CITIC Pacific (267) has just issued a big profit earning this afternoon. This is not due to their main businesses, but rather, they have bet wrongly on foreign exchange rates. They have bought massive foreign currency target redemption forward contracts and daily accrual (accumulator) contracts for AUD and EUR. All was working very well in the first half of the year, but things start to turn bad with the big and sudden drop in AUD and EUR in the past few weeks.
CITIC Pacific has exposures to currencies such as AUD and EUR because of their mining projects in Australia. On the other hand, they have bought contracts with notional values that are a lot higher that what they need. A hedging tool, that was supposedly good for the company, has turned into a tool for speculation. When speculation turns sour, shareholders lose their shirts. CITIC Pacific has realized a loss of HKD 807 million on these contracts from 1 July to 17 October, and they believe they will continue to loss money on these contracts until 2010 since not all contracts can be terminated or unwound. At the same time, they are making a provisional loss of HKD 15.5 billion for these contracts.
This case is very similar to what is happening in Korea: With a 40% drop in Korean Won from its height, a lot of SMEs in Korea are suffering because of the foreign exchange contracts they have with the banks. Should companies actually take a view on foreign exchange? Maybe not… since even market professionals can’t predict what is going to happen in the next few days.
I expect a big drop in 267’s share price tomorrow!
