Fundamental Conditions Augur Well for Asia-Pacific Corporates in 2018


Wednesday, December 27, 2017 /08:30AM / Fitch Ratings 

Fitch Ratings forecasts a stable sector outlook in 2018 for its rated portfolio of 356 Asia-Pacific corporates. We expect fundamental conditions to improve for most corporates due to global economic growth, stable commodity prices and modest capex. Key risks focus on China, where domestic funding costs have risen sharply and expansion in key sectors is slowing. 

Fitch assigned stable sector outlooks to 13 of our 14 sector-specific 2018 outlook reports across the Asia-Pacific. The only sector with a negative outlook is Hong Kong retail property, as we expect retail sales to remain weak in light of lower spending by Chinese tourists and rising street-shop vacancies. 

We forecast the portfolio's overall net debt/EBITDA leverage ratio to fall to 2.0x by 2019, from 2.2x in 2017. Overall revenue growth is likely to remain strong, at 6% in 2019 (2017: 8%), and capex/CFO should remain well below 100% for most sectors, except utilities and transportation. Aggregate free cash flow generation should become positive by 2019, after turning negative in 2017 due to corporates in emerging Asia. We expect sector leverage to fall for basic materials, energy, retail, leisure and consumer products (RLCP) and technology, media and telecommunications (TMT). Leverage should stay flat for industrials, utilities and transportation. 

Our rating Outlook bias is largely neutral, due to a similar proportion of Positive Outlooks (8%) and Negative Outlooks (9%). This is a change from 12 months ago, when the proportion of Negative Outlooks (9%) was well above Positive Outlooks (3%). Most of our Negative Outlooks are in China (18) and the majority of Positive Outlooks are in Indonesia (9) and China (8). By sector, most Negative Outlooks are for real estate (13), basic materials (5) and RLCP (5), while most Positive Outlooks are for real estate (7), utilities and transport (7) and TMT (5). 

Our 12-month rolling ratio of downgrades/upgrades remains in favour of downgrades, at 1.5:1.0, after downgrading 29 and upgrading 19 corporates during the 12-months ending 3Q17. However, this ratio has fallen from a peak of 4.3:1.0 in 1Q17, with 3Q17 marking the first time the number of upgrades has exceeded that of downgrades since 4Q14. 

Credit conditions in China have tightened following a significant rise in the cost of domestic-debt funding during 2017. We believe the authorities will keep policy options open and maintain adequate liquidity in key sectors to ensure target economic growth rates can be met. Nevertheless, corporate defaults in heavy industries linked to property and infrastructure are likely to increase in 2018, given signs of negative housing market growth, slower growth in fixed-asset investment and ongoing government efforts to cut excess capacity and curb pollution. 

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