China's Nine Dragons warns on profit slump as weak yuan bites (updated)

Nine Dragons Paper (Holdings)

22/01/2016 05:00

* Warns H2 net profit likely fell 54 pct 
    * Without FX losses, profit would have more than doubled 
    * Other mainland firms seen facing similar earnings hit 
    * Paper price rise hopes lift Nine Dragons shares 
 
 (Adds analyst comment, market reaction, details) 
    By Donny Kwok 
    HONG KONG, Jan 22 (Reuters) - Chinese cardboard maker Nine 
Dragons Paper (Holdings) Ltd  2689.HK  warned its second-half 
profit likely halved, buckling under foreign exchange losses as 
mainland China firms begin to absorb the impact of the weaker 
yuan. 
    Owned by one of China's richest women, Cheung Yan, Nine 
Dragons issued a preliminary estimate late on Thursday that its 
net profit for July-December slumped 54 percent to 310 million 
yuan ($47 million). Stripped of foreign exchange losses, profit 
would have jumped 144 percent, it said. 
    The warning from Nine Dragons, worth $2.5 billion by market 
value, is the first from a big Chinese company that show how the 
yuan's slide versus other countries may hit some firms hard. 
While a 4 percent weakening in the past three months versus the 
dollar has helped exporters, companies like airlines and paper 
producers face mounting bills for raw materials and fuel.  
    "I would expect to see more similar incidents (profit 
warnings) to come into light in the upcoming earnings seasons as 
more companies spell out the impact of yuan devaluation," said 
Walter Woo, analyst at Oriental Patron Financial Group.  
    Investors turned a blind eye to the warning early on Friday, 
focusing on a potential rise in paper prices to send Nine 
Dragons shares sharply higher. Jefferies Equity Research wrote 
to clients that Nine Dragons' business was growing strongly, and 
at 0400 GMT the shares were up 9 percent while the benchmark 
index climbed 1.4 percent.  
    But Chinese companies that have borrowed heavily in global 
dollar debt markets are increasingly planning early repayments 
of their dollar-denominated loans and bonds to offset the impact 
of the yuan's continued weakening.  urn:newsml:reuters.com:*:nL3N14S32C 
    On Thursday China Eastern Airlines  0670.HK  said it had 
completed the issuance of the second tranche of super short-term 
commercial paper in 2016 to refinance bank loans and improve the 
debt structure of the company. 
    Chairwoman Cheung had warned in an interview with Reuters in 
September that depreciation of the yuan was one of the company's 
biggest challenges. 
    Since then Nine Dragons has accelerated its conversion of 
borrowings denominated in foreign currencies into borrowings 
denominated in RMB to curb further exchange losses. 
    By the end of January 2016, yuan is expected to account for 
about 50 percent of the group's debt portfolio, Nine Dragons 
said. By the end of June 2016, the proportion of borrowings 
denominated in yuan is estimated to increase to more than 80 
percent, with the rest denominated in euro.  
    Nine Dragons will publish its interim results late in 
February. 
     
($1 = 6.5794 Chinese yuan) 
 
 (Additional reporting by Michelle Chen, Rain Liang and Matthew 
Miller; Editing by Anne Marie Roantree and Kenneth Maxwell) 
 ((donny.kwok@thomsonreuters.com; +852 2843 6470; Reuters 
Messaging: donny.kwok.reuters.com@reuters.net)) 
 
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