RMB DEVALUATION

RMB DEVALUATION

CHAPTER: CHINA’S YUAN AND CONSIDERATIONS FOR A REAL INFLECTIONYuan Turning Point or One-Off? That’s the Question for CompaniesAnalysts Tim CraigheadAug 12, 2015

Companies in China and around the world surely heard the shot fired by the PBOC, as the yuan weakened a record 1.9% in one day vs. the dollar. A true yuan inflection, from sustained strength to gradual weakness, would impact revenue, costs, margins and competitive positions across industries and regions. In the near term, the trade-weighted yuan will be propelled as much by the euro, yen and other currencies beyond the dollar. Longer term, a real change would mark another policy move to steady China’s economy.

Companies Impacted: The most obvious upshots of a weakening yuan are improving competitive positions for Chinese exporters and harder times for international firms trying to sell into the mainland.

PBOC’s Yuan Shift Belongs in the Context of Steady 10-Year ClimbAnalyst Tim CraigheadAug 12, 2015

The PBOC’s policy change on the yuan needs to be viewed in a long-term context. On one hand, weakening the yuan by 1.9% is the largest one-off adjustment on record. More importantly, it may also mark a clear shift in stance from years of promoting yuan strength. Yet yuan movements tend to be gradual and long-term in nature. The 52% gain in the trade-weighted yuan since 2005 is significant, yet it took place over 10 years. Other factors have driven short-term cycles and will likely do so in the future.

Companies Impacted: Larger-cap U.S. companies with the most revenue exposure to mainland China include Skyworks, Marvell Tech, Yum Brands, Qualcomm, Avago Tech and NXP Semi. They generate more than 45% of revenue in China. Click the exhibit for a screen of global companies with China exposure.

RMB DEVALUATION

Judging the Yuan vs. Only the Dollar Ignores Yen, Euro WeaknessAnalysts Tim CraigheadAug 12, 2015

Companies and investors need to consider more than just the yuan’s relationship to the dollar following the PBOC’s striking change in currency policy. While the 3.4% two-day drop vs. the dollar is dramatic compared with its normal course, the trade-weighted yuan arguably carries more importance. It’s still up 10% as of Aug. 12 vs. the average for 3Q 2014. Yen and euro weakness vs. the yuan have been propelled by aggressive stimulus measures. More competitive easing could come.

Weaker Yuan Stokes Competition, Lowers Costs for Global FirmsAnalyst Tim CraigheadAug 12, 2015

Companies around the world may have to shift their global strategies if the PBOC’s yuan reset starts a new trajectory. Even if weakening is gradual, China’s manufacturing and growing services capability would be more competitive. Currency translations on exports to China, a major source of revenue for sellers of everything from tech to autos, fried chicken to handbags, would be reduced. While the costs of imports from the mainland would be cheaper, growth in outbound Chinese travel may be slowed.

Companies Impacted: Chinese tech and shipping companies are among the most exposed to international sales. ZTE, China CSSC, Lens Tech, China Intl Marine Terminal, GoerTek and Beijing Kunlun Tech all generate more than 65% of sales abroad. Click the exhibit for a screen of Chinese companies with global exposure.

RMB DEVALUATION

Yuan Shift May Stimulate Some Exporters in China, Vex ImportersAnalyst Tim CraigheadAug 12, 2015

A sustained weakening in the yuan would have both positive and negative implications for companies in China. It could make Chinese exporters more competitive and/or boost their translated revenue, reversing a trend that has been in place with few exceptions since 2005. For companies that import into China, costs could go up. For those with dollar debt, servicing will be more expensive. These effects will take time to play out, especially with the trade-weighted yuan now still up about 10% vs. the 3Q 2014 average.

