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Sports Direct may benefit from cheaper yuan

Article By: ,  Financial Analyst
August 19, 2015 3:03 PM

The market is well aware, by now, of European industrial sectors whose exposure to China’s currency devaluation is perceived as a risk.

But what about industries which could potentially benefit?

 

 

The market has pored over forecasts of the impact on autos, luxury, mining and industrials.

But companies that manufacture in developing countries whilst retailing exclusively in developed countries could be in line for currency-related revenue upgrades.

A ‘screen’ of stocks listed on Europe’s Stoxx 600 highlights a clutch of consumer-facing and light industrial names.

Ranking companies whose main manufacturing region is China by any advantage bestowed from low Cost of Goods Sold (aka COGS), shows potential devaluation beneficiaries in sharper relief.

 

The biggest European names revealed include Sweden’s Hennes & Mauritz (H&M).

75% of its factories are in ‘Developing Asia’, including China, Vietnam, and Malaysia among other places.

H&M’s COGS has latterly been 40.6%.

It has an edge in this respect against Spanish rival Inditex, which owns chains like Zara.

Inditex’s manufacturing base is more slanted towards Europe.

 

Alternative measures to COGS are almost as revealing.

For instance, they show that broadcast electronic components manufacturer, Pace Plc. could be underpinned.

82% of its revenues are in dollars, whilst almost its entire manufacturing needs are outsourced to China.

Little-known PureCircle Plc., whose main product is the plant-based Stevia sweetener, was also flagged.

It buys 50% of its raw materials from China.

This implies as much as half of its dollar manufacturing costs could be reduced by 3.7%—the extent of CNY/USD’s advance so far this month.

 

 

The highest-profile UK-based beneficiaries from cheaper yuan could be Sports Direct and Associated British Foods.

The cut-price sporting goods retailer has COGS of 56.4%, and City estimates suggest 80%-90% of its costs are in China.

ABF, which derives about 60% of its operational earnings from low-cost fashion and homeware outlet Primark, has a COGS and regional manufacturing focus that are similar to Sports Direct.

Both are outperforming the FTSE 100 index by a similar amount over a year, but ABF is just 2.82% higher in the year-to-date, perhaps capped by its close proximity to all-time highs.

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