Retailers could be worst hit by steady yuan devaluation

Kenneth Ko

THE depreciating yuan is expected to hurt Hongkong companies which rely heavily on domestic sales in China, but manufacturers re-exporting products from China to overseas markets could be winners.

Mr Alex Tang Yee-yuk, head of research and marketing at Dao Hang Securities, said the fall of the yuan was set to continue, and some China play stocks would be affected.

He said Hongkong retailers whose main market was China would be hard hit by the depreciation, which would eat into their earnings from mainland sales.

He said property companies that had cheaply put together land banks in China, such as New World Development and Kumagai Gumi (HK), would not be materially affected.

But late-comers who acquired land at high costs might be vulnerable.

Mr Tang said investors should be more selective in buying China plays, and that companies with strong foreign currency earnings ought to be favoured.

He said Hongkong manufacturers with production facilities in China - particularly those who generated export earnings - might benefit because they paid for labour and raw materials in the local currency.

A Hoare Govett Asia report also comments on China plays that will be adversely affected by the devaluation of yuan.

It says companies such as CP Pokphand, Goldlion, Giordano, Cafe de Coral and Fairwood Holdings enjoyed substantial re-ratings in the past six months on expectations of strong growth in their China operations.

But the yuan's depreciation meant China sales were worth less every day in Hongkong dollar terms.

''We have found that the impact on certain companies can be substantial,'' the brokerage says.

''Coupled with the possible imposition of a more stringent than expected austerity programme, we advise clients to watch for any signs of a correction in China-related consumer spending plays.'' Hoare Govett has downgraded the ratings of CP Pokphand, Goldlion, Champion Technology and Giordano because of their heavy exposure to China.

CP Pokphand's forecast profit has been cut by 12 per cent on the assumption that the official yuan exchange rate will fall to 7.8 yuan to the US dollar by the end of this year.

In the case of Goldlion, the company's management has reiterated that the depreciating yuan's negative impact can be passed on to customers through price increases.

But Hoare Govett is not convinced, and says Goldlion could see a drop in earnings of up to 22 per cent.

The brokerage expects the impact on Giordano, Fairwood, Cafe de Coral to be negligible, as their earnings from China sales are insufficiently large.

Fairwood managing director Dennis Lo Hoi-yeung said the impact of the depreciating yuan on his company was insignificant.

He said revenue from the company's Shenzhen and Guangzhou fast-food shops could be directly re-invested in new outlets in China, avoiding currency exchange losses.