20220928-招银国际-Strategy_Report_RMB_outlook_and_impact_on_sectors_19页_1mb

Strategy Report Summary

RMB Outlook and Impact on Sectors

Core Content

The RMB is expected to further weaken against the USD in the next 1-2 quarters due to the continued divergence in US and Chinese monetary policies, which may increase the interest rate spread, and heightened US-China geopolitical tensions. The RMB may see a moderate appreciation in 2023 if the US experiences a recession and China reopens its economy. The turning point of the RMB trend will depend on two key factors: the timing of the US inflation decline and recession, and the adjustment of China's zero-COVID policy.

Key Impact Sectors

• Technology: Positive impact. Net exporters with RMB costs and USD sales (e.g., AAC Tech, BYDE, FIT Hon Teng, Goertek, Luxshare, TK Group, Innolight, Maxscend, and Xiaomi) will benefit. However, companies with high USD debt/cost and RMB sales may suffer.
• Capital Goods: Positive impact. Companies with overseas revenue (primarily in USD) and domestic cost structures (mostly in RMB) will benefit from RMB depreciation. SANY Heavy and Sinotruk are highly sensitive to RMB depreciation, but the main focus remains on sales volume in the Chinese market.
• Consumer Discretionary: Positive impact. Sectors with high overseas revenue, such as Textiles, Small Home Appliances, Large Home Appliances, Sportswear, and Catering, are expected to benefit. A 1% depreciation of the RMB against the USD could boost net profit for Textiles by 1-2%.
• China Property: Negative impact. Weaker RMB increases the cost of offshore USD-denominated debt for developers, with an estimated exchange loss of up to 20% of 2021 earnings if USD/CNY remains at current levels.
• Gas: Negative impact. RMB depreciation raises the import costs of gas for the "three barrels of oil," pressuring the gas dollar margin for city gas operators.
• Consumer Staples: Mixed impact. Companies like Dairy and Breweries benefit from local sourcing, while Smoore has significant overseas revenue but hedges its forex exposure.
• Internet: Limited impact. Most internet companies are domestic, but those with overseas revenue (e.g., Tencent, NetEase, Alibaba) may see slight benefits.
• Software & IT Services: Limited impact. Hikvision and Dahua will benefit due to high overseas revenue and RMB cost structure, while SenseTime and GDS may suffer due to USD-denominated costs and debt.
• Banking & Insurance: Limited impact. Regional banks have minimal FX exposure, and even for major banks like BOC and ICBC, the impact on profit and book value is minimal. Insurers have limited overseas investment and revenue.

Broad Market Impact

Main Points

• Earnings Growth Correlation: Estimated earnings and forward P/E of China/HK stocks show a positive correlation with the RMB exchange rate. Market indexes often lead the RMB rate by 2-6 months.
• Stock Performance: In RMB depreciation cycles, A-shares and HK local stocks outperform H-shares. A-shares investors, with RMB as their functional currency, are less sensitive to RMB fluctuations compared to offshore investors.
• Sector Performance: Energy, Consumer Staples, and Utilities tend to outperform during RMB depreciation. Financials, Property, and Utilities also show better performance in HK local markets.

Historical Sector Performance During RMB Depreciation Cycles

Key Observations

• Outperforming Sectors: Energy, Consumer Staples, and Utilities have historically outperformed during RMB depreciation.
• HK Local Stocks: Financials, Property, and Utilities in HK outperform their Mainland counterparts due to lower RMB exposure and higher FX sensitivity.
• Examples:
  • Financials: HSBC, Bank of China, and others.
  • Property: Property developers and related firms.
  • Utilities: Utility companies with higher overseas revenue.

Detailed Impact on Individual Stocks

Positive Impact

• Technology: AAC Tech, BYDE, FIT Hon Teng, Goertek, Luxshare, TK Group, Innolight, Maxscend, and Xiaomi.
• Capital Goods: Zhejiang Dingli, SANY International, Zoomlion, and Yancoal Australia.
• Consumer Discretionary: Textiles, Small Home Appliances, and Large Home Appliances.

Negative Impact

• Technology: Willsemi, Sunny Optical, and ZTE.
• Capital Goods: Weichai Power (due to EUR appreciation).
• Consumer Discretionary: Companies with minimal overseas exposure or significant FX hedging, such as Crystal and Vesync.

Neutral Impact

• Capital Goods: Yancoal Australia and UEG have no RMB exposure.

Summary of Key Factors Influencing RMB Depreciation Impact

• RMB Depreciation: Boosts net profit for net exporters and companies with USD revenue and RMB costs.
• USD Appreciation: Reduces the value of USD-denominated assets, affecting companies with significant USD debt or costs.
• Economic Growth: Stronger China growth and weaker US growth may lead to a moderate RMB appreciation in 2023.
• Geopolitical Tensions: May continue to exert downward pressure on the RMB in the short term.
• Policy Adjustments: The adjustment of China's zero-COVID policy and the US recession are critical turning points for the RMB trend.

Conclusion

The RMB depreciation cycle is expected to have a varied impact across sectors. Technology and Capital Goods are likely to benefit from the depreciation, while China Property and Gas sectors are expected to suffer. Consumer Discretionary and Consumer Staples show mixed outcomes, depending on their revenue and cost structures. HK local stocks and A-shares tend to outperform H-shares during RMB depreciation due to lower FX exposure and different currency dynamics. The long-term trend may shift in 2023 if the US enters a recession and China reopens its economy, potentially leading to RMB appreciation.