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Published on August 17, 2007

Hana Microelec-tronics, one of Southeast Asia's independent electronic manufacturing services (EMS) producers, says its operating profit is slashed by Bt120 million each time the baht appreciates 10 per cent against the US dollar.

All the group's sales revenue is in foreign currency, primarily dollars, and currency costs are 63 per cent of revenue, according to a summary filed by the company with the Stock Exchange of Thailand.

Hana witnessed a 24.6-per-cent slump in second-quarter net earnings of Bt432 million, down from Bt573.4 million a year earlier. Sales revenue increased 8 per cent year on year to Bt3.98 billion from Bt3.67 billion. It attributed the decline to increases in material costs, the baht's appreciation and a stock-options programme.

Revenue increased by 19 per cent to $114.4 million (Bt3.89 billion) from $96.3 million. However, operating profit dropped 27 per cent to Bt422 million from Bt581.9 million.

Each week's sales and purchases are booked based on the exchange rate at the close of the previous week. The average exchange rate for the second quarter was Bt34.70 per dollar from Bt38.12 a year earlier and Bt35.59 in the first quarter of this year.

In the second quarter, the baht appreciated 9 per cent against the dollar. Thus, in baht terms, sales revenue grew only 8 per cent.

Hana's management team said that out of the group's foreign exchange exposure, $21 million was hedged. Under the hedging contracts, foreign exchange contracts are used to buy baht and sell dollars on a rolling three-month or six-month basis.

"Therefore the foreign exchange gain/loss booked for every 10-per-cent movement in the closing baht/dollar exchange rate is now negligible but it still affects the operating income due to fluctuation in the exchange rate during the quarter," Hana said.

The company posted a lower operating profit, even though it has no interest-bearing debt. Cash reserves as of June 30 were Bt2.2 billion, up from Bt2.1 billion in the same period last year.

The high sensitivity of the baht's appreciation to sales revenue was cited as one of the major factors which could have an impact on the company's performance.

The other factor is that as the manufacturer of products on behalf of its customers for shipment to them or their

customers, Hana needs to

win and retain business

from existing and new customers.

"In turn, customer demand is affected by world economic growth and the customers' sales growth," Hana said.