Analysts are expecting Singapore-listed companies with facilities in China to recover slowly even though production has restarted for the Chinese manufacturing sector.
With the aim of containing the spread of Covid-19, the week-long Chinese New Year holidays had been extended by Chinese authorities and firms are only permitted to restart operations in their Chinese facilities from 10 Feb onwards.
In addition to this, the restrictions and quarantines have also been mandated by the Chinese authorities throughout the country.
Speaking to The Business Times (BT), RHB Securities analyst Jarick Seet commented that under the current limitations, time is needed for supply chains to revert to normal production levels.
Mr Seet remarked that “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.”
Credit Suisse analysts are expecting a 15 per cent fall in production in Q1 2020 as operational overall capacity remains far from optimal. Against this background, some firms are having a hard time getting their China production up to speed.
In a Singapore Exchange (SGX) filing, the electronics manufacturing services firm Valuetronics Holdings (Valuetronics) announced that its factories at Huizhou in Guangdong had restarted operations although some employers cannot yet return back to work.
In light of this, for the six months ending on 31 March 2020, Valuetronics is expecting revenue to fall against the time period one year ago when production temporarily dropped as well.
Similarly, Jadason Enterprises’ subsidiaries in China, which mainly offer support and manufacturing services to printed circuit board manufacturers over there, are facing similar difficulties.
Based on the SGX filing, employers 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.”
As for Hi-P International the contract manufacturing firm, it has restarted operations in China slowly since 10 Feb. Its Chairman and Chief Executive, Yao Hsiao Tung, remarked in its recent full year financial results outlook statement “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.”
There are also other Singapore firms who indicated in their SGX filings that their operations in China have taken a toll. These firms include the precision metal part maker InnoTek, computer parts distributor Powermatic Data Systems and precision components producer Broadway Industrial Group. These companies still need to provide updates on the resumption of their operations since 10 Feb when factories were initially planned to reopen.
Yeap Jun Rong, who is Phillips Securities’ investment strategist opined that logical hurdles and manpower shortage are causing cash flow problems for firms to resume production at this time will have to sit through this difficulty. Mr Yeap added that “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.”
Firms with a well-diversified business and strong financial position are better positioned to endure the impact from the outbreak.
William Tng, the analyst at CGS-CIMB noted that “if they have factories outside of China that can help with production, that will be a plus.”
The pace of recovery of China’s manufacturing sector is also highly determined by the development of Covid-19. Mr Seet commented that while the situation seems stable at the moment, if the situation takes a turn for the worse, there could be long-term repercussions.
In the SGX filing by tape manufacturer Luxking Group Holdings, the company stated that its group performance for FY2020 may suffer if there is prolonged disruption from Covid-19.
On the other hand, things may improve if the outbreak continues to be under control, as Mr Yeap remarked “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.”
Chinese authorities had already started to loosen the restrictions for movement of traffic and people.
Mr Yeap concluded that “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.”