Highlights

• China has unexpectedly devalued the Yuan by 1.9% yesterday.
• We interpret the latest China move as a measure to safeguard its economic growth. The series of interest rate cuts and liquidity injection since beginning of the year may not be enough to achieve its targeted growth of 7% for 2015 (HLIB forecast: +6.8%). Please refer to our Economic report the same day for more comments.
• Recalled that we issued a report on 14 Jul entitled “Exposure to China” highlighting companies who have direct and indirect exposure to China.
• This report is to serve as a refresher to highlight the sectors and/or companies that have exposure in China given that besides potential impact on the economy, there could be direct implications to sectors and/or companies under HLIB coverage universe.

Comment

• From Figure 3 (on page two), various companies and/or sectors have exposure to China via revenue and profit as well as via centers, GDV, export, outlets, passenger, patronage and throughput which will also translate into financial performance.
• The percentage exposure varies but most, if not all, do not exceed 20% while some are less than 10%. The only exception is Sime Darby whereby China accounted for 24.2% of total revenue in FY06/14. However, at the EBIT level, China contribution was reduced to 10.4%.
• The degree of impact could also varied, depending on type of business (i.e. defensive or cyclical), price competitiveness (weaker MYR), availability of substitution, ticket item (big vs. small) as well as ability of management to maneuver their strategy to minimize the impact.
• Despite the various exposures, we are not pressing the alarm bell yet and are maintaining our assumptions and forecasts of these companies and/or sectors given that we expect the Chinese government to introduce more stimulus measures to sustain and stabilize economic growth. Moreover, notwithstanding the expected slowdown, we are still projecting China GDP growth of 6.8% (vs. 7% in our previous forecast).
• Thus, the 0.2-ppt reduction in economic growth projection is unlikely to result in significant financial impact to these companies and/or sectors.
• We will continue to monitor the developments in China and will not jump to conclusion (to significantly change the forecasts of these companies and/or sectors and subsequently result in potential change in ratings) unless we see signs of risks that the China economy will disappoint or undershoot significantly from our projection.

Source: Hong Leong Investment Bank Research - 12 Aug 2015