Yuan’s Devaluation May Cut Both Ways for Metal Prices in ChinaAnalyst Yi ZhuAug 12, 2015

Dollar-denominated overseas metal prices may drop in the short-term following China’s yuan devaluation. Import costs for China, the largest consumer of metals, will be higher. The devaluation may be both bullish and bearish for domestic metal prices. The bull factor is that China’s exports will be more competitive, which helps domestic demand and prices. Yet the resulting lower metal prices overseas may also drag on the Chinese market via arbitrage, which adds to the bear cases for prices in China.

RMB DEVALUATION

Companies Impacted: Shenhua Energy, Datong Coal, China Coal and Yanzhou Coal are key miners trying to boost China’s thermal coal exports. Shenhua’s exports fell 33% in 1H vs a year ago due to intense competition from Australia.

Yuan Devaluation May Not Help China Miners With Coal ExportsAnalyst Michelle LeungAug 12, 2015

China’s yuan devaluation may not help boost coal exports as the currencies of its key export markets, Japan and Korea, have fallen by more against the dollar. Moreover, the currencies of other major coal exporters, including Australia and Indonesia, have also depreciated rapidly against the dollar over the past few years. Dollar-denominated overseas coal prices may fall on bearish China import demand.

Devalued Yuan May Put Pressure on Nitrogen Fertilizer PricesAnalysts Christopher Perrella & Jason MinerAug 12, 2015

China’s yuan devaluation may affect nitrogen fertilizer markets since the country is the world’s largest urea exporter, having shipped 13.6 million tons in 2014, or 30% of global trade. A weaker yuan boosts cash generation in local currency for exporters, which can stall consolidation. At worst, the devalued currency pressures the floor on global urea prices to below current estimates of $280 a metric ton and delays farmer restocking. Urea trades globally in dollars, yet half of Chinese producer costs are in yuan.Companies Impacted: Yara, CF Industries, PotashCorp and EuroChem are the largest publicly traded producers of nitrogen worldwide. Other key producers include Agrium and China BlueChemical.

Companies Impacted: Changes in freight flows affect profitability of transportation providers, including containerliner operators (Mitsui OSK, Maersk and China COSCO), rail operators (Union Pacific), intermodal providers (J.B. Hunt), freight forwarders (Expeditors) and air freight carriers (FedEx).

RMB DEVALUATION

Freight Transportation’s Winners and Losers From Devalued YuanAnalysts Lee Klaskow & Talon CusterAug 12, 2015

China’s unexpected move to devalue the yuan to bolster exports could ripple across global shipping and freight industries. The recovery for dry bulk demand may be delayed further since China’s economy appears to be cooling rather than entering a period of reacceleration. The devaluation should make Chinese exports more attractive, and could bode well for the liner and air freight industries, which are both facing slack capacity. This may also bolster North American international intermodal volumes.

Impact: Volkswagen luxury brand Audi and other German luxury automakers buy more parts from overseas. Their higher retail prices tend to cover the costs of the more expensive imported components.

BMW Brilliance, BAIC Benz Face Higher Parts Costs on Yuan DeclineAnalyst Steve ManAug 12, 2015

German joint ventures with Chinese carmakers may face rising costs for parts as the yuan falls against the euro. BMW Brilliance and BAIC’s Beijing Benz are the most sensitive to euro moves because they get about half their vehicle components overseas. The partnerships typically purchase parts from the German carmakers. Volkswagen’s ventures with FAW and SAIC may be less affected by euro gains because they buy as much as 95% of their components locally.

RMB DEVALUATION

Companies Impacted: BMW, Daimler’s Mercedes-Benz and VW’s Audi are China’s largest luxury automakers, with a combined 74% share last year. BMW has a venture with Brilliance, and Mercedes works with BAIC and Audi with FAW. These ventures faces higher purchase costs for parts as the euro appreciates vs. the yuan.

