KUALA LUMPUR: 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, says Citi Research.
In a report yesterday, Citi Research cited the property sector, which has hogged headlines with massive developments in Iskandar Malaysia, Johor, 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 seek to increase domestic assembly capacity by nearly 13%, 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 pre-tax profit and makes up about 12% of our revised net asset value for IJM,” it said.
In February 2013, IJM signed a memorandum of understanding with Guangxi Beibu Gulf International Port Group for the disposal of a 40% stake in Kuantan Port Consortium Sdn Bhd to Guangxi. The deal includes the construction of a new deepwater terminal on a 283.2ha industrial site north of Kuantan Port, which is to be acquired with the assistance of the Pahang 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 forays 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 diversification along the value-chain, across industries and overseas.
“Chinese developers’ expertise in project design, community layout, marketing strategy and execution stand out and residential units catering to the Chinese way of living can easily find markets among local Chinese,” it said.
Meanwhile, Citi Research said Malaysia can become an investment destination for China automakers as the Asean market is still relatively dominated by Japanese brands.
As for the telecommunications sector, Citi Research pointed to China Mobile’s (CM) interest in telecoms firm Axiata Group Bhd.
“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 latecomers 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,” said Citi Research.
“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.
“Alternatively, CM could also think about partnering with Telekom Malaysia Bhd on its planned/announced long-term evolution [LTE] deployment following its acquisition of Packet One Networks (Malaysia) Sdn Bhd,” it said, adding that this partnership would allow CM to further expand its TD-LTE technology influence outside of the China market.
This article first appeared in The Edge Financial Daily, on October 30, 2014.