Who is in Dubai and Vietnam?

KUALA LUMPUR: The announcements on Dubai World’s debt restructuring and the Vietnamese dong’s devaluation hit world markets late last week. Malaysia was not spared, with some construction companies, perceivably with the most direct exposure, falling -9.2% since last Wednesday (compared to a -0.1% fall in the KLCI).

Malaysia’s exposure to the Middle East is not large. The only direct exposure is the construction industry with some small contracts. But with 75% of infrastructure work in the Middle East coming from Gulf Cooperative Council (GCC) countries (which are oil-rich) ex-Dubai, we see no permanent dent to the prospects for work.

We believe there is limited risk to earnings at Malaysian corporates stemming from Dubai’s debt restructuring and Vietnam’s currency devaluation, and our positive view on the market remains intact. Earnings recovery remains intact supported mainly by a recovery in Malaysia’s gross domestic product.
Specific companies with a Middle-Eastern skew to investments, such as MMC Corporation Bhd (not rated), may come under closer scrutiny for their exposure, however.

We believe a sentiment-driven correction in Malaysian construction players should be used as a buying opportunity. Impact of the macro events on banks should be limited.

Construction: Limited impact
For Dubai, although both IJM Corporation Bhd and Gamuda Bhd have some construction order book from the Middle East, their pending works from the Dubai region are negligible. In fact, most of the infrastructure opportunities out of Middle East come from GCC countries ex-Dubai, which are in turn backed by oil reserves for funding support.

While IJM does not have any projects in Vietnam, Gamuda is developing a property asset called the Yenso Park project in Vietnam. Gamuda’s exposure increases further as Gamuda’s construction arm is also undertaking infrastructure development for the project.

While we expect the project to be one of the key contributors to the company’s earnings, the devaluation impact is likely to be muted as most of the project contribution is denominated in US dollars. Almost 70% of Gamuda’s construction and property transactions are US dollar-based, thus the devaluation of the dong should not impact the company’s earnings adversely.

In a worst-case-scenario (assuming the dong as the revenue currency), we estimate the maximum negative impact of devaluation would be 0.5% and 0.8% of our FY10F and FY11F earnings forecasts, respectively.
Thus, any sentiment-driven correction in Malaysian construction players should be used as a buying opportunity, in our view.

Banks
Malayan Banking Bhd (Maybank) appears to have the highest exposure of Malaysian banks under our coverage to both the Middle East and Vietnam. Recall, management had in FY09 made a RM200 million general provision for potential defaults of selected Middle East corporates, thus the final impact may not be as large.

Maybank also has RM586 million of loans extended in Vietnam and a RM335 million investment in Vietnam-based An Binh Bank, bringing its total Vietnam exposure to 3.5% of total shareholders’ funds, according to our estimates.

CIMB Group Holdings Bhd also has been active in the Middle East through its CIMB Islamic division, which is involved in a joint venture with the Kanoo Group in Bahrain. Management declined to discuss specific client details, but said that there is unlikely to be any impact from Dubai-related exposure.

Public Bank has a 50% stake in VID Public Bank Bhd (Unlisted), which contributed about US$5 million (RM17 million) of group pretax last year (~0.6% of group pretax). Its cost of investment in Vietnam is about RM130 million, on our estimates.

Hong Leong Bank was given a licence to operate a wholly owned commercial bank in Vietnam in January 2009. The bank was incorporated in July 2009 with charter capital of ~RM205 million, equivalent to 3.4% of shareholders’ equity. Banks with minimal/no exposure to both these regions include AMMB Holdings Bhd (RM4.9, buy) and Alliance Financial Group Bhd (AFG, RM2.78, buy).

Property: Risks for pockets in the Nusajaya development
UEM Land Holdings Bhd (ULHB, not rated) appears the most exposed to the Dubai World crisis. ULHB has a 40% stake in a JV with Limitless Land, a Dubai World entity, to develop a 111-acre high-end residential development called Residential North in Puteri Harbour, Nusajaya.

The JV was set up in December 2007 with a total initial investment of RM241.8 million and development is estimated by the company to be worth RM1.5 billion in gross development value (GDV) by 2013, when it is scheduled for completion.

Since the JV was set up in December 2007, we understand that there has not been much progress in the development. The pull-out of Damac Properties, which is another Dubai property company, from a RM397 million deal to buy three commercial land parcels in Puteri Harbour in June this year probably held back the development of Residential North further.

ULHB’s pro-rata initial investment of RM96.7 million represents just 3% of its RM3.18 billion assets as of end-June. However, judging from the three times book and 67 times consensus FY10F earnings the market is valuing ULHB at, we think at least some of that RM1.5 billion estimated GDV of Residential North is probably reflected in the current valuation.

That the development of Nusajaya has been slower than anticipated has been a major concern for investors, we believe, and the current Dubai episode introduces more uncertainties. Besides Limitless Land’s involvement in the Residential North development, Dubai’s Millennium Development is also one of the three partnering developers of Medini, Nusajaya. The development of Medini is also understood to be at a very preliminary stage.

In terms of stock performance, ULHB has been a clear outperformer year-to-date — up 200.9% on a total return basis, vs the KLCI’s 48.9% gain. Only IJM Land Bhd (IJMLD, not rated) fared better among the major property companies in Malaysia with a 247.7% gain over the same period.

ULHB’s shares fell 30.5% over a one-month period between 12 June and 13 July, vs the KLCI’s loss of 2.4% over the same period when Damac pulled out from the Puteri Harbour deal in June 2009.

A view of Mina Seyahi in Dubai (photo by Reuters)