China’s Evergrande debt crisis minimal to Malaysia
KUCHING: The ongoing financial issues surrounding Chinese developer Evergrande will likely have limited impact to Malaysia’s stock market.
The troubled property titan has warned it may not be able to service its colossal debts of more than US$300 billion, seeding panic among property buyers, bond holders and contractors while fanning fears of a default that could ripple through the world’s second-biggest economy.
As of June 30, 2021, Evergrande has short-term debt of 240 billion yuan and long-term debt of 332 billion yuan. With 87 billion yuan cash (excluding the restricted cash), the company was in net debt position of 485 billion yuan.
According to a report by AFP, the Hong Kong-listed firm has more than a million units prepaid by customers yet to be built, adding to the sense of dread among Chinese investors, many of them first-time buyers trying to get a foot on the runaway property market.
According to Evergrande’s announcement to the Hong Kong Stock Exchange, “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.”
The analyst team at AmInvestment Bank Bhd (AmInvestment Bank) saw that concerns on whether the company will default on its payment together with the contagion risk have affected the overall sentiment of Asian equity markets.
“We believe that the impact to Malaysia’s stock market will be limited,” it opined in a research note.
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 three and one per cent respectively of their total group portfolio.”
Net gearing wise, all six companies under AmInvestment Bank’s coverage were still manageable at below 60 per cent. However in the short term, property sales in China may slow down on dampened buyer sentiment.
The research house also did not expect any impact on banks, as Malaysian banks’ focus in Asia were 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,” it added.
“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.”