Squeeze on H shares tipped to continue
By KERRY WONG and AGATHA NGAI
RISING inflation and raw material costs combined with tighter credit policies are believed to have squeezed the profits of H shares in 1994, and analysts expect they will remain the factors clouding earnings prospects in coming years.
H share companies Yizheng Chemical Fibre, Guangzhou Shipyard, Luoyang Glass and Beiren Printing will announce their 1994 results this week and analysts expect the first three will deliver positive news, while Beiren is likely to announce lower net profits.
Market forecasts predict Yizheng will record 850 million yuan (about HK$779 million) net profits in 1994.
Expectations have been raised with the announcement this week that the company would conduct a $1 billion H share issue this month, indicating that results must be better than their earnings projections in November, said Anna Ho, an analyst at Swiss Bank Corporation.
Ms Ho anticipates an optimistic year for the mainland's chemical fibre industry.
'There is a big demand for polyester, stimulated by high cotton prices forcing manufacturers to look for cheaper alternatives,' she said.
Although Luoyang Glass has announced that it will proceed with its A share issue, there is considerable doubt as to whether it will take place. Raising production capacity is very important as it will improve profits given the tremendous demand for glass on the mainland.
However, plans to raise funds in order to increase production capacity could be put on hold, because of difficult market conditions in Hong Kong and the mainland.
Luoyang Glass' net profits for 1994 are expected to drop, due to exchange losses from yuan appreciation in the second half of last year. Nevertheless, the company's prospects are bright, according to Queenie Cheung, research manager of Standard Chartered Securities.
There are two joint ventures planned in Qingdao and Qinhuangdao, expected to raise capacity by 10 per cent.
The company had three production lines at the end of 1993, with production capacity of 305,000 tonnes a year. An additional line was put in place at the end of 1993, with a capacity of 60,000 tonnes.
Yamaichi Securities' 1994 profit forecast for the shipbuilder Guangzhou Shipyard (GSI) is 204 million yuan, while Standard Chartered Securities maintains a similar figure of 202.1 million yuan.
The more than 80 per cent profit growth forecast is backed by the one-off foreign exchange gain last year, which has created some controversy as accountants say the gain should have been reflected in the 1993 result.
Yet in the long run, analysts are still positive towards the company's market share, amid intensified competition from other domestic producers.
GSI's shipbuilding order book is already full up to 1996. There are also confirmed orders for 1997.
For Beiren Printing, Yamaichi research manager Jeannie Cheung referred to the company's downwardly revised profit forecast of 85 million yuan.
Although the Beiren Printing has a leading share of China's fragmented printing machinery market, short-term demand was restricted by the tight credit control, and a turnabout was not expected in the near future, said Ms Cheung.
Analysts have cast doubt on its principle of payment on delivery, because most orders come from the established customers.
According to Beiren's interim for A shareholders, the accounts receivable was 13.98 million yuan on June 30, compared to 2.25 million yuan in the beginning of the year.
These figures indicate that there is a rising risk on doubtful debts, which could affect the company.
Although concerned over sales growth, Salomon Brothers maintains a profit forecast of 90 million yuan for the firm last year.
It suggests that Beiren had tried to improve efficiency by introducing foreign printing technology.
But the brokerage is cautious on Beiren's non-core businesses, including a property development in Beijing, which will drain capital from its core operations.