Scuttled by yuan
GUANGZHOU Shipyard has kicked off the earnings reporting season for Chinese enterprises listed in Hong Kong with a set of disappointing figures.
The company has apparently fallen victim to its own change in strategy.
The announcement of a 66 per cent plunge in interim profits, much worse than the market has expected, has prompted many analysts to revise downward full-year forecasts.
The shipbuilding company blamed much of the poor result on external factors: namely the yuan's appreciation, a rise in the cost of raw materials and a lack of exceptional gain.
In fact, the third item is more an accounting issue, because the gain was a result of a favourable exchange difference due to the unification of the yuan's dual exchange rate on January 1, 1994.
As the exceptional gain is definitely not going to happen again, it is widely expected that Guangzhou Shipyard's net profit will drop this year. The question is by how much? Obviously, a lot of analysts have underestimated the impact of the other two factors. The company found the yuan's rise as the most detrimental factor to its profitability.
In the first half, 90 per cent of its sales were for export, compared with about half in the full year 1994, as a result of the company's increased efforts to sell more ships and containers abroad following a cut in profit margins.
Last year, profit margins of its shipbuilding business were eroded by China's introduction of value-added tax, which affected those ships sold in the domestic market.
The company plans to complete a total of six ships this year, which are all for the international market.
In an attempt to mitigate the impact of the yuan's rise on profitability, Guangzhou Shipyard either has to pray for a stable yuan, or, more pragmatically, include in this year's result some contribution from another three ships that are for the domestic market and are scheduled for completion next year.
Another downside of the company is its exposure to the highly competitive container manufacturing market. While the product price is capped by fierce competition, the cost of its main raw material, steel, has jumped significantly on the back of the rise of the Japanese yen.