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TRADE TENSIONS

Singapore market still singing trade war blues

Companies with supply chain links in China, as well as banks, airlines and ports, could feel the impact from the latest round of Sino-US tariffs

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Credit Suisse says between 10 and 14% of local banks' loan books are in trade loans, so the trade war could affect their growth momentum.

Singapore

BEGUN, the trade war has. And the wall of tariffs dividing the US and China could stretch well beyond 2019, pundits say, making bargain hunting in affected Singapore stocks a difficult proposition.

Credit Suisse's private banking research head for South-east Asia Kum Soek Ching told The Business Times: "Anyone going into the Singapore market now has to have at least a 12-month investment horizon in view of the multiple headwinds, not only from a more protectionist trade environment but also from a liquidity squeeze from higher US interest rates and a stronger US dollar."

While some consumer gadgets such as iPhones, smartwatches and bluetooth devices have escaped the latest round of levies on "Made in China" products, that still leaves nearly half of all Chinese exports to the US subject to duties.

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The new 10 per cent tariffs apply to US$200 billion worth of Chinese goods and take effect from Monday. The tariffs will rise to 25 per cent on the first day of 2019. Another US$50 billion worth of Chinese exports have already been taxed earlier this year. China has retaliated by slapping tariffs of up to 10 per cent on US$60 billion worth of US goods.

Among Singapore-listed companies, electronics manufacturers with a supply chain linked to China are expected to be the most vulnerable.

Six out of 13 of Hi-P's manufacturing plants are based in China, and it derived 24 per cent of revenue last year from the US. Valuetronics' are sited in Guangzhou, and 42 per cent of its revenue came from the US in the 12 months to March 31.

Memtech International does all its manufacturing in China, but executive director Chuang Tze-Mon told BT that he is yet to see a direct impact to operations.

"At present, our annual ramp-up of production during the seasonally stronger third quarter is ongoing. For example, within the automotive segment, most of our projects are servicing the China and Asia-Pacific markets. In addition, the majority of our products are delivered to downstream manufacturers within China which further mitigates the impact from tariffs," he said.

CGS-CIMB tech analyst William Tng said: "Overall, the impact is very hard to say. The way we are thinking now is that if all your factories are in China, you have less room to manoeuvre. If you talk to manufacturers, people are making enquiries and checking with their peers, 'If I do this in Malaysia, Batam, Vietnam, what kind of price are you going to charge?'"

Last month, Taiwan's Delta Electronics, which does most of its production in China, chose to handle trade risks by launching an offer to buy out its Bangkok-listed associate, so mergers and acquisitions could be one thing to look out for.

Other Singapore-listed manufacturers such as Venture Corp have plenty of spare capacity in Malaysia if customers want to move production lines here. But "unless they're doing simple things like mounting components to circuit boards, that cannot happen overnight", Mr Tng said.

In the special case of Apple suppliers, which have evaded tariff shock this time round, UOB Private Bank investment strategist Francis Tan said: "I think the market share of Apple in the US is very large - I think they will be let off the hook for a long time, however long it takes for them to shift out of China." (President Donald Trump has urged Apple to start building new plants in the US, in a tweet.)

Mr Tan sees the trade war dragging on for as long as Mr Trump remains president of the US. His four-year term ends in early 2021.

Singapore banks will also be directly affected by the trade war, flagged Credit Suisse's Ms Kum.

"For the banks, between 10 and 14 per cent of their loan books are in trade loans, so a fall-off in trade momentum due to the trade war could affect the banks' loan growth momentum. DBS and OCBC have a bigger exposure to Hong Kong and China, but so far the banks have not reported any material impact yet. We think this is probably a risk for 2019," Ms Kum told BT.

"The banks' wealth management units will also be impacted by a general risk-off market sentiment under the shadow of a prolonged and vicious trade war," she added.

DBS Singapore equities research head Janice Chua has a negative outlook on airlines and port operators such as Hutchison Port Holdings Trust, which are focused on China and Hong Kong.

Ms Chua said of Singapore Airlines: "Air cargo earnings are not a major proportion of overall profit for most airlines, the most being up to 30 per cent for Cathay Pacific, and up to 15 per cent for SIA. But currency movements will have a more real impact on the earnings of airlines, with a stronger US dollar resulting in higher costs for Asian carriers."

NRA Capital research head Liu Jinshu described the September tariffs as more wide-ranging than earlier rounds, and cautioned: "Affected products include food, some auto parts, clothing, minerals and chemicals. The tariffs might cause Chinese producers to turn to their domestic market or other international markets, leading to stiffer competition especially for commodity companies."

But Jennie Liu, spokesperson for China Sunsine Chemical Holdings, which sells rubber accelerators to tyre makers, told BT: "We don't see any material impact on our sales from the new tariffs. China Sunsine's direct exports to the US market were about 5 per cent in 2017; in the first half of 2018, they dropped to 2 per cent. Global demand for rubber accelerators will rise in tandem with growing car population."

She added that many Chinese tyre makers have set up factories in South-east Asia, after the US imposed anti-dumping and countervailing taxes on passenger and light-truck tires in 2014.

As for Singapore-listed plantations, Phillip Securities head of research Paul Chew does not see any direct impact except for Wilmar, which is the second-largest soyabean crusher in China.

For now, any so-called winners in the trade feud would be riding on currency movements more than anything.

Mr Chew highlighted companies that bill in US dollars while booking costs in emerging markets, such as rubber glove makers Riverstone and UG Healthcare, as well as coal and palm oil exporters.

But Charles Antonny Melati, executive chairman of Indonesian coal miner Geo Energy, which exports mainly to China, was more cautious: "The depreciation of the rupiah is a positive as our production costs, more than 50 per cent of which are in rupiah, are now lower in US dollar terms. In contrast, the weakening renminbi, trading at a 19-month low, has translated to higher costs in US dollars when payment is settled for commodities such as coal, which dampens the coal import demand from China."

Other companies that could get an earnings lift from a stronger greenback include Yangzijiang Shipbuilding, Hi-P, Venture and UMS, wrote DBS Research. Malaysian wooden furniture maker LY Corp also sells in US dollars while most of its manufacturing costs are in ringgit.

In the long run, tariffs can be deflationary and limit growth, but Credit Suisse's Ms Kum believes that the rise of the Chinese consumer is a secular trend that is not going to go away.

She said: "China's retail sales growth has been soft of late, but that has much to do with system deleveraging, particularly in the property sector ... The increasing penetration of smartphones is providing a strong backstory for online shopping in China, where 20 per cent of retail spending is done online. The online channel is offering an additional opportunity for companies to raise sales, especially in luxury goods and fast-moving consumer goods. Generally, we see the Chinese consumer as a more resilient theme than other cyclical sectors amid a more uncertain market backdrop."

 

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