China’s Tech Giants Face Mixed Fortunes Amid Brexit Fallout

The fortunes of mainland China’s largest information technology companies could take some odd turns as the impact of Britain’s vote to exit the European Union will differ for internet services firms and hardware suppliers, according to analysts.

While uncertainties remain on how “Brexit” will be implemented, a weakening euro and British pound may see products from major suppliers of personal computers, smartphones, tablets, television sets and other consumer electronics become more expensive in European markets.

Bernstein senior analyst Alberto Moel said in a report that such a scenario “could lead to demand destruction, and reduced sales and profits”. Moel said hardware suppliers that would be more vulnerable to Brexit include those that meet one of the following characteristics: a high portion of components are priced in [now stronger] yen and US dollars; these parts account for a high portion of their product’s total bill of materials; low operating margins; and the product is of a discretionary spending nature, which means consumers are more likely to defer purchases.

“Most affected from a foreign exchange translation exposure are the personal computer manufacturers from high EU revenue exposure,” he said. “Least affected are the display panel makers as they have no direct exposure to the affected currencies.” Data from Bernstein showed that Lenovo Group, the world’s largest supplier of personal computers, generated 25 per cent of its revenue from Britain and the EU.

Ken Hui, a Jefferies equity analyst, estimated that Britain and the EU accounted for a combined 24 per cent of Lenovo’s personal computer shipments and 7 per cent of its smartphone volume during the company’s fiscal year ended March 31.

lenovoA further slowdown in demand would be bad news for Hong Kong-listed Lenovo, which operates in more than 160 countries. It reported a US$128 million net loss in its financial year ended March 31, compared with an US$829 million net profit in the previous year. The firm mainly attributed that loss to restructuring costs and other charges, which included a write-off of its smartphone inventories. “Any attempts to raise local prices [in Britain and the EU markets] to offset foreign exchange impact will only further weaken demand,” Jefferies’ Hui said.

Shenzhen-based Huawei Technologies, however, was unfazed by the fallout from Brexit as it confirmed to the British government earlier this week that the rest of its five-year, £1.3 billion investment commitment in the country will push ahead. Privately held Huawei is the world’s third-largest smartphone supplier and No 1 global equipment supplier to telecommunications network operators by revenue.

baiduTsang Chi, the head of Asia-Pacific internet research at HSBC, said in a report that China’s leading internet companies — online search leader Baidu, online games and social media titan Tencent Holdings and e-commerce powerhouse Alibaba Group — would perform well amid the turbulence brought by Brexit. “Among the China internet giants, Tencent is uniquely positioned as 74 per cent of its revenue and 83 per cent of its gross profits are comprised of valued-added consumer services, mostly desktop computer and mobile gaming,” Tsang said. “In addition, Tencent makes up 10 per cent of the Hang Seng Index … trading US$400 million per day.”

Alibaba owns the South China Morning Post.

Source: South China Morning Post