Earnings in decline
07 September 1998 00:00 [Source: ACN]
Political turmoil in Russia adds to Asia's economic
August proved another difficult month for Asian equity markets
as global concern mounted over stability in Russia. Asia's chemical
shares were not immune from the general weakness and most
underperformed their own markets. Interim results provided
The Hong Kong market came under intense
scrutiny during the latter part of the month as the government
tried to undo attempts by speculators to profit from equity and
The government used some of its vast foreign-exchange holdings
to buy selected Hong Kong blue chips and did manage to ameliorate
the decline in the index.
However, this market support activity was of little comfort to
the China H-shares. These continued to plunge,
leaving the sector as the worst among those in our coverage so far
in 1998. The H-share index lost more than 30% in value in August.
The year-on-year comparison is also unflattering, reflecting the
fact that the H-shares reached their speculative peaks in August
August brought official confirmation that the 8% GDP (gross
domestic product) growth target for 1998 is unlikely to be met.
From a corporate point of view, the interim reporting season
brought a dismal set of figures from chemical stocks.
Each one reported sharp declines in earnings during the first
half compared with the same period last year, while Yizheng
Chemical Fibre reported a net loss.
With the exception of Jilin Chemical Industries, most companies
recorded falls in turnover in comparison with the previous set of
interims, reflecting weak product prices and pressure on
Jilin has nonetheless deferred its option to purchase additional
new facilities from its parent and shelved its proposed domestic
A-share issue because of the weak markets.
Zhenhai Refining, already the weakest stock in the sector this
year, was not helped by news that it is facing problems recovering
a US$20m deposit placed with a unit of the Bank of China group.
Taiwan's chemical stocks all underperformed the
market in August as moves in the index continued to be driven by
sentiment towards the electronics sector.
Economics news was limited, although the July unemployment rate
- at 2.9% - was higher than forecast, reflecting a general slowing
in the economy.
Interim results from major groups revealed the impact of poor
product prices and the weakness of the NT dollar.
Formosa Plastics reported pre-tax profits down 53% for the first
half to end-June, following a NT$1.1bn (US$31.7m) foreign-currency
loss, for example. Net profits, however, were up following a
substantial tax rebate. The difficulties faced by the group were
highlighted by the closure in early August of a loss-making
textiles unit and a revised company forecast for lower pre-tax
profits for the year as a whole.
Formosa Chemicals & Fibre Corp and Nan Ya Plastics saw falls
in interim net profits of 56% and 14% respectively. The group is
reported to have made a substantial increase in its investment in
the Mai-liao cracker site in order to increase capacities and
broaden its production base into more speciality products.
Economic news from South Korea generally served
to confirm how difficult current conditions are. A 6.6% decline in
first-half GDP was the worst year-on-year fall since 1980, with
private consumption and capital spending down. Unemployment
continues to rise and has reached 8.6%.
The one bright spot was the marked improvement in the trade
balance as exports in the June quarter rose 16% against a 22% fall
in imports. In this context, the shares in our coverage held up
quite well compared to the index. SK Corp came under pressure,
partly in response to the untimely death of the chairman of the SK
Group, but also following the release of first-half results showing
net profits down 63% from last year. Moody's has put the company on
review for possible debt downgrade in the light of continued won
In contrast, LG Chemical reported a 193% rise in net profit for
the first half, though it conceded that business conditions could
become worse in H2.
Honam Petrochemical - the best performer so far this year -
reported a strong first half. Profits were more than double those
of last year, helped by its ethylene glycol business. Sector
interest in the second half will focus on the extent to which South
Korea's leading groups can push through wide-ranging reforms for
Indonesia's index gains in July were followed
by a severe sell-off in August, particularly towards the end of the
month. The decline reflected general global uncertainty and a round
of poor interim results. The rupiah showed signs of strength and
was heading back towards 11 000 to the US dollar, from recent
levels of around 12 000.
Domestic difficulties remain, however, with a number of local
banks being asked to cease business.
On the corporate front, the stocks in our coverage came under
pressure during the month and remain underperformers, although a
decision on whether or not to delist Tri-Polyta has been postponed
Interim results did not help sentiment. Indo-Rama, for example,
recorded a 90% fall in first-half net profits as non-operating
charges increased substantially. In Thailand,
National Petrochemical Co (NPC) and Thai Petrochemical Industry
(TPI) were heavily sold over the month.
Although in profit for the first half as a whole, NPC recorded a
Q2 net loss reflecting market conditions and a Baht776m (US$18.6m)
For TPI, discussions over the restructuring of its debt
continue, with reported options ranging from trade sales, through
debt-to- equity swaps, to possible legal action to seize
While the Indian market saw a relatively modest fall over the
month, the leading chemical stocks came under some pressure.
Against a background of a recent round of poor results, reports
indicated that the government might be poised to dispose of a 25%
stake in Indian Petrochemicals Corp Ltd, taking its holding below
Reliance Industries continued to seek to minimise its borrowing
costs by reportedly borrowing in foreign currency and buying back a
Japanese stocks in our coverage fell in August
although they remain the best performers over the year so far. The
slide came partially in response to a severe sell-off in the Nikkei
index towards the end of the month.
Sentiment towards Japan itself remains weak and concern over
Russia and other Asian markets was sufficient to take the index
sharply lower. The tone was set early in the month, when the yen
hit an eight-year low. This came in response to official comments
that Japan's economy is indeed in a severe slump together with
renewed concerns over the stability of the country's banks.
On the corporate front, Showa Denko announced a 39% fall in
recurring profits for the first half and is looking at a 41% fall
for the full year. The petrochemical and aluminium divisions are
expected to be weak.
Mitsubishi Chemical also indicated that sales and profits for
its first half were likely to fall by more than previously
The company continued restructuring its US operations,
announcing the sale of two of its Verbatim plants and disposing of
diagnostic drug company Celedyne. At end-July, Nippon Shokubai
sought permission to sell Yen20bn (US$137.7m) of bonds to raise
cash for refinancing and new investment.
||27 Aug 1998
||2 Jan 1998
||year to date
||26 Aug 1997
|Yizheng Chemical Fibre
|HS China Index
|Far East Textile
|Nan Ya Plastics
|Taiwan Styrene Monome
|National Petrochemical Corp
|Thai Petrochemical Industry
|Thai Plastics and Chemicals
|Bankok SET Index
|TriPolyta ADRs (US$)
|Gujarat Alkalies and Chemicals
|Indian Petrochemical Corp.
|Bombay 30 Index
|Nikkei 225 Index
|Source: Bankers Trust
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