Mainland developers worry as weak RMB hurt earnings by 29%

Posted: Jul 3 2014Last Updated: Jul 14 2017
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2 July 2014 - The devaluation of the RMB is a risk factor to mainland property developers according to the Oriental Daily.  A research report by Credit Suisse stated that if the RMB depreciated by 15% against the US dollar, earnings per share for China property stocks listed in Hong Kong might drop 29.6% due to a large volume of external debt. However, Portwood Capital Chairman, Peter Churchouse said that market pundits are exaggerating debt problems for mainland developers and believes that some high-quality China property stocks will outperform.  

 

Credit Suisse said that developers with high degrees of external debt would suffer from an increase in financing costs as most have no hedging strategies for their RMB currency exposure. In addition, Hong Kong-listed property stocks need to pay dividend in Hong Kong dollars, which would further affect earnings.  China Greentown (03900) CFO Feng Zheng said that while a RMB devaluation might affect the income statement, there would be no effect to a company’s cash flow and operations.   

 

According to Peter Churchouse, Hong Kong-listed mainland property companies’ average net gearing ratio was 53.87%, significantly higher than those of Hong Kong, Singapore, Australia and ASEAN property companies' gearing ratios, which range from 11.55% to 43.83%.  Churchouse believes the market is unduly worried, which has resulted in overselling of some stocks. He noted Chinese Overseas (688) as an attractive pick as its debt status is in good condition, the current stock price has dropped to low long-term earnings levels, and due to recent deregulations in the China property market.  

 

Photo Credit: Oriental Daily

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