Friday, October 22, 2010

China's rate hike may hit some S'pore listed firms


China Minzhong, Yangzijiang and CapitaLand may suffer fall-outs: DMG
By JAMIE LEE
CHINA'S surprise interest rate hike could hit companies such as CapitaLand, China Minzhong and Yangzijiang Shipbuilding, said DMG & Partners Securities in a report yesterday.
The People's Bank of China said this week that it would raise benchmark rates by 0.25 percentage point, increasing the one-year deposit and lending rates to 2.5 per cent and 5.56 per cent, respectively.
With 35 per cent of its revised net asset value (RNAV) from China, CapitaLand risks a bigger fall-out compared to its peers from the policy risks in the Chinese property market, which could hurt the share price movement, DMG said.

DMG also noted that CapitaLand's two planned launches in Shanghai - The Pinnacle and Paragon - could be delayed from the initial launch period that is six months from October.

'The unexpected rise in Chinese interest rates, coupled with our prognosis of an upcoming trial property tax, points to policy risks within the broad Chinese real estate sector that are not receding,' DMG said.
'This will continue to cap share-price upside.' But DMG noted that CapitaLand's earnings should be less affected, given its resilient retail portfolio.

By comparison, impact on Keppel Land - which has a 25 per cent RNAV exposure to China - should be offset by its large exposure to the rebounding office sector in Singapore, DMG said.

Earnings of vegetable producer China Minzhong could notch lower as a stronger yuan puts pressure on its export sales.
DMG said that China Minzhong's export sales make up 68 per cent of the group's revenue for the 12 months ended June 2010.
'While China Minzhong has been able to mitigate most of its foreign exchange risks by selling through China-based export distributors, any sudden surge in the yuan could adversely affect demand from the USA and Europe, its main export markets.'
In response, a company spokeswoman said that for fiscal 2010, just 17 per cent of the group's sales were denominated in foreign currencies. Because contracts are signed annually, the company has the flexibility of pricing in yuan appreciation if required, she added.

Also taking some heat was Yangzijiang, which could be hit by a stronger yuan since it takes in shipbuilding contracts that are typically in US dollar terms, but stomachs most of its costs in yuan terms.
Yangzijiang's fiscal 2009 annual report said that the Chinese shipbuilder holds currency forwards to hedge 'highly probable forecast revenues denominated in US dollars'.

DMG sees some positive impact for China Essence and C&O Pharmaceutical.
China Essence's higher borrowing costs is likely to be more than offset by savings from US dollar and Hong Kong dollar-denominated debts, while C&O Pharmaceutical could expand its gross margins since cost of purchase for its exclusive products are made with the US dollar.

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