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AmInvest Research Reports

Author: AmInvest   |   Latest post: Wed, 27 Oct 2021, 11:01 AM

 

Strategy - Assessing impact from Evergrande’s debt crisis

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Investment Highlights News

  • China’s Evergrande Group share price declined 10% on Monday to HK$2.28. This is the lowest level in more than 11 years. YTD, the stock has tumbled 85% from HK$14.90 at the start of 2021. We understand that the weak share price performance is caused by concerns that the company may not have sufficient cash to address its near-term payment obligation to lenders. As of 30 June 2021, Evergrande has short-term debt of RMB240bil and long-term debt of RMB332bil. With RMB87bil cash (excluding the restricted cash), the company was in net debt position of RMB485bil.
  • According to Evergrande’s announcement to the Stock Exchange of Hong Kong, “the month of September is typically when real estate companies in China record higher contract sales of properties. However, the ongoing negative media reports concerning the group have dampened the confidence of potential property purchasers in the group. The company expects significant continuing decline in contract sales in September, thereby resulting in the continuous deterioration of cash collection by the group which would in turn place tremendous pressure on the group’s cash flow and liquidity”.
  • Concerns on whether the company will default on its payment together with the contagion risk have affected the overall sentiment of Asian equity markets. For example, the Hang Seng Index plunged 821.62 points or 0.64% to 24,099.14 on 20 Sep. Regionally, Asean stock markets’ performance on 20 Sep was as below: i) FBMKLCI Dropped 20.62 points or 1.33% to 1,527.89 points - Dropped 20.62 points or 1.33% to 1,527.89 points

ii) FTSE Straits Times STI Index - Dropped 29.50 points or 0.96% to 3,041.73 points

iii) SE Thai Index - Dropped 22.59 points or 1.39% to 1,603.06 points

iv) Jakarta Composite Index - Dropped 56.93 points or 0.93% to 6,076.32 points

v) Philippine SE Index - Dropped 54.95 points or 0.79% to 6,857.90 points


Our view

  • We believe that the impact to Malaysia’s stock market will be limited. In terms of direct exposure to China’s property market for stocks under our coverage, only two property companies have exposure to China property market. They are IOI Properties Group (developments in Xiamen) and Sunway (development in Tianjin). Based on our channel checks, none of the ongoing developments involved Evergrande. The remaining GDV 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%. However in the short term, property sales in China may slow down on dampened buyer sentiment.
  • We do not expect any impact on banks. Malaysian banks' focus in Asia are mainly in 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.
  • On the potential contagion risk to Asian equity markets, we believe it is limited at this juncture unless the China 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.
  • Our in-house projection for Malaysia 2021 GDP forecast is maintained at 3.0%–3.5%.
  • Separately, we have downgraded our end-2021 FBMKLCI target slightly to 1,643 points (from 1,695 points). Our target PE has been reduced to 15.6x which is at -0.5SD. The discount in our valuation reflects the recovery towards normalization though not fully to the pre-pandemic level in the near term. 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, which is one of the FBMKLCI components.
  • We maintain Maybank, Tenaga Nasional, CIMB Group, Telekom Malaysia, RHB Bank and Westports as our top picks We have also added Sime Plantation, Dialog, Sunway and Media Prima to the list.


 

Source: AmInvest Research - 21 Sept 2021

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OnTime $200-$300billion is 1.3% of China's gdp. When Lehman Brothers collapsed its debt was $35TRILLION, twice the gdp of the USA.
21/09/2021 3:30 PM


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