China fund fears creep up in Malaysian market

Panic selling is expected on IWC when it reopens. Indications on Thursday morning prior to IWC

PETALING JAYA: Fears of companies from China not putting their money in Malaysian government projects, following the surprise cancellation of a deal that would have given a state-owned Chinese firm a stake in the development of the prestigious Bandar Malaysia project, caused sentiment on Bursa Malaysia to go south.

It came hot on the heels of the Ministry of Finance Inc (MoF) calling off the deal to jointly develop Bandar Malaysia with a consortium called ICSB comprising Iskandar Waterfront Holdings Sdn Bhd (IWH) and China Railway Engineering Corp (M) Sdn Bhd (CREC).

Stocks related to Tan Sri Lim Kang Hoo, who is the majority shareholder of IWH, particularly took a beating. Ekovest Bhd hit limit down in early Thursday trade to RM1.01, but subsequently recovered. It closed 26 sen down to RM1.17 on a volume of 230.13 million shares.

Trading in Iskandar Waterfront City Bhd (IWC) shares is suspended for two days following this development, and will resume on Monday, May 8.

Both IWH and IWC are controlled by Lim. IWH is to take over the listing status of IWC via a corporate exercise that should be announced today. IWC will resume trading at 9am on May 8.

Panic selling is expected on IWC when it reopens. Indications on Thursday morning prior to IWC’s suspension was that the stock would open at limit down level, which is 30% lower. The stock closed Wednesday at RM3.08.

Meanwhile, the construction index was the biggest loser of the day, down 1.88% to 341.84. The broader market was down 13.84 points to 1,758.67 on a volume of 3.45 billion shares. Overall, there were some 824 losers compared to 185 winners and 294 unchanged counters.

On Wednesday evening, TRX City Sdn Bhd, an entity under MoF, stated that the share sale agreement (SSA) governing the development of the 486 acres of land in Sungai Besi had lapsed because ICSB had failed to meet the payment obligations despite having been granted repeated extensions.

Following the termination of the agreement, the MoF through TRX City, owns 100% of Bandar Malaysia, the statement said.

Reports stated that the ICSB consortium had been given more than 12 extensions to complete the payment of the first 10% amounting to RM741mil. It is learnt that the consortium had already paid up RM200mil.

However, a source close to IWC said that the conditions precedent to complete the deal were only fulfilled yesterday and that the payment would only come later.

TRX City said it would immediately invite expressions of interest for the role of master developer of Bandar Malaysia to ensure that the Malaysian people benefit from its development in its entirety.

UOB KayHian research head Vincent Khoo said that the announcement by TRX City not only created a potential panic selldown on IWC, which was scheduled to soon sign a definitive agreement to merge with sister company IWH, but could also dampen the broader market sentiment and reverse positive foreign equity inflows into Malaysia.

“We expect IWC shares to be significantly impacted, unless a firm signal of a reversal of the Bandar Malaysia sale termination emerges before IWC shares recommence trading,” said Khoo.

Khoo said that a significant overcast on the broader market sentiment is expected, given that the IWH-IWC merger had marked the start of market exuberance and the run-up in small-mid caps.

“Now, there is the perceived implications on political uncertainty, ‘murkiness and reliability’ of government deals, and dampened sentiment of the Chinese foreign direct investment theme in Malaysia.

“This potential u-turn in sentiment could halt or reverse the strong year-to-date foreign equity inflow into Malaysia, and hence, the ringgit’s recent uptrend.

“Hence, we foresee a period of risk-off, marked by profit-taking on the many concept stocks which have gone ballistic year-to-date,” said Khoo in his report yesterday.

Nonetheless, despite this negative development, the merger between IWC and IWH is expected to continue. A definitive agreement is expected to be signed today.

Recall that in a corporate proposal announced on March 8, IWH would take over the listing status of IWC through a share swap between the two.

The ratio is on the basis of one IWC share to be exchanged for one share in an enlarged IWH. The new-look IWH (newco) will also own up to 7,400 acres of land fronting the sea between Johor Baru and Singapore.

IWH at the moment is 63%-owned by Lim through his private company Credence Resources Sdn Bhd, while the remaining shares are held by Kumpulan Prasarana Rakyat Johor (KPRJ). IWH holds a 38.34% stake in IWC that has 1,072 acres mainly located in Tebrau, Johor.

IWH, on the other hand, has 3,900 acres of waterfront land, of which 80% has been claimed.

The corporate exercise proposes that all land outside IWH that is owned by Lim and KPRJ be consolidated in exchange for new shares in the newco and redeemable convertible preference shares.

The new-look IWH, thus, will be sitting conservatively on RM30bil of prime city land. The basis of RM30bil is on the assumption that the 7,400 acres of land in the Johor Baru waterfront are valued at RM93 per sq ft.

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