Hwang DBS Market Strategy-Budget 2006

A quiet Budget
>
> Overall, the 2006 Budget announcement was mildly contractionary (lower
> deficit target) and market-neutral as expected. Nevertheless, the Budget
> was positive for certain sectors, especially the tobacco sector as the
> effective total duty hike of 13% on cigarettes was much lower than recent
> rumours of 40-50% hikes. Construction companies should also benefit from a
> planned 10% increase in development budget.  In addition, the allowance of
> partial group tax relief could benefit selected companies with loss-making
> subsidiaries. No change to our 930-940 year end KLCI target, and our top
> Buys include B Toto, Public Bank and IJM. The biggest "winner" from the
> Budget announcement is BAT, which was recently upgraded to Buy.
>
> *           Reduced growth expectations. No surprises from the
> "fuel-defensive" 2006 Budget, which focused on cushioning the lower income
> group from rising inflation by maintaining fuel subsidies until end-2005,
> lowering road taxes for diesel-powered and lower capacity vehicles, and
> raising allowances to civil servants. The government now expects 2005 GDP
> growth to ease to 5.0% (6.0% before), before recovering to 5.5% in 2006. A
> moderate 5% rise in the Budget (to RM136.8m) will lower the government's
> target deficit to 3.5% of GDP (2005e: 3.8%).
>
> *           A big relief for cigarette producers. The effective total
> duties on cigarettes were raised by only 13%, and 9% for malt liquor
> products. This is positive for BAT and JTI, whose share prices were
> recently pressured by rumours of sharp duty increases. Tobacco producers
> raised prices by 6-10% which suggest margin and earnings expansion. The
> impact on malt liquor producers is Neutral given the moderate duty
> increase and more onerous duty hikes on hard liquor.
>
> *           Auto policy deferred again; no major incentives for the REIT
> market. Disappointingly, no announcements were made with regard to the
> auto sector since a more onerous tax structure was announced in Jan 2005
> (which raised duties on non-national car producers). Also disappointing is
> that the only modest incentive for REITs is tax deductibility of legal and
> consultancy expenses.