China Eastern Airlines Corp. (CEA:US) tumbled to the lowest level in six months in U.S. trading on concern a more flexible yuan will erode foreign-exchange gains.
China Eastern, the nation’s second-largest carrier by passengers, and China Southern Airlines Co. (ZNH:US), the biggest, dropped after policy makers announced that they were widening the band the yuan is allowed to trade within for the first time since 2007. E-Commerce China Dangdang Inc. slid after its chief financial officer resigned, leading declines in the Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese shares in the U.S., which lost 1.5 percent to 101.62 yesterday in New York.
The yuan had its largest drop in more than a week versus the dollar yesterday, after the People’s Bank of China said on April 14 it was doubling the currency’s trading band to 1 percent from a so-called daily fixing rate. Fluctuations in the yuan, which weakened 0.1 percent last quarter, meant currency earnings for China Eastern were “significantly lower” than for the first three months of 2011, the company said April 13.
“Chinese airlines, which previously reported foreign- exchange gains as a benefit from yuan gains, may be impacted by the currency policy change should the yuan react with a depreciation,” said Alex Ashby, a New York-based research analyst at Global X Funds, an exchange-traded fund company which manages $1.3 billion including Chinese equities. “It is not very clear yet how the yuan rate will move after the band widening.”
The IShares FTSE China 25 Index Fund (FXI:US), the biggest Chinese exchange-traded fund in the U.S., declined for a second day, dropping 0.9 percent to $37.08. The Standard & Poor’s 500 Index (SPX) fell 0.1 percent to 1,369.57 with 278 stocks on the gauge advancing while 216 declined.
The yuan weakened 0.2 percent yesterday to 6.3150 per dollar in Shanghai, the biggest decline since April 5, according to the China Foreign Exchange Trade System. China’s central bank set its fixing rate yesterday 0.13 percent lower at 6.2960 per dollar. The yuan weakened as much as 0.5 percent from that rate, failing to test the new limit.
American depositary receipts of Shanghai-based China Eastern fell 3.6 percent to $15 in the U.S. yesterday, the lowest close since Oct. 7. The ADRs, each representing 50 common shares in the company, traded 0.3 percent above the carrier’s Hong Kong stock, which tumbled 4.9 percent to HK$2.32, the equivalent of 30 U.S. cents. The premium reversed a 1 percent discount on April 13.
China Eastern and its larger competitor China Southern expect net income to decrease more than 50 percent in the first quarter because of smaller foreign-exchange gains, higher jet fuel prices and slower economic growth, both carriers said April 13 in statements to the Hong Kong stock exchange.
China Eastern reported (CEA:US) 1.87 billion yuan ($300 million) in net foreign-exchange gains in 2011, compared with 1.07 billion yuan of increases in 2010, according to its March 25 statement to the Hong Kong exchange.
The yuan appreciated 4.7 percent versus the dollar in 2011 and gained 3.6 percent in 2010. The currency’s strength against the greenback last year was the main driver behind China Eastern’s 2.02 billion yuan of finance income, the company said in its March 25 filing.
ADRs of Guangzhou-based China Southern slid 2 percent to $22.07 yesterday, the weakest level in four trading sessions. The ADRs’ discount (ZNH:US) to the company’s Hong Kong stock narrowed to 1.6 percent, from 2.3 percent on April 13.
Yingying Hou and Paul Dewberry, analysts at Bank of America Merrill Lynch, said they are assuming the yuan will depreciate 0.5 percent this year. The analysts remain positive on China Southern’s stock because a lack of foreign-exchange gains “looks reflected in its valuation,” they wrote in a research note yesterday.
China Southern’s Hong Kong stock trade for 7.63 times estimated earnings over the next 12 months, after the multiple reached a five-month high of 7.85 on April 13, data compiled by Bloomberg showed. That compares with 5.44 times for China Eastern.
Shirley Lam, an analyst at Nomura International Hong Kong Ltd. reiterated her buy ratings on both carriers yesterday. She maintained a 12-price month price target of HK$5.90 for China Southern’s Hong Kong stock and HK$4.36 for China Eastern.
The Shanghai Composite Index (SHCOMP) slipped 0.1 percent to 2,357.03 yesterday, trimming its gains this year to 7.2 percent. The Hang Seng China Enterprises Index (HSCEI) of Chinese companies traded in Hong Kong dropped 0.8 percent to 10,844.74, snapping a two-day advance.
The widening of the yuan’s trading band “has no immediate impact on the market, while down the road, it will introduce more volatility in Chinese stocks,” said Bart Turtelboom, the London-based co-head of emerging markets at GLG Partners, which oversees about $26 billion, said by phone yesterday. “Chinese stocks will rise further from here as the economic slowdown is near the bottom and we’ve seen signs of recovery.”
Beijing-based E-Commerce, known as Dangdang (DANG:US), tumbled 15 percent to $8.63 in New York, the biggest one-day drop since June 2011. The company said in a statement yesterday that Chief Financial Officer Conor Chia-huang Yang had resigned.
Yang will stay with Dangdang, China’s biggest Internet bookseller, for a period as long as three months as the company searches for a replacement, according to the statement. Dangdang spokeswoman Maria Xin could not be immediately reached for comment outside of Chinese business hours.
Spreadtrum Communications Inc. (SPRD:US), a Shanghai-based mobile- phone chip designer, plunged 12 percent to $14.93, the biggest daily slide since Feb. 29.
Price Target Cut
Analysts led by Bill Lu at Morgan Stanley downgraded the company yesterday to equal-weight from overweight, meaning they expect the stock to be in line with the total return of the relevant country MSCI index over the next 12 to 18 months. They cut the price target for its stock to $18.31 from $26.50.
“The company’s products are not quite ready for prime time and we don’t see them being ready for another one to two quarters,” the analysts wrote in a research note yesterday. “A faster ramp of the China smartphone market could lead to a short-term hiccup as 2G slows and smartphone products are not quite ready to take over.”
This “temporary” issue could get resolved by the second half this year, the analysts wrote.
Spreadtrum has lost 28 percent this year after rising 14 percent in 2011.
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