by millionairemind » Tue Oct 21, 2008 10:34 am
Bankruptcies underline Hong Kong's exposure to credit crisis
By Susan Fenton ReutersPublished: October 21, 2008
HONG KONG: A spate of corporate bankruptcies in Hong Kong has highlighted the territory's vulnerability to the credit crisis and the slowing global economy, clouding the outlook for its banking sector.
In the past two months, provisional liquidators have been appointed for six Hong Kong companies, including the jewelry maker 3D-Gold Jewellery Holdings, formerly Hang Fung Gold, as well as the retailer U-Right and the toymaker Smart Union, a supplier to Mattel and Disney.
With more businesses expected to succumb to the pressures of rising costs, weakening demand and difficulty in obtaining financing amid the credit crisis, analysts said the number of bankruptcies would surge and were cutting their earnings forecasts for Hong Kong banks.
"We believe this is only the beginning of the credit deterioration cycle for Hong Kong banks," Citigroup said in a research note Monday. "Retailers and exporters are likely to feel the most pain, given declining property prices, shrinking consumer spending, falling export demand and tightening bank credit."
The Hong Kong General Chamber of Commerce said Monday that it believed the territory was heading for a recession. It projects zero to 1 percent growth in 2009 as the economy feels the effect of a U.S. recession, slower trade and easing growth in mainland China.
"This is the worst economic environment of our lives," said David O'Rear, the chamber's chief economist.
"It isn't a slump, a contraction, a downturn or a correction," he added. "Companies need to look to their cash flow in anticipation of a very rough ride in 2009."
In the banking sector, Citigroup considers Bank of East Asia the most sensitive to rising credit costs, citing its relatively low profitability.
"We estimate that every 50 basis point increase in credit cost would lower BEA's fiscal 2009 earnings by 30 percent, compared to 14 percent for Bank of China and 9 percent for Hang Seng Bank," the note said.
Morgan Stanley on Monday cut its earnings estimates for Bank of East Asia and said its share price, which has already plunged 60 percent this year, could slump to 15 Hong Kong dollars, or $1.93, from 20.80 dollars at the close Monday.
Hang Seng Bank, a unit of the global lender HSBC, is Morgan Stanley's top banking stock for 2009 on the expectation that its earnings should outperform the sector because of prudent lending practices, and because it did not sell the "mini-bonds" offered by the collapsed U.S. investment bank Lehman Brothers. Thousands of Hong Kong investors in those securities lost money, and banks that sold them have agreed to compensate purchasers.
Morgan Stanley also cut its earnings estimates for the smaller banks Wing Hang Bank and Dah Sing Financial, saying aggressive growth in their loan books in the past two to three years would result in sharply higher credit costs.
Adding to the banks' deteriorating outlook is the potential for a sharp rise in bankruptcies in southern China as well as in Hong Kong. Clement Chen, chairman of the Federation of Hong Kong Industries, said that in a worst-case outlook, a quarter of the roughly 70,000 factories owned by Hong Kong companies in the Pearl River Delta linking Hong Kong and southern China could close down.
"The outlook at the moment is rather grave," Chen said.
Things could get "most difficult" in the next few months leading up to the Chinese New Year, he added, when companies give their annual bonuses to workers before the long seasonal holidays.
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch
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