PETALING JAYA: Warming relations between China and Malaysia, along with the resurrection of China-linked projects such as the RM44bil East Coast Rail Link (ECRL) and the RM140bil Bandar Malaysia project, are catalysts that have yet to be factored into the Malaysian stock market.
As these projects inch closer to reality, the Malaysian stock market could see a boost, not just from new money being pumped into the country, but also new growth engines for the economy.
The FBM KLCI has been the worst performer against its regional peers in the first half of 2019.
At its close of 1,690 points yesterday, it was still down about 0.03% on a year-to-date basis.
“The full potential of the China factor has yet to unfold. Malaysian investors have not factored this in yet.
“With China and Malaysia back to being on good terms, this could eventually lead to a trickle-down effect on the other sectors as the multiplier effect kicks in,” said UOB KayHian research head Vincent Khoo.
Khoo added that this re-engagement opens many opportunities in sectors such as merchandise trade, manufacturing and services, foreign direct investment (FDI) and tourism.
The relationship between China and Malaysia appeared to take a new high following Prime Minister Tun Dr Mahathir Mohamad’s (pic) visit to China and his expression of support for the One Belt One Road initiative.
Prior to Dr Mahathir’s visit to China back in April, Malaysia-China relations were frosty and uncertain due to the suspension of several key China-linked projects by Dr Mahathir, who overthrew the previous administration in the May 2018 general election.
Dr Mahathir had attacked the China-linked mega projects launched by former premier Datuk Seri Najib Razak, alleging corruption, collusion and overpricing in the contracts.
Then, just before visiting China in April, Dr Mahathir made a U-turn on two major projects and the prospects of warm bilateral ties didn’t seem far-fetched.
On April 12, Malaysia revived the ECRL project after renegotiating its cost down to RM44bil from RM65.5bil.
It subsequently reinstated the Bandar Malaysia project, with a revised total gross development value of RM140bil.
Both these projects heavily involve China state-owned contractors.
In the case of the ECRL, there are more than RM10bil of subcontract opportunities for local contractors.
It could also create new industrial clusters along new railway corridors.
In the case of Bandar Malaysia, tech giants such as Alibaba and Huawei have also signaled their interest to set up their ICT centres there, thus further boosting property prices around the area.
“Potentially, it’s a big boost to the manufacturing sector, with anecdotally rising interest by Chinese manufacturers to establish in Johor,” said UOB Kay Hian.
“Investors have clearly not factored in much of the potential benefits from re-engaging China. Possibilities include elevated FDI and demand for Malaysian bonds, higher demand for Malaysia’s merchandise trade and crude palm oil, and improved Chinese tourist arrivals,” said Khoo.
On the stock market front, more merger and acquisition activities could materialise, lifting the valuations of targeted companies and sectors. This could give a boost to the local bourse.
Anecdotally too, Khoo said that industry observers note that there has been a surge of Chinese interest in establishing plants in Johor.
Beneficiary sectors include construction, manufacturing (exporters), and possibly plantation and selected property companies.
Plantations-wise, Malaysia and China signed a memorandum of understanding on April 25 to buy an additional 1.9 million tonnes of the commodity, worth about RM4.56bil, from 2019 to 2023.
The price was based on US$600 per tonne with an exchange rate of RM4 for US$1.
Last year, Malaysia exported 3.07 million tonnes of palm oil and palm products with a total value of RM8.38bil to China.
This was 7.3% more than the 2.86 million tonnes of palm oil sold at RM9.39bil in 2017.
China was Malaysia’s second-biggest importer of palm oil and palm-oil based products in 2018.
Meanwhile, in the manufacturing sector, China accounted for 16% of Malaysia’s total manufacturing exports (largest importer).
Malaysia’s tourism sector could also be boosted with the arrival of more Chinese tourists.
In 2018, China tourist arrivals grew by 29%.
Chinese tourist arrivals to Malaysia recorded an overwhelming increase from 2.2 million visitors in 2017 to almost three million in 2018, making them the largest group of visitors, followed by India and Korea.
In his second half outlook report published on July 1, AmInvestment Research Head Joshua Ng said that the FBM KLCI has become inexpensive from a historical standpoint.
“At the last close of 1,682.2 points, the FBM KLCI was trading at 18.0 times and 16.6 times our projected 2019 and 2020 earnings, respectively, at a discount to its five-year historical average of about 18 times.
“Past experience tells us that this would be short-lived, and we strongly advise investors to take advantage of the situation while it lasts,” said Ng.
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