Long-Term Yuan Drop Disrupts China’s Production of Foreign CarsAnalysts Steve Man & Kevin TynanAug 13, 2015

GM, VW and Peugeot SA, which have tie-ups with China’s largest automakers, may post declines in equity profit if yuan depreciation persists. BMW and Mercedes may face even bigger earnings headwinds because their partners in China need to import about half the components used to manufacture vehicles there. GM’s equity income from China accounted for 49% of last year’s pretax income. About 27% of VW’s pretax income was generated from its Chinese ventures. China’s biggest carmakers are SAIC, FAW and Dongfeng.

Chinese Yuan Devaluation May Boost Xiaomi, Huawei ShareAnalysts John Butler & Matthew KantermanAug 12, 2015

A protracted devaluation of the yuan may drive a shift toward locally made smartphones for Chinese consumers, and may lead to greater market share gains by domestic makers if foreign rivals such as Apple, HTC and Samsung raise prices to protect margins. Xiaomi led the Chinese market in 1H with a 15% share, according to IDC, leaving it well-positioned to benefit from any shift in demand. Huawei is a close second, accounting for 13.6%, and is also positioned to gain domestic market share.

Apple, HTC, Samsung Most-Exposed Foreign Handset Makers to ChinaAnalysts John Butler & Matthew KantermanAug 11, 2015

Apple, HTC and Samsung, the three leading foreign-smartphone manufacturers in China based on 1H shipments, are among the most vulnerable to margin erosion and declining growth because of the yuan’s devaluation. Apple is the most-exposed of all foreign vendors, with 24.1% of its 1H shipments going to China, according to IDC. HTC (13.6%) and Samsung (11.4%) also have significant exposure, while Asus, LG, Microsoft and Sony all ship less than 10% of their total units to China.

RMB DEVALUATION

Companies Impacted: Among BI luxury goods peers Chow Tai Fook, Ferragamo, Swatch and Prada have the highest sales exposure to Asia, excluding Japan, with the majority of sales driven by China. Samsonite, Hermes and Kering’s luxury segment follow, all generating more than 30% of sales from the region.

Weaker Yuan Is Major Issue for Luxury Industry on Sales ExposureAnalysts Deborah Aitken & Maja RakicAug 13, 2015

Global luxury goods retailers with operations in China will take a hit to sales on translation if the yuan continues to weaken. A strong yuan helped sales growth for Europe’s luxury goods retailers in 2Q. Hermes reported a 1,250 bps gain in sales growth from currency translation in 2Q, led by a 2,200 bps increase from Asia-Pacific, excluding Japan (the largest region, representing 34% of group sales). Sales among U.S. peers may face a translation drag on sales if the dollar continues to strengthen against the yuan.

RMB DEVALUATION

Companies Impacted: Among the key Hong Kong retailers, Sa Sa has the highest exposure to Chinese shoppers, who account for 71% of sales. Jewelers like Chow Tai Fook, Chow Sang Sang and Luk Fook look to them for 60%. Emperor, the city’s leading watch retailer and menswear company Trinity, get at least 30%.

Hong Kong May Give Up Shoppers’ Paradise Crown as Yuan WeakensAnalysts Catherine Lim & Michael SovinerAug 12, 2015

China’s yuan devaluation will likely dampen its citizens’ desire to shop in Hong Kong as goods priced in the dollar-pegged currency turn more expensive relative to other shopping destinations. Even before the devaluation, the yuan had fallen by 3% against the Hong Kong dollar since the beginning of 2014, while it had risen by 17% against the euro, yen and won, making it cheaper to buy the same products in Europe, Japan and Korea, than in Hong Kong. The euro, yen and won may stay weak based on consensus forecasts.

Peer Comparison: Baby food makes up 21% of Danone’s sales and 13% for Nestle. Danone’s merger of its stake in Chinese infant-formula maker Dumex with Yashili, for a larger stake in parent China Mengniu, is pending. The EU’s SMP exports to China (the No. 3 EU SMP export market) grew 54% in 1H vs. two years ago.

