Many stocks have been caught up in the sell-off, which include domestic-centric stocks that should not have been directly impacted by a limited trade spat. We highlight four such stocks: Genting Malaysia, Mynews Holdings, Petron Malaysia and WCT.
US And China Trade Tariffs
There is no trade war yet….
… but the rhetoric on both the US and Chinese sides had been escalating until President Xi Jinping’s conciliatory speech at the Boao Forum for Asia on Apr 10, where he pledged “new phase of opening up” for China’s markets.
So far, the proposed measures over the past three months have been as follows:
● Jan 22: President Donald Trump approved a 30% tariff on solar panels and a 20% tariff on washing machines which affect China and South Korea the most.
● Feb 16: The United States Department of Commerce presented several options to combat China’s trade practices, including tariffs of 24% on all steel imports (and 7.7%
on aluminium) which are widely seen as aimed particularly at China, the world’s largest steel maker.
● Mar 7: Europe pushed back as the EU officials threatened to place tariffs on American-made goods if the US would impose such tariffs on imported steel and aluminium.
● Mar 8: The US approved 25% tariffs on steel and 10% on aluminium; Mexico and Canada were granted initial exemptions.
● Mar 22: President Trump announced a plan to impose annual tariffs on USD50bn worth of goods from China.
● Mar 22: China made its own threat stating it would impose tariffs on USD3bn worth of American-made goods. The move was in response to the earlier decision in March by the Trump administration to impose steel and aluminium tariffs; this announcement came shortly after President Trump had disclosed his USD50bn tariff plan.
● Mar 22: The US decided to grant more exemptions on its steel and aluminium tariffs by offering temporary exemptions to the EU, South Korea and others.
● Apr 2: China imposed tariffs of up to 25% on 128 American-made products (including wine, pork, pipes, etc.) in response to the US-imposed tariffs on steel and aluminium. This action would mainly affect the US farm land and the rust belt communities, which have been politically important for President Trump.
● Apr 3: The US targeted electronics and it formally proposed tariffs on USD50bn worth of Chinese-made products, including flat-screen TVs, medical devices, aircraft parts and batteries.
● Apr 4: China countered with tariffs on soybeans, cars and chemicals and proposed USD50bn in tariffs on additional American-made products.
● Apr 5: President Trump doubled down and said he was considering imposing additional tariffs on USD100bn worth of goods, in response to China's retaliation.
● Apr 10: While speaking at the Boao Forum, President Xi promised a new round of opening up in China. Chinese officials were quick to emphasise that these measures were always a part of China’s economic plans and were not in response to the US threats.
There is an important reason to take this war of words seriously. For many years, before he became President, Mr Trump has been critical about the global trade system being unfair to the US economy and it is one area where he has been consistent. President Trump has always felt the US was not getting a fair deal from its trading partners. China has been singled out as the most “unfair” partner of all as it ran the largest trade surplus with the US at USD375bn in 2017 2 .
Regardless, there is a reason to predict this won’t go much beyond words. After all there are no winners in this war and this fact alone makes one believe that an actual trade war may not actually materialise. The issue really comes down to what each party hopes to achieve, what tools they have at their disposal, and ultimately what each is willing to compromise.
To be fair, the US complaints do have a certain amount of legitimacy, since China is not as open to imports from the US as the US is to imports from China. Just a couple of examples: the tariff China applies on US-made cars is 25% while the US imposes only a 2.5% tariff on Chinese-made autos; also, there is a forced transfer on technology that is imposed by China on the US firms, when setting up of joint ventures, as there are limits on ownership.
However, making the trade deficit the poster child is probably the way to go. The US current account deficit largely reflects a shortfall of domestic savings to investments, and unless the savings or investments rates change, the trade deficit will largely remain unchanged. If the US imposes tariffs on China, it may reduce its deficit with China but it may also in turn increase its deficit with some other countries. Therefore its overall deficit (as a percentage of GDP) would probably remain unchanged. There may also be a secondary effect - if the overall cost of imports rises, it would in turn affect the exchange rate, and hence the magnitude of the deficit.
In any case, if the US does go down the tariff route, the main impact on ASEAN is likely to
be through the value chains, and most likely be felt on electronics and electrical appliances sectors which we have addressed before.
The Chinese tariffs are likely to have a different effect as there isn’t really a value chain that uses intermediate inputs from the ASEAN which ends in the US. In any case, the Chinese tariffs are directed at agricultural products and more likely, the main result will be through a rise in the price of certain global commodities.
If matters get bad, there could be a rise in risk aversion, and markets may move to a “risk
off” setting. The Fed, despite its claims that its actions will not be affected by tariffs, is likely to take the rise in policy rates to a flatter trajectory than what we are predicting. At the very least, the Fed may take on a "wait and see" approach and which case the safe haven ssets, such as the US Treasuries and currencies such as the JPY, are likely to rally.
If things get really worse, it is possible that China may use other methods which it has at its disposal and the US doesn’t. For instance, there is already speculation that China may hoose to devalue the CNY 3 . There also is a possibility that China could threaten to sell or
even outright sell part of their holdings of US Treasuries, even at a loss.
