Dow Jones Newswires -- February 6, 1998
HK-Listed Petrochem Cos.' Growth Hindered By Yuan Concerns
By TARA SUILEN DUFFY
AP-Dow Jones News Service
HONG KONG -- Lower crude oil prices early this year have so far
failed to offset concerns that a currency depreciation in China
will cap the shares of Hong Kong-listed mainland petrochemical
companies, analysts say.
Repeated assurances from China's economic czar Zhu Rongji and a
cohort of other high ranking officials that the country won't
devalue the yuan have had mixed success, and analysts remain
unconvinced that the yuan will hold at current levels for the
rest of 1998.
In the wake of sharp depreciations in South East Asian
currencies, economists, analysts, and investment strategists
speculate about the possibility of a yuan devaluation of anywhere
from 10%-40% over the next 10 to 36 months in order for China to
remain competitive. The Chinese government currently maintains
the value of the yuan at around 8.28 per $1.00.
As a result, confidence in petrochemical companies such as
Beijing Yanhua Petrochemical Co. (BHY) and Zhenhai Refining and
Chemical Co. Ltd. (Q.ZRC) rests on the yuan issue.
Salomon Smith Barney's 'defensive play' recommendation for
Beijing Yanhua Petrochemical Co. is testament to escalating
concerns about the yuan and underscores shifting investment
strategies that focus both on individual companies' balance
sheets and foreign currency exposure.
Although upstream petrochemical earnings peaked in 1997 and are
expected to deteriorate this year, Beijing Yanhua will outperform
the H-share index because it is less exposed than others to raw
material imports, product exports and foreign debt, the Salomon
Smith Barney report says.
Salomon Smith Barney analyst Janet Yang says the depreciation of
Southeast Asian currencies and slides in regional equities
markets highlight the need to adjust investment strategies.
'Asia has been an earnings momentum market, but now earnings will
be less and less important,' she says.
Chinese companies with little foreign exchange exposure and
balance sheet risks will outperform the H-share index, she adds.
The Hang Seng China Enterprises Index has fallen by 84.43 points
to 638.56, or 12%, so far this year after falling by 257.56
points, or 26%, in 1997.
Among Hong Kong-listed Chinese oil and petrochemical companies,
Beijing Yanhua may prove to be the most impervious to a yuan
devaluation, but it offers only negative growth earnings per
share growth of 57% in 1998 and 45% in 1999, according to Salomon
Smith Barney.
Still, Yang says Beijing Yanhua, which makes resin, plastics,
rubber, and basic organic chemical products, and Shanghai
Petrochemical Co. (SHI), both show resilience in their balance
sheets and minimal foreign exchange exposure.
As the Hang Seng Index rose Friday morning, the two companies'
shares followed suit. Beijing Yanhua shares rose to $HK1.36, from
$HK1.17. Shanghai Petrochemical shares also rose 7.3% from
Thursday's close to HK$1.17.
Because sectoral earnings could fall over the next couple of
years, investors will be more selective in picking a company,
Yang says.
Shumin Huang, a Hong Kong-based petrochemical analyst for Goldman
Sachs, says yuan devaluation concerns shouldn't be overplayed to
such a degree that they dominate petrochemical stock selection.
She noted the concerns aren't justified for some companies,
including Zhenhai Refining and Chemical Co.
'Structurally, the currency is fairly valued and institutionally
there are reasons not to devalue (the yuan),' agrees Paul
Bernard, oil and petrochemical analyst at Goldman Sachs' Hong
Kong office.
Zhenhai Refining is a 'quality company' which outperformed the
Hang Seng China Enterprises Index by 40% in 1997, notes Bernard,
prompting Goldman Sachs recently to upgrade it to a buy
recommendation.
Concerns about a possible currency devaluation, nonetheless, have
hampered shares' performance. Lower crude oil import costs,
typically a bullish sign for refineries' share prices, have so
far not been enough to keep Zhenhai's shares up. Friday morning,
as the Hang Seng China Enterprise Index gained 32.51 points,
Zhenhai shares did gain HK$0.25 to HK$2.75.
The currency concern, however, is not unwarranted, Huang says.
'If the yuan does depreciate, Zhenhai's earnings growth will be
wiped out by it,' she warns. She says she sees the yuan holding
for another three years.
While Zhenhai has reiterated state policy that the yuan will not
be devalued, a company official says the company has considered
steps to offset potential losses from a weaker yuan, including
increasing exports of petroleum products.
The company is one of the few H shares to have posted consistent
earnings growth since its listing and should benefit from
extended lower crude prices and improved efficiency, expansion
and upgrading, according to a Goldman Sachs report.
Zhenhai's competitiveness will be strengthened as it is expected
to become the largest refiner in China by 2000, the report says.
Slower forecast economic growth in China isn't enough of a
concern to detract from Zhenhai's attractiveness, it adds.
China's GDP grew by 8.8% in 1997 and is forecast to grow at only
8% in 1998.
Zhejiang province, where Zhenhai and its customers are located,
has been growing at a faster rate than the national average,
sustaining the demand for the refiner's products, Huang says.
-By Tara Suilen Duffy; 852-2802-7002; sduffy@ap.org
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