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SCMP Reporter

Mainland airlines and car companies will be the hardest hit if the yuan devalues, a SocGen-Crosby research report says.

 China research associate director Raymond Jook forecast the yuan would depreciate slightly from 8.3 to the US dollar to an average of 8.5 yuan next year and then to 8.8 yuan in early 1999.

 He said the mild devaluation was attributable to a slowdown in exports and the easing of monetary policies and reforms which allow local companies to retain foreign currency earnings.

 Most mainland companies would not be affected as they import only a small proportion of their raw materials and they have very low foreign liabilities, he said.

 The exceptions are airlines and car companies such as H shares China Eastern Airlines, China Southern Airlines, Qingling Motors and B share ChanganAuto.

 Both China Eastern and China Southern have foreign debts of about US$1.8 billion, he said.

 According to the report, a 1 per cent depreciation in the yuan against the dollar would bring about a 29 per cent drop in earnings per share for China Eastern and 17 per cent fall for China Southern next year.

 A 5 per cent depreciation would wipe out all their profits, he said.

 If depreciation continued, Mr Jook said China Southern would extend its losses but China Eastern would gain because it derived a higher revenues from abroad.

 The car companies would suffer as they have a relatively high proportion of raw material imports.

 Some firms that have significant hard currency earnings - more than 20 per cent of total profits - or exports would fare better than their counterparts, he said.

 Among those with great exposure to Hong Kong dollars or US dollar-based earnings that report in Hong Kong dollars are red chips such as Shanghai Industrial Holdings, Top Glory, Cosco Pacific, China Merchants and China Overseas Land.

 Firms that rely heavily on exports for US dollar-based earnings are red-chip Legend Holdings, B shares CIMC, Shanghai Zhenhua Port Machinery, Shanghai Haixin, Erdos and First Pencil.

 Mr Jook said not all of these firms would be buy stories because of other factors that affected profitability.



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