Across The Border

The winners and losers from the yuan’s continued slide

The exchange rate fluctuation is having a huge impact on Chinese airlines especially, as much of their debt is in foreign currency

PUBLISHED : Thursday, 20 October, 2016, 1:24pm
UPDATED : Thursday, 20 October, 2016, 10:54pm

The further weakening of the yuan is distressing Chinese mainland airlines, property developers and retailers, especially those selling luxury foreign goods.

But domestic exporters are flying high, as their goods become more competitive by the day.

The national currency has now weakened more than 8 per cent since August 11 last year, when the Chinese government surprisingly stepped in and cut its daily reference rate by 1.9 per cent, which it insisted then was a one-time adjustment.

For the market, the yuan’s depreciation means capital outflows are likely to intensify further, affecting liquidity. But for individual companies, a weaker currency created very clear winners and losers.

Mainland airlines are among the biggest to lose out as much of their debt is in foreign currency, explained Victor Au, the chief operating officer at Delta Asia Securities.

“Most of the debt of domestic carriers is in US dollars, and a weaker yuan against the greenback means it will be more expensive to service, thus their profitability will be hurt,” said Au.

The mainland’s airlines also generate much of their revenue in yuan, while they pay for fuel, aircraft purchase and leasing in US dollars.

“The exchange rate fluctuation is having a huge impact on Chinese carriers,” added Au.

Air China, China’s third largest carrier based on passenger numbers, recorded a net exchange loss of 1.698 billion yuan for the first six months of 2016, 1.575 billion yuan greater than the loss reported in the same period of 2015, mainly due to the rapid appreciation of the US dollar against the yuan.

“The fluctuations in the Chinese yuan exchange rate had a significant impact on the operating results of Chinese airlines,” said China Southern Airlines, the largest carrier, in its 2016 interim report, showing the group recorded net exchange losses of 1.516 billion during the first half, mainly put down to yuan depreciated against US dollars and other major foreign currencies.

China Eastern Airlines, second largest by passenger numbers, has also warned currency and interest rate risks have put pressure on its activities.

But all the carriers said they have been working to actively optimise the currency structure of their liabilities. to decrease the negative impact in future

China Southern has managed to raise its yuan-denominated financing proportion to 50.8 per cent from 31.7 per cent at the beginning of the year.

Nevertheless, Au said it is not easy for mainland airlines to fully hedge against the pressure being created by the yuan’s depreciation.

“Their losses from yuan depreciation are sure to be bigger than the gains from optimising their liability structure,”Au added.

Kelvin Lau, an analyst with Daiwa Capital echoed Au’s point, expecting “the airline industry outlook to remain dim in the second half of 2016”, as a result of the currency crunch.

Chinese property developers, too, are being met with similar issues, because many of their revenues are generated in yuan, but their debts are mostly in dollars.

As are many luxury retailers, as a weaker yuan means their customers are now having to spend more buying everything from French handbags, to Swiss watches and German cars.

The country’s exporters, on the other hand, are having a field day from the weaker currency.

“The currency depreciation will certainly help improve companies’ export competitiveness and generate foreign exchange gains,” said UBS analysts, led by Gao Ting and Weng jingjing in their latest report.

UBS is tipping Chinese-made electronic goods suppliers, home appliances makers, defence equipment manufacturers, and those computers, textiles and apparel firms, as likely to be those with the highest overseas share of total revenue, up to an average among those sectors of 38.1 per cent, according to its study of first-half corporate results.

The currency depreciation will certainly help improve companies’ export competitiveness and generate foreign exchange gains
UBS analysts

Au from Delta Asia Securities was even more specific, shining the light on domestic textile manufacturers as making the most of the dropping yuan,

“However, for some of these sectors, a high proportion of foreign currency debt could partly offset the positive impact of Chinese yuan’s depreciation on revenue,” warned Gao Ting, “so export-oriented companies with a lighter foreign currency debt burden will benefit most.

Of specific A-share stocks, UBS recommends lighting specialist Zhejiang Yankon Group, Yihua Lifestyle, the wood flooring and furniture producer, and electric goods giant Hisense, while Au selected two beneficiaries from a weaker yuan among Hong Kong stocks – sofa maker Man Wah Holdings, and power tools giant Techtronic Industries,

The yuan has dropped in value daily for the past week, and UBS forecasts it to weaken further to 7.1 to the US dollar by end of year 2017, further benefiting export-dominated companies.

Au rules out any significant plunge in the coming couple of months, but next year expects to see further drops “if China’s economy proves to be weaker than expected”.