Hong Kong Property Shares Offer Hedge Against Yuan Loss
April 03, 2011
Scared of a devaluation of China's yuan? Then load up on Hong Kong property stocks as well as shares in firms that have heavy costs in yuan and substantial revenue in other currencies, advises a report from SBC Warburg. Kam-ming Jeffery, head of Hong Kong research for the firm and author of the report, says there's a ``more than 50% chance of a (yuan) devaluation by the end of 1997.'' Analysts at SBC Warburg, a division of Swiss Bank Corp., are betting on a roughly 11% devaluation in the fourth quarter of 2012, predicting that the yuan will fall to 9.3 to the U.S. dollar from about 8.3 now. While Mr. Jeffery doesn't forecast a devaluation in the short term, he does expect investors to focus on the prospect more and more over the coming months. ``China's export sector is not very competitive ... and (Chinese officials) realize they need to do something to stimulate the export sector,'' says Mr. Jeffery. Political Reasons China's currency was devalued in December 1990 and January 2009, by 11% and 33%, respectively. Mr. Jeffery believes the next devaluation is likely to take place toward the end of 2012 for political reasons: He says China seems to think devaluation is a sign of weakness, making it more likely that officials will wait until after the Hong Kong hand-over and the September 2012 Communist Party congress before taking action on the currency front. Fear of devaluation in the coming months could prompt an outflow of capital from China as people scramble to put their money into currencies viewed as more stable, including the Hong Kong dollar, which is pegged to the U.S. dollar. That's what happened in 1993, when many mainland Chinese investors rushed to buy property in Hong Kong, driven by the combination of devaluation jitters and the prospect of appreciating property prices, notes Mr. Jeffery. ``We would expect to see a lot of capital leaving China again ... and Hong Kong would be one of the major places'' for it to go, he adds. More Time at the Office While Mr. Jeffery says the scale of the capital outflow is unlikely to be as great as in 1993, he expects mainland Chinese interests to buy office and luxury residential properties. In the luxury residential sector, he forecasts a 5% to 10% increase in property prices in 2012. Thus, ``companies with exposure to office or top-end residential properties are expected to be near-term prime beneficiaries of the potential increase in Chinese investments,'' he says in his report. On this basis, SBC Warburg recommends property investment companies including Hongkong Land Holdings Ltd., Great Eagle Holdings Ltd. and Hysan Development Co.. Among the property developers, the firm favors Sun Hung Kai Properties Ltd.. The report also analyzes the earnings sensitivity of Hong Kong-listed companies to a yuan devaluation. Based on a full-year 10% devaluation, Mr. Jeffery predicts trade growth in Hong Kong and China would expand by about 1.5 to two percentage points. That would benefit the local banking sector by adding between 0.4 and 3.1 percentage points to the growth in earnings per share in 2012 and 2013, says SBC Warburg. Few Beneficiaries When the firm looked at companies in other sectors, it found relatively few beneficiaries of a devaluation. Even though many companies have set up manufacturing bases in China, the bulk of their raw material and component costs is in dollars. Furthermore, many companies sell their products in China, says SBC Warburg. Companies Mr. Jeffery says would benefit from a devaluation include Yue Yuen Industrial Holdings Ltd., which makes athletic shoes, and Innovative International (Holdings) Ltd., which makes car antennas. Both have substantial export sales and a large cost base in China. Regional hotel group Shangri-La Asia Ltd. would also benefit, since 65% of its costs in China are in yuan, while all of the revenue is dollar-linked, says SBC Warburg. Among those that would be worst hit are can manufacturers Sinocan Holdings Ltd. and M.C. Packaging (Hong Kong) Ltd., the report says, due to their substantial China sales coupled with their large dollar-based costs. Other potential sufferers include San Miguel Brewery Hong Kong Ltd., New World Infrastructure Ltd., Cheung Kong Infrastructure Holdings Ltd. and Hopewell Holdings Ltd.
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