Listed Chinese firms will announce their 2016 earnings after the Lunar New Year holiday. Since the Chinese yuan slumped 6.8 percent against the dollar last year and the majority of Hong Kong listed firms derive most of their earnings from China, the currency movement is a big deal.
Mainland companies already represent nearly 70 percent of the total listed companies in Hong Kong. The remaining local and international companies have considerable exposure to the mainland market.
The impact, however, varies a lot, depending on the income source and the accounting currency. We can classify companies into four categories.
Companies that are based in China get most of their revenue from the mainland market. Provided that they are hardly involved in trade activities or foreign borrowing, as long as they use the yuan as the reporting currency, yuan exchange rate changes have little impact on their results. Typical examples include Vanke and Li Ning.
Those with considerable US dollar or Hong Kong dollar debt with earnings largely denominated in yuan would have suffered significant currency translation loss last year. China Evergrande Group and Yuexiu Property fall into this category.
Companies that own lots of foreign assets will gain from a weaker yuan as their overseas income will be inflated when converted into yuan. Fosun International and Fuyao Glass Industry Group are some of the firms that stand to benefit for that reason. Liang Xinjun, Fosunís chief executive, said that the companyís net profit would increase 12 percent if the yuan falls 10 percent.
In the fourth group, these companies present their accounting statements in Hong Kong dollar or US dollar. China is the source of their main income. These are firms that will suffer the most from a weaker yuan.
Companies like Lee & Man Paper Manufacturing and Vinda International Holdings belong to this category.
Interestingly, since the second half of last year, seven Hong Kong-listed companies have decided to change their presentation currency from Hong Kong dollar or US dollar to Chinese yuan, including Want Want China Holdings, Tingyi Cayman Islands Holding (00322.HK), Hengan International Group Co. and Sino Credit Holdings.
Changing the presentation currency is a big move as it involves the restatement of all income, costs, assets and liabilities.
In fact, no Hong Kong-listed firm took such a move between 2012 and 2015.
Nevertheless, investors should bear in mind that the change of presentation currency wonít change company fundamentals.