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Maybank IB picks top five listed beneficiaries as it ‘gan bei’ to 50 years of Malaysia-China friendship

Publish date: Thu, 20 Jun 2024, 09:09 AM

AS Chinese Premier Li Qiang arrived in Malaysia today for a three-day working visit and to celebrate 50 years of diplomatic ties between both countries, Maybank IB Research is not discounting the possibility of more foreign direct investments (FDIs) from China flowing into Malaysia amid further relaxations in visa requirements and inking of new trade agreements.

The research house went on to posit - with history as its guide - five potential beneficiaries which comprised Malaysian listed companies under its coverage where it has “buy” calls on and have potential Chinese catalysts.

Below are the five notable beneficiaries:

MYEG’s blockchain-based ZTrade platform could see substantial traction post-signing of official documentation between Malaysia’s Finance Ministry and the General Administration of Customs China today (June 19).

ZTrade enables the digitalisation of trade clearance and tariff computation to cut processing time by up to 50%.

Early-stage revenue generation from ZTrade will be primarily driven by the issuance of digital Certificates of Origin (CO) which is mandatory for all outbound Malaysian trade to China.

Each CO is priced at 200 yuan (c.RM130) with the option for a bundle plan (five COs at 750 yuan) made available to Malaysian exporters. ZTrade which is currently in the pilot testing phase is expected to go live by 3Q 2024.

Similar to MYEG’s Zetrix token sales business, Maybank IB Research expects ZTrade’s net operating margins to be in the c.90%-95% range. China has been Malaysia’s largest export partner for 15 consecutive years with the country accounting for the lion’s share of Malaysia’s cross-border trade last year at 17%.

Malaysia’s exports to China totalled RM192.1 bil (-9% year-on-year) in 2023. United Nation’s COMTRADE database further indicates that the compound annual growth rate (CAGR) of outbound Malaysian exports to China was a healthy 12% between 2016 and 2022.

EPMB has recently expanded upstream by collaborating with Chinese original equipment manufacturers (OEMs) Great Wall Motor and Beijing Automotive Group Co to serve as their contract assembler in Malaysia for right-hand drive vehicles for local and export markets.

Operations at the assembly plant are set to begin in 2H 2024 with an initial capacity of 6,000 units/year and projected to reach 30,000 units/year as EPMB secures more OEM assembly contracts.

According to the company, this venture is expected to boost EPMB’s margins with contract assembly offering higher margins compared to its traditional automotive parts manufacturing (teens vs low single digits in percentage terms).

Maybank IB Research expects the vertical integration to create synergies, thus enabling EPMB to supply parts to the vehicles it assembles.

China’s Haitian Group has bought 92 acres of land in ECW’s Eco Business Park II in 2023 while UEM Sunrise Bhd has signed a memorandum of understanding (MOU) with ITRAMAS Corporation Sdn Bhd and China Machinery Engineering Corporation to form a strategic partnership aimed at developing a 40-acre Renewable Energy Industrial Park in Gerbang Nusajaya, Johor.

Elsewhere, Bridge Data Centres backed by the Chinese tech giant ByteDance launched its data centre in Sedenak Tech Park, Johor in October 2022. Potential beneficiaries are sizeable landowners involved in industrial parks (ie ECW) and unlisted landowners such as Johor Corp and Iskandar Investment Bhd.

For exposure in the industrial property segment, Maybank IB Research likes ECW for its hands-on management, exposure in the industrial property segment in Klang Valley and Johor (10% of total gross development value) and relatively healthy balance sheet (0.3 time net gearing).

In April 2023, Prime Minister Datuk Seri Anwar Ibrahim announced that Rongsheng Petrochemical (the world’s largest petrochemical company) has committed an estimated total investment of up to RM80 bil for a refining facility in Pengerang, Johor.

Maybank IB Research believes that this will benefit Dialog Group due to the need for: (i) local EPCC (engineering, procurement, construction and commissioning) expertise; and/or (ii) storage of crude/refined/distilled products as Dialog will be able to provide long- term tank terminal services to Rongsheng should the investment come to pass.

Based on the research house’s calculation, every RM6.5 bil tank terminal investment (long term, independent, average utilisation rate assumptions of 87.5%; EBITDA margins of 80%) by Rongsheng will lift Dialog’s equity value by RM4.2 bil which will raise the research house’s target price by 74 sen/share from RM3.13 currently

Malaysia’s visa requirement exemption for Chinese visitors will run from Dec 1, 2023 until Dec 31, 2025. However, Thailand permanently exempted visa requirements for Chinese visitors on March 1, 2024. Chinese visitors are known to respond favourably to visa exemptions.

AAX has the largest exposure to Chinese destinations among Malaysian airlines. In 2019, 25% of its Available Seat Kilometres (ASK) were to Chinese destinations (Capital A Bhd: 14% of ASK).

That said, AAX is unlikely to fly a lot more frequently to Chinese destinations. It is operating 16 out of a planned 19 Airbus A330s by end-FY2024E (2019: 24 Airbus A330s).

However, it could charge higher fares to and from China. According to Maybank IB Research’s estimate, every RM5 increase in average fare will accrete RM16 mil-RM17 mil/year to core net profit and 26 sen to its AAX’s target price.

“Our base case earnings estimates and target price of RM1.88 assumes average fare of RM590-RM595,” added the research house. - June 19, 2024.

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