IMPACT from the possible collapse of China’s Evergrande Group (the country’s second largest property developer by sales) to the Malaysian stock market is limited judging from the company’s limited link to Malaysian stocks.
According to AmResearch, only two property companies under its coverage have direct exposure to China’s property market.
“They are IOI Properties Group Bhd (developments in Xiamen) and Sunway Bhd (development in Tianjin) but based on our channel checks, none of the ongoing developments involved Evergrande,” revealed the research house in a strategic note.
“The remaining GDV (gross development value) of IOI Properties Group and Sunway in China is also insignificant at only 3% and 1% respectively of their total group portfolio. Net gearing-wise, all six companies under our coverage are still manageable at below 60%.”
In the short term, however, AmResearch expects property sales in China to slow down on dampened buyer sentiment.
Yesterday (Sept 20), share price of the Evergrande Group declined 10% to HK$2.28 – the lowest level in more than 11 years due to concerns that the company will default on its near-term payment obligation to lenders.
Along with concerns over its contagion risk, sentiment of Asian equity markets was affected with the Hang Seng Index plunging 821.62 points or 0.64% to 24,099.14 while the FBM KLCI dipped 20.62 points or 1.33% to 1,527.89 points.
Elsewhere, AmResearch does not expect any impact on the financial sector given Malaysian banks are mainly focused on Singapore, Indonesia and Thailand.
“China is not a large or key market for regional banks. Hence, we do not see a risk for Malaysian banks from the default of Evergrande’s bonds,” opined the research house.
On the potential contagion risk to Asian equity markets, AmResearch believes that it is limited at this juncture unless the Chinese Government allows Evergrande Group to default and does nothing to control the situation.
“This is an unlikely scenario as we believe that Beijing will try its best to resolve the issue due to the need to provide stability for the people,” reckoned the research house.
Moving forward, AmResearch has maintained its 2021 gross domestic product (GDP) projection for Malaysia at 3%–3.5% but downgraded its end-2021 FBM KLCI target slightly to 1,643 points (from 1,695 points previously).
“Our 2021 earnings growth has also been lowered to 54.6% from 55.5% previously. The weaker earnings growth is due to the reduction in earnings growth from Top Glove Corp Bhd which is one of the FBM KLCI components,” justified the research house. – Sept 21, 2021
