |
| Automobile | -Tariff reduction provides increased market access for component manufacturers, although we note that most of the Malaysian autoparts producers are not regionally cost competitive, except for a few (eg APM and plastics component manufacturers). -Increased competition from TPPA countries expected to be moderate. - National car marques may lose the advantage. | Potential winners. Auto parts manufacturer APM Automotive Potential losers. National producers. |
| Banking | The TPPA is unlikely to have a significant impact on the banking sector's competitiveness and regulatory landscape as any further liberalisation remains subjected to various criteria. It is not surprising that the criteria stated are broadly similar to those subjected to locally incorporate foreign banks of non-TPPA members. Under the TTPA agreement, Bank Negara Malaysia (BNM) will allow banks from TPPA members' flexibility to establish an additional 8 new sub-branches but subjected to distribution ratio of 1 market centre: 2 semi-urban: 1 non-urban which is similar to the existing branch distribution ratio that all locally incorporated foreign banks currently adheres to. However, given the significantly lower ROE derived from rural and sub-rural branches, many locally incorporated foreign banks have not adopted an aggressive branch expansion plan. As part of the TPPA, BNM will also permit 100% foreign ownership of banks but subjected to the "best interest of Malaysia" criteria. This is broadly similar to BNM's current flexibility on foreign shareholding limit granted to non-TTPA members but based on special government-to-government arrangements on the principal of reciprocity. To-date, no such agreements have established as many member and non-member TPPA countries continues to have differing regulatory caps and flexibility on foreign shareholdings on local banking entities. For example, Vietnam who is one of the TPPA members will continue to implement a 20% foreign shareholding limit on its local commercial banks. | Banks with strong regional growth aspirations such as Maybank and CIMB could benefit from greater government-to-government reciprocal arrangement among member TPPA countries such as Indonesia and Vietnam. |
| Construction | Slightly positive for general construction companies as cost of construction related machinery imported from Japan and the US would be lower. | |
| Consumer – Brewery | According to the draft agreement, Malaysia is to phase out import tariffs on beer and other alcoholic beverages. Current duty on imported beer stands at RM5/litre and if the current import duty of RM5/litre is to be reduced to zero, local brewers will face significant competition in the long term. Nevertheless, the local brewers will continue to be protected by their significant scale advantage on A&P and distribution, apart from retaining a modest production cost advantage. | Potential moderate losers. Carlsberg, Guinness Anchor |
| E&E | Generally positive, underpinned by: a) further tariff reduction (albeit small) on major exporting countries, such as elimination of 0.6% tariff by the US, b) access to US government procurement (the US government is currently restricted from acquiring goods and services, including E&E, from Malaysia), and c) More liberalised cross-data flows are expected to improve efficiency. However, the benefits could be partly offset by increase in labour cost for companies that do not confront with the International Labour Organisation (ILO) Declaration (key item would be imposition of limits on working hours, ie < 60 hours per week and 1 day off per week). E&E companies would only benefit from the tariff removals from 7 TPPA members - Australia (0.03%), Canada (1.5%), Mexico (2.72%), New Zealand (0.76%), Peru (3.83%), the US (0.61%) and Vietnam (0.68%). | |
| Gloves | Mildly positive impact as the bulk of rubber gloves exported are for the medical sector and hence is not subjected to any import duty in the US. Glove companies are only expected to benefit from increased import volumes from 3 of the 12 nations which impose import duty on gloves - namely Canada (15.5%), Mexico (15%) and Peru (9%) with Canada being the only glove importer (ranked among the top 10) of rubber gloves from Malaysia. | |
| Manufacturing | Bulk of their sales to the US. Removal of import tariff will likely prompt higher orders from US clients. Tariff-free access to the US would provide a competitive advantage as the US imposes anti-dumping duties on imported solar products from China and Taiwan. | Potential winners. VS Industry, SKP Resources, SLP Resources, Wellcall Potential winners. Tek Seng |
| Oil & Gas | Petronas will get preference for local suppliers of up to 40% of its annual budget for upstream businesses (scale down from 70%, in a 6-year timeframe) and receive non-commercial assistance for specific projects. According to PWC, Petronas has increased the awards of service contracts to Bumiputera companies from 30% (in the 1980s) to over 70% last year. On the flip side, companies could be encouraged to increase investments in O&G assets in TPPA countries. | Potential losers. Companies with huge dependence on Petronas local contracts and those that lack diversification to global contracts may be affected. MMHE (90%), Barakah (90%), and Perisai (>80%), have the greatest exposure to Petronas on revenue/ EBIT. |
| Plantation | No material impact on the plantation sector. Among the top six importers, only the US (4.5%) and Japan (3.0%) are participating in the TPPA agreement. Currently, crude palm oil is not subjected to any import duty from both the US and Japan. | |
| Ports | Trade creation to potentially boost demand for container/volume services | Potential winners. Westports |
| Textile | Companies may be subjected to a clause whereby they would need to include 'yarn forward rule' that requires TPPA nations' fabric production to use member-produced yarn in textiles in order to qualify for duty-free access. | Potential winners. Prolexus and Magni Tech (Non-rated). |
Source: UOB Kay Hian
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