Pressure on yuan may boost earnings for some SGX firms
Singapore
FADING hopes of a US-China trade resolution have hit China's currency, with some banks revising their forecasts for the currency lower as the yuan slumped to a four-month low on Monday.
A weaker yuan trend could benefit Singapore-listed companies which clock costs in the currency, like Hi-P International and Yangzijiang Shipbuilding, analysts said.
The yuan fell 0.8 per cent to end its onshore trading session at 6.8721 per US dollar on Monday, its weakest such close since Jan 3. It later fell past 6.88 per dollar, erasing all its gains for the year, according to Reuters data.
"The pressure on RMB depreciation may depend on three near-term factors including the size of China's retaliation package, US's plan to impose tariffs on the remaining US$325 billion products and the market's assessment on whether the setback is temporary or not," said Tommy Xie, head of Greater China research at OCBC Bank.
On Friday, the US hiked tariffs on US$200 billion worth of Chinese imports to 25 per cent from 10 per cent, and China has vowed to respond.
"In the near term, it is likely that both CNY (onshore yuan) and CNH (offshore yuan) would stay defensive against the USD. The risk near term is probably for CNY weakness to overshoot our year-end forecast of 6.80/USD," wrote UOB analysts in a Monday note.
If the current tensions abate, most currency strategists see the USD/CNY moving within 6.80 to 6.90 in the next few months. But if talks fail, the yuan could threaten to break above the "psychological barrier" of 7.00.
"We have been advising our clients to adopt a stress test approach this year, and that they need a game plan, should talks fall through," said Philip Wee, FX strategist at DBS.
"Going by the latest US narrative, any trade deal would only hold off more tariffs, and not lower existing tariffs," he said.
For Singapore-listed companies that book costs in yuan, a softer Chinese currency would boost the bottom line, particularly, electronics manufacturers with a supply chain linked to China.
Valuetronics' factories are sited in Guangzhou, while Memtech International does all its manufacturing in China.
Moreover, the majority of their revenue is derived from the US, said RHB analyst Jarick Seet. A sustained decline in the yuan will hence benefit them and could potentially help their share prices, he said.
Hi-P International, whose six out of 13 of manufacturing plants are based in China, could also stand to gain. Its overheads are mainly in yuan, but about 90 per cent of Hi-P's total revenues are in US dollars, according to DBS Equity Research.
Other potential gainers include Yangzijiang Shipbuilding, which registers most of its orders in US dollars while costs are in yuan, said KGI Securities' Joel Ng.
But if the trade war hits the companies' demand, that could offset the benefits of a weaker yuan.
"If cost goes down but books shrink, that will offset the effect," Terence Wong, chief executive at fund management firm Azure Capital pointed out. Hence, the market will still hope for some sort of resolution between the US and China.
That probability, UOB's analysts predicted, is now 60 per cent, down from 65 per cent. The worst-case scenario of having no resolution is 30 per cent, up from 25 per cent previously.
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