KUALA LUMPUR (Oct 29): The influx of China's investments to Malaysia may disrupt the supply side of the equation and elevate competitive intensity, thereby posing risks to the local incumbents, said Citi Research.

This could potentially impact key sectors such as industrials, property, automobile and telecommunications.

In a report today, Citi Research cited the property sector, which has hogged headlines with massive developments in Iskandar Malaysia by Chinese developers. This has increased competition for incumbents such as UEM Sunrise Bhd and Sunway Bhd, it said.

It also noted that Chinese auto firm GW Motor Co Ltd’s proposed investments into Malaysia seeks to increase domestic assembly capacity by nearly 13% and thus, overcapacity is a risk if the export plans into the rest of Asean do not take off.

Nevertheless, Citi Research said the key beneficiary of Chinese foreign direct investments (FDIs) would be IJM Corp Bhd, given the longer term potential development in Kuantan Port, Pahang.

"The port contributed 10% to IJM’s financial year 2014 (FY14) core pretax profit and makes up about 12% of our revised net asset value (RNAV) for IJM,” it added. 

In February 2013, IJM had signed a Memorandum of Understanding with Guangxi Beibu Gulf International Port Group for the disposal of a 40% equity stake in Kuantan Port Consortium Sdn Bhd to Guangxi. The deal  includes the construction of a new deepwater terminal on a 700-acre industrial site north of the Kuantan Port, which is to be acquired with the assistance of the Pahang state government.

“We understand that construction works for the expansion began in September 2013 and it is scheduled to commence operations in 2016,” said Citi Research.

In addition, IJM’s property arm, IJM Land Bhd had in December 2013 paid RM296 million for a 60% interest in Asas Panorama Sdn Bhd, a joint venture with Sino Development Ventures Ltd, to acquire and develop 273.2ha of land near Kuantan Port. 

"IJM Land is planning a RM1.4 billion mixed development project comprising primarily industrial development there," Citi Research said.

On the property sector, Citi Research said Chinese developers have made foray into Malaysia since 2012, with pioneers like Country Garden, Guangzhou R&F and Agile.

“Fierce competition in the domestic market and the current property market downturn in China have made developers look for diversifications along the value-chain, across industries and overseas. 

"Chinese developers have seen some early success in Malaysia. With its first project launched in 2013, Country Garden posted more than Rmb10 billion subscription sales for a single project in Malaysia, making it the largest developer in the country in terms of sales,” said Citi Research.

"Chinese developers’ expertise in project design, community layout, marketing strategy and execution stand out and residential units catering to Chinese way of living can easily find markets among local Chinese," it added.

For the auto sector, Citi Research said Malaysia can become an investment destination for China auto makers as the Asean auto market is still relatively dominated by Japanese brands.

"With overcapacity escalating in China and outlooks for other emerging markets uncertain (Russia/Ukraine/Latin America/Middle East) some original equipment manufacturers are shifting their focus towards Asean, which has a population of at least 400 million and fast-growing economies. 

"The wide existence of Chinese-speaking communities in Asean countries helps understanding the local market easier than say Latin America, and the price sensitivity of this market also gives Chinese carmakers some opportunities to expand," it added.

Citi Research also pointed to China Mobile’s (CM) interest in telecoms firm Axiata Bhd.

CM for its part had started venturing in other areas such as its recent investment in Thailand (18% in True Corp) and failed attempts to expand into Taiwan (Far Eastone). 

"Malaysia for its part could offer itself as a potential target market for CM given the availability of assets both with incumbents and relatively smaller late comers in need of capital.

"Based on press reports on Aug 8, CM has reportedly held talks with Khazanah Nasional Bhd on potentially acquiring a 20% minority stake in Axiata Group. 

"A stake in Axiata would have given CM immediate extensive albeit indirect footprint across multiple markets given Axiata’s quality assets in Malaysia (Celcom), Indonesia (XL), Sri Lanka (Dialog), Bangladesh, Cambodia and Singapore. 

"No deal however has materialised to date. Given Axiata’s position as a national champion, it may be difficult to envisage Malaysia’s willingness to allow a foreign state-owned entity to influence its strategy," it noted.

Citi Research added that in the absence of any direct acquisition of a major incumbent operator, CM could explore potentially partnering with smaller operators such as U Mobile Sdn Bhd, which has announced intentions to list and secure capital. 

"CM’s entry in this case could plug any capital needs on the part of U Mobile, which will in turn allow it to expand its network more effectively.

“Alternatively, CM could also think about partnering with Telekom Malaysia Bhd (TM) on its planned/announced long-term evolution (LTE) deployment following its acquisition of Packet One Networks (Malaysia) Sdn Bhd. 

"Synergies in this sense would be more visible given TM’s LTE focus where CM has recently devoted attention to given its recent TD-LTE roll-out in its home market," it said, adding that this partnership would allow CM to further expand its TD-LTE technology influence outside of the China market.