June 30, 2016 12:00 pm JST

Europe-reliant companies take a hit from Brexit

KENJI KAWASE, Nikkei deputy editor

HONG KONG "You only find out who is swimming naked when the tide goes out," Warren Buffett famously wrote in his letter to Berkshire Hathaway shareholders in February 2002, following the Sept. 11, 2001, terrorist attacks. The Berkshire chairman and investment guru was referring to how such a surprise event -- a so-called black swan -- can reveal true strength or weakness. On June 24, financial markets unsparingly exposed which Asian blue-chip stocks were most vulnerable after Britain voted the previous day to leave the EU.

Li Ka-shing, who runs telecommunications, utilities, retail and port businesses in the U.K. under his flagship conglomerate CK Hutchison Holdings and ranks as the richest man in Hong Kong, was especially hard hit. Along with three other major listed arms -- Cheung Kong Property Holdings, CKI Holdings and Power Assets Holdings -- his company saw about 82 billion Hong Kong dollars ($10.5 billion) in market value wiped out in just three trading days.

Li was recently quoted as saying Britain's decision, known as Brexit, is "not the end of the world." Nonetheless, the market is factoring in the potential risk. Joe Morrison, vice president and senior credit officer at Moody's Investors Service, said on June 27 that even though CK Hutchison's credit rating was not affected, Brexit is negative for the company as the U.K. is its "key profit contributor."

Fitch Ratings is also cautious. In a June 24 note, the credit-rating company said Brexit "will be mildly negative for U.K.-focused corporates" and that companies in the areas of transportation, property and leisure will "suffer to some degree."

Singaporean property developer City Developments, whose London-based subsidiary runs 22 hotels in the U.K., was also dealt a blow. In the past five years, the company has accelerated land acquisitions and residential developments in the greater London area. CEO Grant Kelley said in a recent interview with the Nikkei Asian Review that Brexit "clearly could impact London property negatively."

ComfortDelGro, which operates London's second-largest public bus company, is another Singaporean casualty. The company operates 5,254 taxis in the U.K. and has footholds in Liverpool, Glasgow and Ireland as well.

The impact is also being felt in the electronics and automotive sectors. Jason Chen, CEO of Taiwanese personal-computer maker Acer, told reporters that "we would watch closely whether Brexit will have any negative impact on demand and spending power in the U.K. and Europe." Nearly 60% of the company's revenue comes from Europe.

Motherson Sumi Systems, an autoparts manufacturer catering mainly to German carmaker Volkswagen, was the hardest hit in India. However, CEO Vivek Chaand Sehgal said "there is no impact" on the company from Brexit, due to its low exposure in the U.K.

Thai petrochemical manufacturer Indorama Ventures was also displeased with the market reaction. Even though it has a substantial presence in Europe, an executive told the NAR on June 27 that Brexit "does not largely affect our business." The plastic bottles and other food packaging products the company produces are basic necessities, demand for which would remain even if the Brexit decision spills over into the rest of Europe.

The fallout of Brexit could be much wider, according to Nomura. As soon as the result of Britain's vote came out on June 24, it downgraded the aggregate economic growth forecast for Asia excluding Japan to 5.6% from 5.9%. Hong Kong may dip into negative territory while Thailand may lose 0.5 percentage point of growth, according to Nomura, whose team, led by regional chief economist Rob Subbaraman, warned "not to underestimate the depth and reach of financial market contagion to Asia."

The next rate hike by the U.S. Federal Reserve appears likely to be off the table for now, and economists are expecting waves of rate cuts by Asian monetary authorities to support growth. Trinh Nguyen, a senior economist at French investment bank Natixis, expects central banks in the region to "likely adopt a more dovish stance ... especially evidenced in countries most exposed to the slowdown in the eurozone and the U.K.," such as China, Taiwan, India, Indonesia and Vietnam.

Nikkei staff writers Mayuko Tani, Cheng Ting-Fang, Rosemary Marandi, Kentaro Iwamoto contributed to this report.

Asia300

CK Hutchison Holdings Ltd.

Hong Kong

Market(Ticker): HKG(1)
Sector:
Industry:
Producer Manufacturing
Industrial Conglomerates
Market cap(USD): 48,914.95M
Shares: 3,857.67M
Asia300

Cheung Kong Property Holdings Ltd.

Hong Kong

Market(Ticker): HKG(1113)
Sector:
Industry:
Finance
Real Estate Development
Market cap(USD): 29,512.22M
Shares: 3,721.71M
Asia300

City Developments Ltd.

Singapore

Market(Ticker): SES(C09)
Sector:
Industry:
Consumer Services
Hotels/Resorts/Cruiselines
Market cap(USD): 7,161.87M
Shares: 909.30M
Asia300

ComfortDelGro Corp. Ltd.

Singapore

Market(Ticker): SES(C52)
Sector:
Industry:
Transportation
Other Transportation
Market cap(USD): 3,696.57M
Shares: 2,162.49M
Asia300

Motherson Sumi Systems Ltd.

India

Market(Ticker): BOM(517334)
Sector:
Industry:
Producer Manufacturing
Auto Parts: OEM
Market cap(USD): 10,056.1M
Shares: 1,403.4M
Asia300

Indorama Ventures Public Co. Ltd.

Thailand

Market(Ticker): BKK(IVL)
Sector:
Industry:
Process Industries
Chemicals: Specialty
Market cap(USD): 5,531.59M
Shares: 4,814.33M
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