Ultimately, how this pans out will depend on what both sides really want. In our view, if the US wants a greater access to the Chinese markets, it is likely to obtain it. If, on the other hand, this is actually a battle for the future of technology, such as robotics, electric cars, aerospace, or for cutting edge investments in artificial intelligence, the US may find a China that is not malleable. If restrictions are applied on Chinese acquisitions, then we may really be seeing a trade war.
For now, our expectations are that the war of words may continue with occasional threats
and occasional concessions and the markets may dance in step. This matter should probably stop at a certain stage, before it actually becomes a war of action. In such a scenario, various opportunities present themselves, both in defensive stocks or in stocks
where there has already been an over-correction.
Malaysia
Of the stocks under our coverage, about 71% have seen an YTD decline, battered not only by negative sentiment arising from the US-China trade tantrums but also by caution over the impending 14 th General Election (GE14). Both the US and China are important trading partners for Malaysia, while the electrical & electronic (E&E) segment is a major component of Malaysia’s exports. Naturally, technology sector names have been the worst affected as investors price in the potential negatives. However, many other stocks have been caught up in the sell-off and include domestic-centric stocks that should not be directly impacted by a limited trade spat. We highlight four such stocks.
Genting Malaysia (GENM MK, BUY, TP: MYR5.94)
We like Genting Malaysia’s earnings resiliency from its casino operations, which in our view could prove to be one of the best defensive picks amidst current US-China trade friction. While the share price has underperformed the benchmark FBM KLCI YTD, we advise investors to accumulate on weakness as we continue to see the opening of its 20 th Century Fox outdoor theme park by end-2018 to be a major visitation re-rating catalyst. This could then spur patronage to its hilltop casinos and hence improve profitability in the long run.
To briefly recap, the new facilities under its Genting Integrated Tourism Plan (GITP) would continue to open progressively over the next 6-12 months. Management reaffirmed that the 20 th Century Fox outdoor theme park is set to open later this year, while the Skytropolis indoor theme park would commence operations in 2H18. Out of the MYR10.4bn capex allocation, the group has thus far spent MYR6bn to date, with the remaining likely to be utilised by 2018/2019. Overall, 4Q17 visitor arrivals to the hilltop resorts grew to 6.7m (+34% YoY) and we expect further upside come 2H18 upon opening of new facilities.
Mynews Holdings (MNHB MK, BUY, TP: MYR2.03)
Mynews’ prospects are largely driven by the domestic market, and we think it is unlikely to be affected by the trade friction. This is given that all of its Mynews convenience store outlets are based in Malaysia and all of the products are sourced locally. We like Mynews for its attractive value proposition of exciting earnings growth, ambitious multi-pronged expansion plans, as well as the leadership of an entrepreneurial and driven management team. Its earnings growth would be underpinned by the outlet expansion as well as the rising demand for convenient ready-to-eat (RTE) food, which would be captured by its food manufacturing plant.
Petron Malaysia (PETRONM MK, BUY, TP: MYR10.70)
The group’s products are mainly sold in Malaysia (largely gasoline and diesel products) and pricing is pegged to weekly changes in Means of Platts Singapore (MOPS), therefore a trade war would not affect the group’s business directly. We like this stock because we think it has been oversold on overblown concerns of weaker refining margins. After factoring in significantly weaker (27% lower) gross margin/bbl in 2018, the implied FY18F P/E is at 8.9x, still an attractive level for a mid-cap. In addition, its petroleum product sales are also strong, with high single-digit growth (market growth was close to nil) achieved in FY17 due to effective marketing strategies. Petron Malaysia focuses on refining and distribution of petroleum products, concentrating largely on the Malaysian domestic market.
WCT (WCTHG MK, BUY, TP: MYR2.18):
A potential breakdown in trade negotiations between the US and China, in our view, would have little bearing on the Malaysian construction industry. High impact public transportation projects that have been announced or awarded such as the Mass Rapid Transit Line 3 MRT3), KL-Singapore high speed rail (HSR) and the East Coast Rail Link (ECRL) sit atop the Malaysian government’s list of priorities due to their social and economic benefits. In addition, funding for the projects has either been identified (HSR, ECRL) or is in the final stages of being determined (MRT3).
The Malaysian stretch for the HSR project is to be funded by the Malaysian Government, while the ECRL project would be funded by a soft loan provided by China Exim Bank. The MRT3 project, meanwhile, is expected to be funded by a consortium of local and international banks. A potential breakdown in trade negotiations between the US and China is unlikely to significantly shift China’s commitments on its One Belt One Road (OBOR) initiatives – and ECRL’s soft loan from China Exim Bank – in our view.
For exposure to the construction sector, we recommend that investors buy WCT. The company was one of only a handful of contractors that secured work packages for both the MRT2 and Light Rail Transit Line 3 (LRT3) – where It was the only company to secure three packages totalling MYR1.7bn. Hence, we see WCT as a good proxy to the bulge in government spending for domestic public transportation projects. The stock is underappreciated, in our view, having retraced 25% YTD. This is despite the company sitting on an outstanding orderbook of MYR5.6bn, which is a record for the company, and underpins our forecasted 3-year earnings CAGR of 21%.
source: RHB Research Institute – 13/04/2018
