Market to re-rate as Malaysia-China ties warm
KUALA LUMPUR: Analysts believe the revival of two major projects – Bandar Malaysia and East Coast Rail Link (ECRL) – is a strong sign of normalcy returning to Malaysia-China relations.
Last Friday, the Prime Minister’s Office confirmed that the government has decided to reinstate the 483-acre Bandar Malaysia project, which is estimated to generate RM140 billion in gross development value while attracting foreign direct investments.
This follows the recent revival of another Chineseled project, the East Coast Rail Link (ECRL) project, after the project turnkey contractor China Communications Construction Company Ltd agreed to cut the project cost by RM21.5 billion to RM44 billion from RM65.5 billion.
“We believe the market was caught by surprise – and caught short by Putrajaya’s sudden departure from its more “restrictive” views towards Chinese businesses following the change in power post-14th general election (GE14),” said the team at AmInvestment Bank Bhd
We believe the market was caught by surprise – and caught short by Putrajaya’s sudden departure from its more “restrictive” views towards Chinese businesses following the change in power post-14th general election. AmInvestment Bank
(AmInvestment Bank) in its notes yesterday.
“We believe the MalaysiaChina relations already hit the bottom in August last year when Prime Minister Tun Dr Mahathir Mohamad proposed a ban on foreign purchases of properties in Forest City, a US$100 billion (RM410 billion) property project comprising four man-made islands with a total area of 3,425 acres at the southern tip of Johor, developed by Chinese property giant Country Garden.
“We believe accelerated foreign direct investment (FDI) from Chinese businesses – or the expectations of this happening at some point alone – shall stabilise the stock market, ringgit, business and consumer sentiments, and hence the economy, if not lifting them out of the doldrums at present.”
The latest development could not have come at a more critical time, AmInvestment Bank said, as there has been concerns of capital flight from Malaysia following the recent decision by the Norwegian sovereign wealth fund to reduce its exposure to emerging market bonds, which could result in an outflow from Malaysian bonds estimated at US$1.9 billion (RM7.8 billion).
It was also worried by the news on the FTSE Russell putting Malaysia on the watch list with a view to excluding it from the FTSE World Government Bond Index which could trigger an outflow of Malaysian Government Securities to the tune of US$8 billion (RM32.8 billion).
“The revival of Bandar Malaysia alone could immediately bolster the government’s coffers by RM1.24 billion, being RM7.41 billion deposit plus RM500 million advance payment,” it added.
“The full settlement of the purchase consideration, of which the time frame is still unknown at present, could bring in another RM6.17 billion.”
Key sectors that stands to gain from the Bandar Malaysia revival are building materials and construction, it highlighted.
“The project will stimulate demand for cement and steel, of which the extent will depend on how aggressive Bandar Malaysia rolls out its launches,” AmInvestment Bank opined.
“The local participation requirements will ensure that Malaysian construction companies get a fair share of Bandar Malaysia’s construction works.
“However, we are mindful that not many local contractors have worked with Chinese main contractors before, and if their experience in time will be a fruitful one.”
The research firm pegged property players to expect negative impact from the Bandar Malaysia revival, as the massive integrated development would add more floor space to the already over-supplied residential, commercial, office and retail segments in the Klang Valley.
The saving grace is Bandar Malaysia may stimulate new demand if it is able to, as advertised, “draw major international financial institutions, multi-national corporations and Fortune 500 Companies to locate their regional headquarters” there, including (Chinese) tech giants such as Alibaba and Huawei.”
“We are more inclined to want to look beyond the sectors in our analysis for the revival of Bandar Malaysia,” it affirmed.
“We believe investors should instead focus on how the improved Malaysia-China ties could help bring down the market risk premium, resulting in multiple expansion for the market.”