Bottom line: Lenovo and TCL Communications’ profits are likely to take a hit in the current quarter and into early 2015 due to currency loses related to economic turmoil in Russia.
The economic crisis in Russia is capturing headlines around the world, but far less attention is going to non-Russian companies that are likely to take a hit as a direct result of the turmoil. Automaker Geely (HKEx: 175) has become one of the first to reveal the damage that some companies may face, citing the slide in the Russian ruble as one of the biggest causes for a halving of its profits for 2014.
But Geely is hardly the only company that will suffer from the Russian economic crisis, which has seen the value of the ruble plunge since June due to the tumbling price of oil, Russia’s largest export. Russia has also become a big market for many of China’s gadget makers, which have trouble competing in the west but have found a more eager audience from more price-sensitive Russians. In that category, PC and smartphone maker Lenovo (HKEx: 992) looks like the most vulnerable name, though a number of other smartphone makers also face large exposure in Russia.
Russia’s economy has been sliding for much of the last half year, as global oil prices fell by half to reach levels not seen since 2009. Those tumbling prices, combined with economic sanctions by the west stemming from the Ukraine crisis, have put the squeeze on Russia’s economy, causing the ruble to lose about half of its value over the last 6 months. That’s bad news for any non-Russian company that makes products at home and exports them to Russia, since the rubles it gets for its sales are rapidly losing value.
Geely, one of China’s better-run homegrown car makers, was clearly feeling the Russia effect when it issued its new warning, saying its profit for all of 2014 will be about half of the 2.66 billion yuan ($430 million) profit it posted for 2013. (company announcement) Geely cited the ruble’s slide as the biggest cause behind the drop, though it also cited a broader 26 percent drop in overall sales in the first 11 months of the year, led by a 49 percent drop in exports.
It’s worth noting that Geely’s revenue and profit were already down 32 percent and 20 percent, respectively, in the first half of the year, as it discovered that it’s easy to start exporting cars but harder to maintain those sales levels. Still, this latest warning shows that its profit erosion accelerated significantly in the second half of the year, and that the Russia effect could continue to hurt its top and bottom lines in 2015.
All that said, Lenovo looks like the most likely victim to suffer from the Russia effect among export-oriented Chinese gadget makers. Lenovo is already the leading PC brand in Russia, and may now earn around $2 billion in annual revenues from the market. That’s still a relatively small amount for a company that posted $10 billion in its most recent quarter alone, and Lenovo still generates about half of its business from China.
Lenovo is also one of Russia’s top smartphone players, and that particular area is one where domestic Chinese manufacturers have found a particularly receptive market. Other Chinese brands that are active and have a sizable share of the Russia market include Huawei and TCL (HKEx: 2618; Shenzhen: 000100), which sells under the Alcatel brand.
Among those 3 companies, Lenovo and TCL tend to be the most aggressive in pricing, meaning they already were probably already selling their smartphones at razor-thin margins in Russia before the ruble’s collapse. Accordingly, I wouldn’t be surprised to see both companies report stagnating or even falling profits in their next quarterly reports, with each likely to cite Russia as one of the main factors.