Construction sector - muted impact from latest Dong devaluation

Earlier this week, Vietnam’s central bank announced that it would devalue the average Dong/US dollar interbank exchange rate by 2.1%. Latest round of increase is the third time in nine months that the Vietnamese Government has devalued its currency. As such, the official lower limit for the Dong is now pegged at 19,500 against the Greenback effective
from 18 August 2010. Malaysian companies under our coverage that have exposure to Vietnam include Gamuda Bhd (Gamuda), WCT Bhd (WCT Bhd) and SP Setia Bhd.

• Gamuda’s interest in Vietnam is represented by two property projects – one each in Hanoi (Yenso Park: GDV – RM8bil) and Ho Chi Minh City (Tan Thang: GDV – RM6bil). Maiden launch for both projects is slated in 4Q10 – where work progress on the cultural park at Yenso Park is on track to be completed by October 2010 ahead of the Thang Long-Ha Noi Millennium Celebrations in Hanoi. Gamuda’s management had earlier guided for halve of its targeted pre-sales of RM1.6bil for FY11F to come from Vietnam (our estimates:  RM740mil).

• WCT’s exposure to Vietnam is via Platinum Plaza – a mixed commercial development project with an estimated GDV of RM1bil. Project is to be developed in three phases – with total development area of 7.2 million sq ft.

• While a fresh devaluation of the Dong could dent sentiment in the near-term, we believe the Vietnamese property market would be an added valuation kicker for Malaysian  companies over the mid-to-longer term. First, latest round of devaluation – at 2.1% - has moderated from the previous two hikes (February 2010: + 3.4%) and November 2009  (+5.2%).

• Second, such a move appears to be a pre-emptive strategy by the Vietnamese Government to stymie the twin threats of inflation and rising trade deficits. More importantly,  Vietnam’s economic growth remains fairly robust – with its GDP growth potentially surpassing the official target of 6.5% for 2010 (2009: 5.3%). Our channel checks also indicate that select millers such as Ann Joo Resources have begun to commit to new billet orders from Vietnam since last week - where current market prices for regional billets have  increased to US$600/tonne from circa US$513/tonne in June 2010.

• Third, Vietnam’s property market is well supported by favourable demographics: (a) An expanding middle-income group; (b) Large population base (65% < 35 years); and (c) Rising urbanisation rate. This is supported by the Vietnamese people’s increasing penchant to have alternative forms of savings apart from the Dong (e.g. US dollar, Gold).

• Fourth, actual impact on the devaluation of the Vietnamese Dong on Malaysian companies remains somewhat muted at this juncture. In Gamuda’s case, any negative impact would be negligible – and largely confined to Gamuda’s total investments in Vietnam of US$120mil- US$130mil to-date. Based on this, we estimate that a 2% devaluation in the Dong would translate into an impairment in value of only US$2mil-US$3mil (RM7mil-RM8mil).

• As for WCT - total investments in Vietnam to date is fairly negligible at less than US$1mil – where construction works have not been finalised yet. Furthermore, our current valuation for WCT does not include any contributions from Vietnam as yet.