Natixis Presents Corporate Health Monitors for Asia and China

Hong Kong, November 28, 2019

Natixis Global Markets Research today released two new reports examining the corporate health of companies in China, and more broadly across key markets in Asia, namely Japan, Singapore, South Korea and Taiwan. Using metrics such as debt dynamics, revenue generation, and capital deployment, the reports also benchmarks Asian countries’ corporate health with that of global firms. This bottom-up exercise offers a unique opportunity for a more micro-based assessment of the economic situation in China and other key Asian economies.

This is the third time that Natixis has published its China Corporate Monitor, which offers an analysis of the financial health of the 3000 largest listed corporates in China, from 2015 to the first half of 2019. Corporates. As many as 14 sectors are covered and their financial health compared with that of 3000 global peers.

The Inaugural Asia Corporate Health Monitor analyses 7,500 publicly listed companies in China, Japan, Singapore, South Korea, and Taiwan as well as global firms and investigates the evolution of corporate health across countries and sectors and with due benchmarking of their global peers.

Below, a summary of the key findings for each report.

The China Corporate Health Monitor: Back to 2015…but with less room to manoeuvre

China is facing an increasingly weak economy notwithstanding stimulus efforts. Combined with increasingly low producer prices, this is hurting Chinese corporates. The worsening external environment is not helping either. Furthermore, neither monetary nor fiscal policies seem to be as effective as the past to engineer a recovery.

Under an increasingly challenging environment, slower revenue growth with additional leverage is further hurting corporates’ repayment ability. Looking to debt dynamics, the situation has improved slightly from 2018, but it is still far from past scenarios. Revenue continues to deteriorate while capital management has worsened this year after a noticeable improvement in 2018.

Another worrisome development is the rapid deterioration of financial health within the new economy. More specifically, sectors related to urban development and rising middle class have relatively good corporate health, while green and technology related sectors remained challenging. Overall, utilities is the best sector - even when compared to their global counterparts. In contrast, ICT and semiconductor companies remain weak within China and versus their global peers. Renewables are underperforming within China but excel compared to global peers.

The best sector in terms of financial health, namely utilities, however, does not seem to be perceived, as both sentiment and market performance has been sluggish. In other words, investment opportunities could exist.

All in all, the outlook for Chinese corporates looks gloomy. The investment cycle has stalled, and this is especially true for small and private firms. New sectors too are no longer as healthy as they used to be. As a result, there seems to be a contagion effect from the old to new economy in China, rather than the new sectors supporting corporate health to a safer level. It seems clear that more government aid in terms of demand policies to support corporate health is needed, but this will only be a temporary solution and will be increasingly less effective based on the lack of response to stimulus since it started in late 2018.

The Asia Corporate Health Monitor: Debt is not a problem, but where is the growth?

Asian corporates are heading for a disappointing end to 2019. Investment and consumption are on the decline thanks to beleaguered domestic demand and a deterioration in external conditions, which have been further exacerbated by the US-China trade-war. Beyond cyclical headwinds, Asian economies, and thus their corporates, are also facing structural challenges related to the transformation of the global value chain in addition to adverse demographic trends on a country level. With Asian corporates heavily dependent on overseas revenue and tech, they have also been hit by both weak external demand and a downturn of the tech cycle.

In line with the macro environment, the financial health of Asian corporates weakened sharply in the first half 2019, and declined compared to their global peers. All financial metrics are worsening despite the lower interest rate environment, which has cushioned debt service. 

Looking to sectoral differences, the telecoms sector is by far the best, yet this has not been reflected in sentiment or market performance. Utilities, autos and infrastructure too have outshined their global competitors, but again, this has not been recognized by investors.

The outlook for Asian corporates is somewhat upbeat in the short term, thanks to a favourable base effect and increasingly lax monetary and fiscal policies. For the tech and semiconductor industries, low inventories and deployment of 5G technology should support the cyclical upturn. Any recovery however is expected to be modest thanks to structural headwinds coming from aging populations, lower productivity as well as an increasing complexity in the functioning of the value chain due to strategic competition between the US and China. Asian firms may hesitate to increase their capex given the looming uncertainties and are more likely to shed costs as a response.