Yen connection bruises Hong Kong's retailers as stocks plunge

[HONG KONG] Times are tough for Hong Kong retailers. And even worse for those with links to Japan.

Shares of CEC International Holdings Ltd which runs the 759 chain of stores, have tumbled 32 per cent this year, compared with a 0.5 per cent retreat in the MSCI Hong Kong Index. International Housewares Retail Co and Aeon Stores Hong Kong Co - both of which sell Japanese products - have dropped at least 6 per cent.

The yen is fast extending its advance versus the Hong Kong dollar after recording the biggest quarterly surge since 2009, driving up the cost of goods brought in from Japan and exacerbating the Chinese territory's already gloomy retail outlook.

There are few signs of a let-up, with Eisuke Sakakibara, the former finance ministry official dubbed Mr Yen for his ability to influence the exchange rate in the 1990s, predicting a continued rally against the greenback.

"The environment is turning unfavorable as a stronger yen increases the cost of importing products from Japan," said Linus Yip, a Hong Kong-based strategist at First Shanghai Securities Ltd.

"Companies face a double whammy as the exchange rate adds to already downbeat retail demand. Share prices will remain under pressure." Hong Kong's retail sales fell 21 per cent, the most since 1999, in February as Chinese visitor arrivals declined.

The number of tourists from the mainland will drop 3.2 per cent for the year and their average spending will shrink 4 per cent, according to the Hong Kong Tourism Board.

CEC plans to close around 15 outlets this year, the Hong Kong Economic Journal reported on Monday, citing Chairman Lam Wai Chun. The company's net income rose by an average 22 per cent in the past three years as its sales of Japanese food and beverage items benefited from a drop in the yen. The company didn't reply to an e-mail seeking comment on Tuesday, while a phone call went unanswered.

The yen climbed 6.9 per cent against the Hong Kong dollar in the first quarter, with the city's exchange rate dictated by a de-facto peg to the US currency, after declining in the last four years.

The currency has surprised analysts this year, surging from around 120 against the greenback to reach 107.63 on Monday, the strongest since the central bank expanded its quantitative easing program in October 2014.

The Hong Kong dollarrose 0.3 per cent to 14.03 yen as of 10.18 am local time on Wednesday. China's yuan has declined 9 per cent against the yen this year, affecting Japanese companies such as Fast Retailing Co Ltd, whose China business accounted for 12 per cent of sales last year. The company's share plummeted 43 per cent in the past year.

"Japanese retailers which have a big presence in China will see foreign-exchange losses on their balance sheets," said Chelsey Tam, Hong Kong-based analyst at Morningstar Investment Service.

"The biggest impact will be on companies that source in Japan but depend on China for demand. One example would be premium diapers that are getting popular in China, where the attraction of the product is that it's made in Japan."

There were 120 corporate bankruptcies in Japan in the 2015 fiscal year directly linked to events in China, up 90 per cent from a year earlier, according to a Tokyo Shoko Research survey. The biggest reason for the bankruptcies was high costs, such as a rise in manufacturing prices due to increases in labor costs in China, as well as higher import costs due to currency fluctuations.

Aeon Stores Hong Kong Co operates the Living Plaza chain and some supermarkets, while International Housewares Retail Co that runs the Japan Home chain, which sells items including household appliances and kitchenware.

BLOOMBERG