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Slow recovery for Singapore companies with China operations amid outbreak
WHILE production has resumed for the manufacturing sector in China, analysts are expecting slow recovery for Singapore-listed companies with facilities there.
In order to contain the Covid-19 outbreak, Chinese authorities had extended the week-long Chinese New Year holidays with businesses only allowed to resume operations in their Chinese facilities from Feb 10.
The authorities also meted out quarantines and imposed restrictions on traffic across the country.
Given such limitations, time is necessary for supply chains to return to normal productions levels, RHB Securities analyst Jarick Seet told The Business Times (BT).
"The local provinces also instructed many of these companies to place preventive measures to guard against the spread of the virus which will hinder production and efficiency," said Mr Seet.
Overall capacity that is operational is far from optimal and analysts at Credit Suisse are expecting a 15 per cent shortfall in production for 1Q20.
Against such a backdrop, some companies are struggling to get their China operations up to speed.
Electronics manufacturing services firm Valuetronics Holdings said in a Singapore Exchange (SGX) filing that its factories at Huizhou in China's Guangdong province had resumed operations but some workers have been unable to return to work.
The firm is therefore expecting revenue shortfall for the six months ending March 31, 2020, against the same period a year ago on the back of the temporary drop in production.
Likewise, Jadason Enterprises' subsidiaries in China, which primarily provide manufacturing and support services to printed circuit board manufacturers in China, are in a similar predicament.
Workers who "returned to other parts of China for the Lunar New Year holidays are now unable to return to the factory due to travel restrictions implemented at these locations", according to the firm in an SGX filing.
Contract manufacturer Hi-P International has been resuming operations in China gradually since Feb 10. In its recent full year financial results outlook statement, chairman and chief executive Yao Hsiao Tung said: "However, the extent of any financial impact is difficult to ascertain as the situation continues to evolve, causing disruptions across global supply chains, including suppliers and final assemblers."
Other Singapore companies have also indicated in their SGX filings that their operations in China have been impacted. Some of these firms include computer parts distributor Powermatic Data Systems, precision components producer Broadway Industrial Group and precision metal part maker InnoTek. But these firms have yet to provide further updates on their operations since Feb 10 when factories were initially set to resume business.
With a lack of manpower and logistical hurdles to fully resume production, Phillips Securities' investment strategist Yeap Jun Rong said companies which are facing cash flow problems during this period of time will bear the brunt of the impact.
"They may be forced to take on more debt or seek alternative funding to tide their business through. This may result in subsequent higher amount of financing costs, which may potentially weigh down their capacity to recover," Mr Yeap told BT.
On the other hand, companies with a strong financial position and a well-diversified business will be able to better weather the storm.
"If they have factories outside of China that can help with production, that will be a plus," said CGS-CIMB analyst William Tng.
But the rate at which China's manufacturing sector recovers is also highly dependent on how Covid-19 develops.
While the situation seems contained for now, it may have long-term repercussions on firms if the situation worsens, said RHB Securities' Mr Seet.
For instance, tape manufacturer Luxking Group Holdings said in an SGX filing that prolonged disruption may result in the group's performance for FY2020 taking a hit.
However, things may look up if the virus outbreak is under control,
Phillips Securities' Mr Yeap said: "If the novel coronavirus is under control, it will spur confidence in local authorities to ease certain restrictions and workers may feel more safe to return to work."
Over the past week, Chinese authorities had already begun to loosen curbs for movement of people and traffic.
"Although many plants are currently operating far below normal capacity due to labour force shortages, I believe production rate should improve over time as workers adjust to strict precautionary measures while others fulfill their quarantine orders and return to work," said Mr Yeap.