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Shanghai Electric switches settlements to euros from dollars

Yuan
Sherman So

The continuing weakness of the US dollar has prompted Shanghai Electric Group, a mainland power generation equipment maker, to settle its overseas orders in euros.

'We are signing new contracts in euros to limit our risks on the falling US dollar,' said Zheng Jianhua, the president of Shanghai Electric Power Generation Group.

Overseas orders accounted for 20 per cent of the company's 56.4 billion yuan (HK$62.93 billion) in sales last year. Most of the company's clients are in developing economies, such as India, Indonesia, Vietnam, the Middle East and Africa.

This year it signed new contracts in Turkey and is following potential clients in Thailand, Bangladesh, the Philippines and countries in South America.

The company projected overseas sales would reach 45 per cent of its total turnover by 2010.

However, the falling US dollar and rising yuan were major hurdles to overseas sales, said Huang Dinan, Shanghai Electric Group president and executive director.

The policy to switch the settlement currency to euros from the US dollar has not been made permanent, but it is one way the mainland manufacturer can limit risks.

Other measures included using forward foreign exchange contracts and adjusting bidding prices for overseas projects after taking into account the yuan's appreciation, Shanghai Electric said.

The company's turnover rose 28.1 per cent last year. Profit grew 37.4 per cent to 2.815 billion yuan, below a consensus of 14 analysts polled by Thomson Financial, who expected an average of 2.937 billion yuan.

Shanghai Electric shares fell 6.56 per cent to HK$3.99 yesterday, compared with a rise of 1.59 per cent on the Hang Seng Index.

'Shanghai Electric should benefit from strong demand from both China and overseas. However, given the margin squeeze, the company's high valuation, and rising raw material costs, we foresee pressure on its share price,' said Helen Wen, an analyst at Morgan Stanley.

New orders signed last year hit 86.7 billion yuan, more than double the previous year's 41.7 billion yuan. The company expects the growth in new orders to slow this year.

At the end of last year, Shanghai Electric had a 133 billion yuan order backlog - signed contracts to be delivered in the next four years. Of that, 36 billion yuan worth of power equipment would be delivered this year, up 20 per cent from last year, Mr Huang said.

However, high steel prices are hurting profitability. The price of iron ore has increased from about 600 yuan a tonne in June 2006 to about 1,600 yuan per tonne last month.

The company said it expected its operating profit margin would drop 1 percentage point from last year's 9 per cent.

The company planned 3.5 billion yuan in capital expenditure this year, unchanged from last year. Most of the funds will be used for developing nuclear power equipment and wind power equipment.

Risk-averting

Overseas sales are expected to hit 45 per cent of turnover by 2010

Of the company's 56.4 billion yuan in sales last year, overseas orders accounted for 20%

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