China Evergrande Group HKG: 3333 debt crisis has limited impact on Bursa — AmInvestment Bank
KUALA LUMPUR (Sept 21): Concerns over whether Chinese property developer Evergrande Group will default on its payments together with the contagion risk have affected the overall sentiment of Asian equity markets, but the impact on Malaysia’s stock market will be limited, said AmInvestment Bank.
The investment bank said the potential contagion risk to Asian equity markets was currently limited unless the Chinese government allowed Evergrande Group to default and did 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,” it added in its strategy note today.
Evergrande Group’s share price fell 10 per cent on Monday to HK$2.28, the lowest level in more than 11 years, following concerns that the company may not have sufficient cash to address its near-term payment obligation to lenders.
Year-to-date, the stock has tumbled 85 per cent from HK$14.90 at the start of 2021.
As of June 30, 2021, Evergrande had short-term debt of 240 billion renminbi (1 renminbi = RM0.65) and long-term debt of 332 billion renminbi. With 87 billion renminbi cash (excluding the restricted cash), the company was in net debt position of 485 billion renminbi.
In terms of direct exposure to China’s property market for stocks under AmInvestment Bank’s coverage, only two property companies have exposure to the republic’s property market, namely IOI Properties Group Bhd (developments in Xiamen) and Sunway Bhd (development in Tianjin).
“Based on our channel checks, none of the ongoing developments involved Evergrande. The remaining gross development value of IOI Properties Group and Sunway in China is also insignificant at only 3.0 per cent and 1.0 per cent, respectively, of their total group portfolio,” it added.
However, in the short term, property sales in China may slow down on dampened buyer sentiment.
AmInvestment Bank does not expect any impact on Malaysian banks as they focus mainly 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,” it added.
Separately, AmInvestment Bank has downgraded its end-2021 FTSE Bursa Malaysia KLCI (FBM KLCI) target slightly to 1,643 points from 1,695 points, with price earnings target being reduced to 15.6 times.
“The discount in our valuation reflects the recovery towards normalisation though not fully to the pre-pandemic level in the near term. Our 2021 earnings growth has also been lowered to 54.6 per cent from 55.5 per cent previously.
“The weaker earnings growth is due to the reduction in earnings growth from Top Glove, which is one of the FBM KLCI components,” the investment bank said.