Posted by: donmihaihai | December 2, 2019

Currency risk. what currency risk?

We have a small domestic market. Most sizeable companies have overseas operation and that can’t be avoid. Hence there is always a currency risk.

Many years back, a friend told me, she won’t invest in Hong Kong Land share because it is quoted in USD. There is a currency risk. Company like Keppel, SIA, Sembcorp are fine because they are in SGD…….wxyz#$$%.

Of course, she trades and that explain on why. Understanding how Hong Kong Land, Keppel, SIA and Sembcorp generate their earnings will know that quoted currency doesn’t matter at all. At worse it just adds another small layer of fractional cost.

Recently, there are people who hit on Food Empire and Yangzijiang currency exposure with number from the currency risk of their AR. Oh from AR, the numbers are there and easy to pick up. But well, those number in the AR can be a stranger to people without a good understanding of accounting. The number is best understood when one learned it language(accounting) and use the language to read the numbers rather than reading the number base on individual language.

Unless there is an outright fraud, don’t blame the company that they are using a foreign language. Investing is the only place where I see people investing their life saving after doing due diligence on something they don’t understand because it is written in foreign language.

Back to currency risk and a quick look at Micro Mechanics, Food Empire and Yangzijiang.

Micro Mechanics. Note 19, foreign currency risk of AR2019. Basically, it says expose to USD, Yen and Peso. Using B/S figure of financial assets and liabilities, it presents a net exposure of USD4.6M and a 10% movement = USD0.469M. Easy.

But wait, this does not mean, a 10% movement in USD-SGD next year will resulted to somewhere close to USD0.469M. B/S net exposure is not P&L exposure.

Next, doesn’t it look strange? Micro Mechanics operates in Malaysia and China, 2 of their top 3 markets but there is zero B/S exposure? How can that be? Well, the only explanation is the amount there representing currency not in the functional currency of their subsidiaries and the AR has not clearly state it. And when a subsidiary functional currency is say RMB and it has balances in RMB, it means there is no risk (rightfully so at subsidiary level) and this will not be reflected in Micro Mechanics SGD financials. Now when RMB depreciate against SGD, the amount will not be calculated into the risk exposure. But this depreciation of RMB against SGD is REAL especially so when REAL money is being remitted.

In short, the information of Micro Mechanics currency risk is unclear and close to useless

Yangzijiang. Note 37. Currency risk of AR2018. Basically, it says expose to USD, EUR and SGD.

Started with financial assets and liabilities from B/S, where net exposure is shown followed by removing amount in functional currency then add in contract assets and highly probable forecasted transaction in foreign currencies, it says YZJ has net exposure of RMB18B in USD. A 11% movement net after tax will be close to the amount presented in YZJ AR.

So Yangzijiang has done what Micro Mechanics has not, clearly state the exposure is after removing amounts in functional currencies then add in highly probable forecasted transaction in foreign currencies. I don’t know how highly probable these amounts are and how far out into next year. While the intent is good, the result is likely to be nowhere near what the real exposure if a 11% movement happened. And most importantly, like Micro Mechanics, those that are not presented in AR are as real as those presented.

Food Empire. Note 37. Foreign currency risk of AR2008. First paragraph says it all.

The Group has transactional currency exposures arising from sales, purchases or operating costs by operating units in currencies other than the unit’s functional currency. Approximately 2.2% of the Group’s sales are denominated in currencies other than the functional currency of the operating unit making the sale, whilst 66.4% of purchases and operating costs are denominated in the unit’s functional currency.

It doesn’t matter whether operating units is a subsidiary or group of subsidiaries, basically, if the subsidiary functional currency is RUR and a 2.2% mean only 2.2% of the subsidiary sales are in other currency other than RUR (functional currency). Where is the risk?

But only about 66.4% of purchases and operating cost are in RUR. Sound good? Think why such high level of cost not in RUR? Where are their manufacturing plants? Indirect cost? Marketing related cost will most likely to be in the functional currency of the unit.

So, the number in AR does not address the main concern of many “investors” ie the devalue of RUR against USD or SGD. The figure doesn’t even show up.

To know the real currency risk of Food Empire, look at below.

Revenue – note 4 say main markets are Russia, Ukraine, Kazakhstan, CIS market and Indo China.

Trade receivables – note 24. Say outstanding 36M and the amount denominated foreign currencies add up to about 3M. Now this does not make sense, unless it is talking about amount not denominated in functional currencies of its entities. If not how is it possible that Food Empire has USD30M of receivables selling into Russia, Ukraine………. etc?

Cash – note 25. Same thing as note 24. Just replace receivables to cash

Trade payables and accruals – note 26. Now this time its finally say, other than functional currencies.

Loans – note 29. Mainly USD and SGD loan. Currencies mismatched!

Segment – note 33. 86M of inter-segment sales! Basically, it is saying the manufacturing is not in the sales countries. This can also be seen as non-current assets are concentrated in Singapore, Malaysia and India.

This risk presentation in AR is as good as useless for many companies and lot of errors as well.

 

 

 


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