Chinese auto manufacturer Geely Automobile ( 0175.HK) issued a profit warning this morning, now expecting this year's net profit to fall by about 50% from a year ago, after they calculated "unrealized foreign exchange loss" from its operations in Russia as well as decrease in sales volume. The Russian ruble has fallen by over 25% against the dollar this week even as Russia's central bank abruptly raised its benchmark interest rates by 6.5 percentage points to 17%. The ruble recently trades at 69.66 per dollar.
Geely's profit warning implies that the company will report 1.3 billion yuan in net profits this year, much lower than the 2-2.1 billion yuan expected by the street. Shares of Geely slumped 18.6% recently.
"Though the forex loss is one-off in nature, this does suggest poor risk management," complained Citi Research's Paul Gong in a note out this morning. Geely does not seem to take foreign exchange rate seriously, added Gong:
In 1H14 interim report, Geely disclosed Rmb2,803mn trade receivables from overseas customers in Note 15, but also s aid the group considers forex fluctuations do not pose a significant risk since its operations are principally in China in MD&A. In 2013's annual report, Geely disclosed Rmb2,009mn receivables denominated in US$ and nothing in roubles in Note 37 and said most of its exports are charged in US$. The forex loss incurred during rouble depreciation shows at least its practice has deviated from its stated company policy.
As part of the collateral damage, Great Wall Motor ( 2333.HK), another Chinese auto manufacturer, retreated 4.2% this morning, because Great Wall Motor is also exposed to Russia. Citi's Gong is less worried about Great Wall Motor however:
By end-June, its 100%-subsidiary Russia Haval has only Rmb37mn net assets. Even assuming 50% rouble depreciation, that would only lead to Rmb18mn translational loss.
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(END) Dow Jones Newswires
December 16, 2014 21:30 ET (02:30 GMT)
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