SHANGHAI/SINGAPORE/TAIPEI -- Companies throughout Asia are taking steps to protect themselves against volatility stemming from China's slowdown by paying off debt, cutting costs and diversifying into new markets.
Dealing with debt
Though the yuan has settled down for now after a period of rapid depreciation, a further softening is widely expected. Chinese airlines hold much of their debt in dollars and are looking to avoid having repayment costs rise as the yuan weakens.
China Eastern Airlines said Jan. 4 that it had repaid $1 billion in foreign-currency-denominated debt early. The company is hit with 600 million yuan to 700 million yuan ($91.1 million to $106 million) in exchange losses for each 1% decline in the value of the Chinese currency against the greenback, Changjiang Securities said.
Baoshan Iron & Steel said Wednesday that net profit for the fiscal year ended in December likely plunged 83% amid heavy foreign exchange losses. The unit of Baosteel has repaid ahead of time some short-term dollar-denominated debt, which totaled $3.3 billion at the end of June. But concerns remain given that it still has long-term dollar debt as well as massive amounts of debt in euros and yen.
China Shenhua Energy began to use currency derivatives this year, such as swaps, options and futures trading, to hedge against the risk of a weak yuan. The country's biggest coal company is worried about exchange losses piling on top of the impact of sinking commodity prices. The company had 45.4 billion yen ($386 million) in yen debt and $1 billion in dollar debt in December.
Disentangling from China
The Chinese economy's slowdown has hit Southeast Asian companies with a double whammy: sluggish demand hurting sales and excess production pushing down prices.
Malaysian state-run oil giant Petronas said Tuesday that it is optimizing costs "to address the impact of the continuous fall in crude oil prices." It plans to lower capital spending and labor costs by 50 billion ringgit ($11.4 billion) over the next four years.
The drop-off in investment by prominent companies is squeezing profits at a variety of businesses. Major banks such as CIMB Group have been cutting payrolls. Uncertainty over employment and incomes could dampen consumer spending, dealing a blow to retailers and other businesses.
Exports to China account for more than 10% of sales at Adaro Energy, where earnings are sliding. The Indonesian coal company has begun taking steps to reduce its reliance on the market. "Right now we are focusing on using our cash flow to invest in the local market such as through developing [coal-based] power plants," CEO Garibaldi Thohir told local media this month.
The domino effect has hit stocks as well. Bloomberry Resorts has tumbled more than 30% this year on concerns that the Shanghai market's plunge will cut into visits to the Philippine company's casinos by affluent Chinese. Osim International, a Singapore-based maker of health products that sell well in China, has also slumped nearly 30%.
Some companies have tried to get ahead of the shift by cultivating other markets. Thailand's Charoen Pokphand Foods has been buying production facilities and restaurant operators in Europe. Its parent, conglomerate Charoen Pokphand Group, is working to become less dependent on China, which had been a growth driver. Thai retailer Central Group has closed stores in China and bought three established German department stores.
But not all companies can rework their growth strategies. Some that took on more foreign-currency debt in anticipation of Chinese demand are burdened by repayment costs now due to unfavorable currency shifts.
Companies in Taiwan and South Korea, where China accounts for a quarter of exports, are also eyeing other markets. Taiwan's Compal Electronics will set up a smartphone factory outside New Delhi, President Ray Chen told reporters Jan. 15. The facility, slated to come online as early as March, will have an initial monthly capacity of 500,000 handsets a month. Compal aims to use local production to tap demand in India, whose smartphone market is seen having a relatively high growth potential.
South Korean steelmaker Posco is expected to report its first ever group net loss for the fiscal year ended December. Overproduction in China dragged down prices, while exchange losses on foreign-currency debt likely mounted due to the weak won. The company plans to ramp up sales of high-margin automotive steel sheet in such markets as Mexico and Thailand to bolster profitability.
Taiwan Semiconductor Manufacturing Co. will start mass production using 5-nanometer process technology by the first half of 2020, President Mark Liu said at an earnings briefing Jan. 14. The foundry currently makes 16nm chips. Announcing production plans four years in advance is highly unusual.
TSMC said in December it would build a major chip factory in Nanjing. But orders in China are mainly for mid- to low-end smartphones, and the outlook for the market is hazy. The announcement of plans to make cutting-edge chips in Taiwan is likely aimed at retaining customers and hedging against China-related risk.