China’s stock market stimulus

In this issue:

• Sentiment on China improves in light of stimulus package
• Estate of Dyna-Mac’s late founder gives Hanwha deal a thumbs down

Greetings dear reader,

Chinese government officials are taking action to support the country’s economy and stock market, and investors are celebrating. Many market watchers believe last week’s developments mark only the beginning of more stimulus to come.

The action started Sep 23 with an announcement from People’s Bank of China (PBOC) governor Pan Gongsheng that a press conference would be held the next day to detail financial support for economic development. Minutes later, the central bank lowered a key interest rate.

On Sep 24, Pan said China was cutting the reserve requirement ratio for banks. This means banks can keep slightly less cash in reserve, and can lend slightly more. He also said the PBOC intends to “drive the market benchmark interest rate downward”.

Funds and brokers will be allowed to tap a PBOC swap facility to buy stocks, and a plan is in the works to set up a refinancing facility to help listed companies and major shareholders buy back shares.

Li Yunze, minister of the National Financial Regulatory Administration, said China will also inject capital into various banks to strengthen the financial industry.

Separately, the China Securities Regulatory Commission said it will actively back mergers and acquisitions involving strategic industries and key assets in a bid to support “economic transformation”.

On Sep 25, PBOC cut the rate at which it makes medium-term loans to banks and injected more money into the economy by purchasing securities.

State broadcaster CCTV, meanwhile, said one-off cash handouts will be given to the poor ahead of the Oct 1 anniversary of China’s founding.

The nation’s Cabinet also pledged to prioritise employment and wage growth in its policies.

What does all this mean for Singapore and the region? More on that below, as well as the battle for Dyna-Mac.

Also, this will be the final newsletter from me. Big Money will take a two-week break, and return on Oct 21 with a new writer. Thanks for joining me for the ride.

What’s happening?

Stocks, particularly those in Hong Kong and China, are already up and running. They could well keep going.

Helen Qiao, China and Asia economist at Bank of America Merrill Lynch, is expecting follow-up fiscal measures in two to four weeks.

This is likely to include “demand-boosting stimulus on consumption and investment, as well as further enhancement of social security, healthcare, and pro-birth measures”, Qiao said in a report.

The timeframe “will allow policymakers to assess the impact of the monetary and financial policy package, while offering a new boost to overcome potential news on weak data after the Golden Week”.

She is pessimistic about the impact of these measures, though, as she believes the problem China faces is a “lack of positive incentives at the micro level in both public and private sectors”.

“(As) people only see downside risks but not upside risks, households and businesses are too cautious to work on productivity gains, innovation, or risk-taking, while local governments resort to performative actions without addressing the real problem in the economy.”

Why it matters

China’s common prosperity policy was revived in a big way in 2021 with various regulatory measures curtailing the growth of certain industries.

The technology and education sectors were major losers, but all kinds of other sectors and companies have been weighed down over the years. As a result, entrepreneurial spirits and risk appetites have flagged.

If Qiao is right, the stimulus measures won’t be enough to boost China’s economy. Some analysts, however, are already trying to work out the impact of stimulus on stocks.

CGS International noted that Thai chemical stocks reacted well to the stimulus news, as the futures of certain chemicals used in construction traded up.

The brokerage isn’t too positive, though. “Given sizeable, under-utilised capacity in most of the chemical value chain, China stimulus policies would need to be forceful in reversing weak consumer demand, in our view, which remains difficult to predict at the current stage,” it said.

In Singapore, DBS Research highlighted three stocks with China exposure that investors can consider for “riding the dragon’s tail”: property developer Hongkong Land, and real estate investment trusts CapitaLand China Trust (CLCT) and Sasseur Reit.

“While macro uncertainties remain unaddressed by the new policy measures, we believe that improving sentiment in China should flow through to Singapore stocks with exposure there,” DBS said in a note to clients last week.

It likes CLCT for its retail exposure of 75 per cent and its attractive forward distribution yield of 8 per cent. Sasseur Reit has an even higher forward yield of around 9 per cent, and could continue to do well on the strength of its “value-for-money” proposition – as it owns outlet malls in China.

Hongkong Land, meanwhile, is expected to see earnings recovery, having taken large property provisions in China for its last financial year. “There is potential for value unlocking, and forward dividend yield stands at circa 6 per cent,” DBS said.

The big number: 35.3%

That is the percentage of Dyna-Mac Holdings that the chaebol Hanwha looks unlikely to secure in its offer for the Singapore-listed provider of engineering, procurement and construction services to the energy sector.

Last week, the estate of the late Desmond Lim Tze Jong, Dyna-Mac’s founder, said it does not find Hanwha’s offer of S$0.60 per share compelling.

In a statement, the late Lim’s estate said the price “does not adequately reflect the value and growth potential of Dyna-Mac post its successful transformation into a global multidisciplinary contractor”.

The statement highlighted Dyna-Mac’s recent record financials and its healthy order book and said that accepting Hanwha’s offer “will not be in alignment with the aspirations of its founder, who diligently grew the home-grown company over the years”.

It did, however, say that it is “not opposed to proposed offers for Dyna-Mac”, suggesting that the estate is seeking a higher price.

Following a Sep 26 exercise of warrants, the estate holds 35.3 per cent of the company. Hanwha’s offer is conditional on it acquiring control of over 50 per cent of Dyna-Mac. Before the offer was made, the Korean giant was in control of 25.4 per cent of the company.

Even before the statement by the late Lim’s estate, analysts had widely panned the offer price and advised investors to hold out for more. Their target prices also exceeded S$0.60.

Hanwha’s response was that its offer “is based on a rigorous review of factors affecting Dyna-Mac’s business outlook, including growth prospects and order book, as well as geopolitical tensions, macroeconomic uncertainties, volatility in oil prices and a global trend towards clean energy transition”.

By the way, this newsletter flagged Dyna-Mac as a potential “blue chip in the making” back in August – roughly a month before Hanwha made a play for the company. Just a friendly reminder of the value The Business Times is bringing every week to your inbox.

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