Impact of RMB Appreciation

For companies that we follow, only two will benefit

The People's Bank of China (PBOC) announced last Saturday that it would increase the flexibility of RMB exchange rate. There are no indications on the timing or amount of adjustment yet, but we do expect the Chinese governments will release more specific information as the Toronto G20 meetings come closer next week. In view of the timing of the announcement, we suspect it might be geared towards political reasons as well.

We expect the currency to appreciate by a modest 2% against the USD this year from 6.83 to 6.70. Gains should be limited because PBOC has already ruled out a one-time revaluation or large-scale appreciation, and it has also decided to keep the existing exchange rate daily trading band (which is 0.5%).  We see that PBOC is ready to resume a managed float of the RMB against a basket of currencies this time, as this should help further improve its control and management of the exchange rate.

Companies we cover that will have positive impacts

Skyworth Digital (751.HK): LCD panels account for about 55% of Skyworth's total production costs, which are payable entirely in US$.  As such, the company should pay about US$1.58bn for the panels in the fiscal year ending March 2011, and a 2% appreciation in Rmb effective today would save the company US$30m of production costs. This will raise its gross profit margin from about 23.1% to 23.9%, resulting in a 13.6% increase in net profits from our original estimate of HK$1,720m to HK$1,954m.  However, the Rmb will not be appreciated in a single step, and will instead be nudged up gradually. Besides, 4 months of FY11 had gone, and there are usually 1-2 months of inventory. As such, we estimate the net benefit of the Rmb appreciation to Skyworth in FY2011 is only about HK$90m, equal to about 5% increase over our current profit estimate of HK$1,720m.

Belle (1880.HK):  About 1/3 of Belle's sales are Nike, Adidas and Puma products, and the US$ component cost for the company is about Rmb5bn.  2% appreciation of the Rmb would therefore reduce product cost by about Rmb100m. As the appreciation is estimated to take one year to be up by 2%, impact of FY2010 ending December would therefore be about Rmb30m only, or about 1% of our estimated profits for the year.