Currency Hedges Protect Cathay, Techtronic's Earnings From Greek Fallout
Asian companies from Techtronic Industries Co. to Maruti Suzuki India Ltd. said currency hedges will help them withstand the impact of the euro’s slump after stocks plunged on concern the region’s debt crisis will spread.
Techtronic, the maker of Hoover vacuum cleaners and Ryobi power tools, fell 1.1 percent in Hong Kong trading today, while Samsung Electronics Co. slid 0.1 percent in Seoul. PlayStation maker Sony Corp. lost 3.4 percent yesterday in Tokyo, where markets are closed today for a public holiday. The companies all get more than 20 percent of their sales from Europe.
“For us, it’s very minimal impact,” said Horst Pudwill, chairman of Hong Kong-based Techtronic. “I anticipated a weaker euro already three months ago.”
Stocks slumped worldwide after Standard & Poor’s cut Greece’s rating to junk and lowered Portugal by two levels, intensifying concern that Europe’s debt crisis will derail the global recovery. The risk of contagion may be overstated for Asian companies, Hong Kong-based fund manager Danny Yan said.
“This has been well-discounted by the market, and only a small number of companies will suffer from currency losses,” said Yan, who helps oversee $400 million at Taifook Asset Management Ltd.
Still, “given the uncertainties, we’ve reduced stocks with Europe exposure,” he said.
Maruti Suzuki, India’s biggest carmaker, earns up to 80 percent of its export revenue from Europe. The New Delhi-based company had overseas sales of 48.6 billion rupees ($1.1 billion) in the fiscal year ended in March.
“We are hedged for the next six months,” Chief Financial Officer Ajay Seth said. “However, we will have to keep a watch for the later part of the year.”
Cathay Pacific Airways Ltd., Hong Kong’s biggest carrier, generated HK$7.9 billion of sales in Europe last year, or 12 percent of total revenue. About 20 percent of capacity in the period was on European routes.
“It’s not a great concern to us,” Chief Executive Officer Tony Tyler said in Hong Kong. “We hedge our currency exposure.”
TPV Technology Ltd., the world’s biggest contract manufacturer of computer screens, has European customers that include Royal Philips Electronics NV. Less than 5 percent of TPV’s sales are settled in euros, and the company has forward currency contracts meant to protect against a fall in its value, said Shane Tyau, director of corporate finance.
‘Very Thin Margins’
“Our biggest concern is on how the current situation may affect end-user demand for our products,” Tyau said in Hong Kong. “We operate on very thin margins, so we simply cannot afford to take any undue risks on fluctuations in the forex markets.”
Greece in January raised taxes on cigarettes and alcohol in an effort to reduce what was the European Union’s biggest budget deficit. Japan Tobacco Inc., the world’s third-largest publicly traded cigarette maker, said the current crisis exacerbates its problems.
Demand has “shrunk significantly in Greece” since the tax increase, Japan Tobacco President Hiroshi Kimura said. The company earned 46.5 percent of its revenue overseas in the year ended March 2009.
Another Credit Crunch
“The situation in Greece has been severe,” Kimura said. “Unless the Greek economy stabilizes, people would keep holding off buying.”
The company said yesterday that annual profit will probably drop 4 percent on Japanese plans to raise cigarette taxes.
The crisis may impact stock prices by curbing investors’ appetite for risk, according to Mitsushige Akino, who oversees $450 million in assets at Ichiyoshi Investment Management Co. in Tokyo.
“That limits the money going into the market, and share prices won’t rise even with good company earnings,” Akino said. “People may even need to pull funds out.
“It’s possible that this would create a credit crunch.”
Japanese automakers say moves in the euro are dwarfed by changes in the U.S. dollar.
Toyota Motor Corp., Japan’s largest carmaker, expects each 1-yen gain against the euro to cut operating profit by 5 billion yen ($536 million). That compares with the 35 billion-yen reduction caused by the same move against the U.S. currency.
Honda Motor Co., Japan’s No. 2 carmaker, estimates that such a move against the euro cuts operating profit by 1.5 billion yen, while a 1-yen move against the dollar cuts earnings by 12 billion yen.
Spokesmen for both companies declined to comment.
Sony, the electronics maker that gets a quarter of sales from Europe, loses about 7.5 billion yen of annual operating profit for every 1-yen decline in the value of the euro, spokesman George Boyd said.
The company “has no plan to take a specific action,” Boyd said.
Nintendo Co., the world’s biggest maker of video-game consoles, got about 41 percent of sales from Europe in the nine months ended Dec. 31, making the region its biggest market. The Kyoto, Japan-based company declined to comment on the impact.
Maruti Suzuki has a long-term strategy in Europe that will survive any currency crisis, Seth said.
“Exchange rates will keep fluctuating up and down, but our business model will continue,” he said. “We have about 15 percent of our sales from the export market. We will continue with that.”