Yuan rise would drive U.S. companies’ China profits

By Jessica Wohl

CHICAGO (BestGrowthStock) – U.S. companies selling everything from soft drinks to cars to millions of Chinese are seen as potential investments for those weighing the likelihood of a yuan revaluation by Beijing.

A decision by the U.S. government to delay a report on whether China manipulates its currency may set the stage for the Chinese to allow the yuan to appreciate for the first time since July 2008, when a global financial crisis began to take shape.

Many analysts expect Beijing will let the yuan strengthen as early as the second quarter and allow it to rise 3 percent to 4 percent over 12 months.

An appreciation in the yuan would make U.S.-made goods cheaper in China, boosting demand for items such Caterpillar Inc’s (CAT.N: ) heavy machinery. It would also bolster U.S. dollar profits for companies such as automakers and cosmetics makers, including Avon Products Inc (AVP.N: ) once they are translated from yuan.

“Any U.S. company that repatriates dollars is going to be a beneficiary,” said Keith Springer, president of Capital Financial Advisory Services in Sacramento, which manages about $100 million across asset classes.

“Eighty-eight percent of Coke (KO.N: ) is international sales, Caterpillar absolutely, and even McDonald’s (MCD.N: ), which is everywhere. Most likely the big industrials. GE (GE.N: ) could be (a beneficiary),” he said.

“As long as they get people to work, which they’ve done, a developing country has to have a strong middle class to keep the economy growing. They need to start buying imports cheap. They’re going to be a consumable nation, much like Brazil.”

Still, there are some concerns a higher yuan “could actually deter the rapid pace of economic growth to a marginal degree,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott, who directly manages $1.5 billion of assets and oversees more than $50 billion.

AUTO BOOM

China’s rapid growth has made it the biggest market, as well as the biggest producer of automobiles, with every major automaker competing for its piece of the business.

General Motors Co (GM.UL: ) sold more cars in China in the first quarter of 2010 than it did in its home market. Its China sales rose about 71 percent to about 624,000 vehicles, while GM’s U.S. sales rose about 21 percent to about 475,000 vehicles.

“Those with substantial presence like GM and VW — their revenues and costs should move in line with local currency,” said Standard and Poor’s analyst Gregg Lemos-Stein.

China is not a huge exporter of cars and its government requires any importers to create joint ventures with Chinese companies. General Motors, for example, is paired with the No. 1 automaker in China — Shanghai Automotive Industry Corp (SAIC).

“A stronger currency, if they were to let it appreciate, would allow them to more easily afford Boeing jets and Caterpillar excavators, and everything in between,” said Matt Collins, capital goods analyst at Edward Jones in St. Louis.

Other standouts include Yum Brands Inc (YUM.N: ), mainland China’s largest foreign restaurant brand, which reaps more than one-third of its profits from the region, according to RBC Capital Markets analyst Larry Miller. But it also faces higher costs with a stronger yuan, since its China business sources most of its ingredients from within the region.

U.S. household and personal products makers such as Procter & Gamble Co (PG.N: ), Kimberly-Clark Corp (KMB.N: ), Colgate-Palmolive Co (CL.N: ) and Estee Lauder Cos Inc (EL.N: ) are also focused on growing in China.

“No one has greater than 5 percent of total sales in China, even though it is still viewed as a high growth market,” particularly as companies enter new provinces, said RBC Capital Markets industry analyst Jason Gere.

Sectors that could be hurt by a stronger yuan include auto suppliers who source components in China for sale abroad.

A rise could also help investors in the ADRs of Chinese companies, said Bryant Evans, manager of an ADR-only portfolio at Cozad Asset Management in Champaign, Illinois. On Monday, newly listed discount hotel chain China Lodging Group Inc (HTHT.O: ) gained more than 7 percent.

“If the Chinese government is successful in allowing a slow appreciation, it is a plus for Chinese companies,” Evans said. “China has a history of being successful in stemming damaging inflation. My bet is on the side of success and allowing a slow float up of the currency, hence good news for Chinese companies’ ADRs.”

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(Reporting by Jessica Wohl in Chicago, Nick Zieminski and Rodrigo Campos in New York, Bernie Woodall in Detroit, Lisa Baertlein in Los Angeles and Scott Malone in Boston)

Yuan rise would drive U.S. companies’ China profits