Singapore Strategy - Aftershocks From China’s CNY Devaluation


The Straits Times Index (STI) fell a whopping 4.2% over the past two days, after China’s surprise move to change the basis of valuing the CNY, which has pushed down the value of CNY/USD by 2.7% and at one point to a level not seen since Jul 2012. In this report, we list down the SG companies that have exposure to China and attempt to estimate the impact on them. Our economist expects further follow-up changes from the PBOC, with the US Federal Reserve rate hike still on the table (either in Sep or Dec 2015), and continuing decline in global equities of 5-10% still probable in the weeks ahead.

Banks, commodities and the oil and gas (O&G) sectors are the most affected, routed by contagion effects over the health of the Chinese economy and sentiment on forex risk in China-dependent economies (MYR and IDR down 2.7% and 2.1% over USD respectively), weakening the asset prices in commodities and further tumbling of oil prices, with the US oil benchmark settling at its lowest level in more than six years (USD43.08 a barrel at one point). Representatives from each segment and their downside over two days (2D) include DBS (2D: -8.3%, DBS SP, BUY, TP: SGD23.30), Noble (2D: -12.9%, NOBL SP, NR) and Nam Cheong (2D: -9.0%, NCL SP, BUY, TP: SGD0.40) as per Figure 3.

Large Singapore (SG) companies with China exposure
Selectively, DBS has more than one-third of its gross loans from Greater China and Hong Kong. On the property front, CapitaLand (CAPL SP, BUY, TP: SGD4.22) and Global Logistic Properties (GLP SP, NR) has 41.4% and ~40% of total assets in China respectively, with both companies maintaining a natural hedge by borrowing in local currencies. Others with majority of their assets and income contribution from China include Yangzijiang Shipbuilding (YZJSGD SP, BUY, TP: SGD1.68), China Everbright International (257 HK, NR), SIIC Environment (SIIC SP, NR), and CapitaLand Retail China Trust (CRCT SP, NR), among others (see Figures 1-2).
Brace for further near-term onslaught
China devalued the CNY for the second day running, sparking fears that the world’s second-largest economy is in worse shape than investors estimated. It set the CNY daily midpoint even weaker than in Tuesday’s devaluation. We believe China’s currency move will decrease the appetite for risky assets in Singapore in the near term. Downside risk includes other central banks being forced to follow suit, which may trigger a fresh round of currency weakening in the emerging economies. We urge investors to stay cautious on forex- exposed companies for now. Amongst our coverage, we favour stocks that rely solely on domestic demand (all SGD-denominated) or generate revenue/lock-in contracts in the USD (or currencies pegged to the USD). Stay defensive in this climate.


Our BUY calls are listed in the table below. (Read Report)

Source : RHB Research

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