Chinese stocks most exposed to escalation in US tariffs

At most risk are component makers that rely on US markets. Handsets and laptops are the two biggest categories of Chinese goods yet to be levied, which means Apple's finished products aren't facing additional tariffs just yet.
At most risk are component makers that rely on US markets. Handsets and laptops are the two biggest categories of Chinese goods yet to be levied, which means Apple's finished products aren't facing additional tariffs just yet.PHOTO: AFP

HONG KONG (BLOOMBERG) - From furniture makers to Apple Inc suppliers, the intensifying trade conflict is leaving some Chinese companies particularly vulnerable.

The earnings growth of non-financial mainland-listed companies could drop by about 4.2 percentage points over 12 months on the back of last Friday's move by the US to raise tariffs on US$200 billion worth of Chinese imports, according to China International Capital Corp analysts Wang Hanfeng and Zhou Changjie. For those listed overseas, they forecast the drag to be 5.1 percentage points.

Washington has followed up with a threat to apply 25 per cent tariffs to another US$300 billion worth of Chinese goods, covering virtually all imports from the country. That puts obvious pressure on exporters of those products, while companies within the global supply chain are also at risk of losing orders if multinationals shift operations to countries such as Vietnam to lower costs and avoid tariffs.

The weaker yuan caused by trade tension is also hurting companies with piles of dollar-denominated debt, including airlines and real-estate firms. The big three carriers - Air China, China Southern Airlines Co and China Eastern Airlines Corp - closed between 5.8 per cent and 7.1 per cent lower in Hong Kong on Tuesday when markets reopened for the first time since the tariff increase.

For Caroline Maurer, head of Greater China equities at BNP Paribas Asset Management, the impact of the escalation in the trade dispute should be "manageable" because Beijing - which has retaliated with higher levies on US goods - is likely to step up its easing measures to offset the impact on economic growth. Still, some areas won't escape unscathed.

"Sectors that are going to be the most impacted are sectors related to the global supply chain, such as China's electronics," she wrote in an email.

Here's a look at some of the most exposed goods:

TOYS, FURNITURE, FOOTWEAR

Demand for these goods will be hurt as consumers have to bear additional tariffs of 5 per cent to 10 per cent, according to CMB International analyst Walter Woo.

Global brands may also speed up relocating supply chains away from China, which is negative to companies with mostly domestic production facilitiesThose companies include Man Wah, Li & Fung, VTech and Bestway Global.

PROPERTY DEVELOPERS

Every 5 per cent depreciation in the yuan will hurt the property sector's core earnings by 1.3 per cent, according to Citigroup. Sino-Ocean Group and Agile Group are among those likely to see the biggest impact on earnings.

Impact should be limited though, as the yuan is no more than 2 per cent away from its near-term support level of 7 per dollar, Citi says.

According to UBS, policy rhetoric on the sector may turn less hawkish as the central bank signals more easing to help the economy.

APPLE SUPPLIERS AND OTHER TECH

At most risk are component makers that rely on US markets. Handsets and laptops are the two biggest categories on the Chinese goods yet to be levied, which means Apple's finished products aren't facing additional tariffs this round. But that poses a valuation overhang on the sector, said Alex Ng, analyst at CMB International.

China's plan to develop artificial intelligence and 5G could potentially be delayed, while restrictions on IP could slow the sector's growth.

The tariff is also a blow for the smartphone maker, Xiaomi, which was aiming to enter the US market. More than half of the company's gross profit is vulnerable to higher component costs from an appreciating geenback, according to Bloomberg Intelligence analyst Anthea Lai.