China Quest for High-Quality EU Milk May Subside on Weaker YuanAnalysts Diana Gomes & Deborah AitkenAug 13, 2015

China’s imports of EU dry non-fat milk (SMP) fell 33% in 1H year-over-year, the European Commission reported. EU dairy exports to China may further subside amid a 3% yuan depreciation vs. the euro since June 30 and the country’s economic slowdown. Even so, China remains the top global dairy importer, with consumers preferring trusted, high-quality EU products, given historical domestic milk scandals. Danone said 1H baby food sales, including milk formula, grew more than 10% in China and remains a key growth driver.

Companies Impacted: ICBC, China Construction, AgBank, Bank of China and Bocom, China’s largest listed banks, held a total 4.9 trillion yuan ($765 billion) of corporate bonds in December. Higher bond yields may lift asset returns and net interest margins for these lenders.

China Bond Yield Rise on Yuan May Relieve Banks’ Margin PressureAnalysts Francis Chan & Jonathan TyceAug 14, 2015

Chinese banks’ net interest margins may face less pressure if bond yields continue rising following the yuan’s devaluation. Yields on AA one-year interbank corporate bonds, which declined through August 10 this year on PBOC rate cuts, have rebounded 12 bps since August 11 when the yuan’s fixing was lowered. BBB+ yields are up 12 bps. Yields may rise further if capital outflows intensify, and lenders could reinvest their matured bonds in higher yields if this trend continues.

RMB DEVALUATION

CHAPTER: YUAN GLOBAL-IZATION SHIFTS COM-MODITIES TRADINGChina Touts Yuan on World Stage to Bolster Clout in CommoditiesAnalysts Yi Zhu (Metals) & Francis Chan (Banks)Jun 24, 2015

China’s recent steps to promote its currency for greater global acceptance include setting up five offshore yuan centers, launching the Shanghai-Hong Kong Stock

China Insurers May Speed Up Overseas Investments as Yuan WeakensAnalysts Steven Lam & Elaine TungAug 12, 2015

Chinese insurers may accelerate their overseas investments before the yuan weakens further as the PBOC lowers the conversion rate. Their overseas investments are far below the regulator’s threshold of 15% of assets, meaning at least $200 billion can be invested abroad based on their 11.4 trillion yuan ($1.8 trillion) of assets as of June. Insurers held about 1.4% of their assets overseas in 2014. Insurers have been active in long-duration assets such as commercial properties in London and New York.

RMB DEVALUATION

Peer Comparison: China’s largest listed generators include China Yangtze Power, China National Nuclear, Huaneng Power, CGN power, Zhejiang Zheneng, GD Power and China Resources Power. The largest listed renewables developer is China Longyuan.

Yuan Dive May Have Minimal Effect on Huaneng, Longyuan EarningsAnalysts Joseph Jacobelli & Charles ShumAug 12, 2015

Huaneng Power may be one of two large listed Chinese power generators affected by the lower yuan as it is the only one with assets outside the country. Its Singapore investment accounted for about 11% of assets and revenue last year. China Longyuan has a 99.1-megawatt wind farm in Canada, representing 0.6% of its total 15,782 megawatt generation capacity. Many controlling stockholders of listed power companies such as China Huaneng Group and China Huadian Group have invested in assets abroad.

Companies Impacted: A weaker yuan will reduce the dollar value of earnings for the Chinese operations of Standard Chartered and HSBC. Furthermore, it may dent growth in the trading operations and outlook for banks active in the offshore yuan market. These include Citigroup, BNP Paribas and Barclays.

Yuan Moves May Prove Mixed Blessing for InternationalizationAnalysts Jonathan Tyce & Francis ChanAug 12, 2015

China’s position as a top trading partner for numerous emerging-market economies across Asia, Latin America, Africa and the Middle East has cemented the need for internationalization of the yuan. Yuan clearing banks are now appointed in 12 countries across Asia, Europe, the Middle East and Americas, bridging the gap between onshore and offshore financing. Following a lowering of the yuan-dollar fix on Aug. 12, fears of further devaluation may slow offshore developments until stability is reached.

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