Friday 29 Mar 2024
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SINGAPORE (July 26): Asian companies, like their peers across the world, are reducing capex, according to a BNP Paribas Asia Strategy report dated July 25.

BNP Paribas analyst Manishi Raychaudhuri is not surprised. He thinks that Asian companies are cutting down on capex due to an environment of political and economic uncertainty, as well as low capacity utilisations across sectors.

Raychaudhuri believes that China, India, Korea and Singapore will likely cut down on capex most rapidly. Taiwan is also likely to continue with its low capex trend over the next couple of years.

Philippines and Thailand, on the other hand, are expected to continue its capex expenditure in the foreseeable time horizon, at a level higher than their long-term average capex/sales. So is Malaysia, though at a level lower than the long-term average in 2016 and 2017.

On a sectorial level, sharp cuts in capex are likely to be seen in the discretionary, staples and Consumer proxies sectors such as Telecommunications and Healthcare. Some consumer proxies such as energy and materials are likely to maintain capex/sales at relatively high levels, particularly in ASEAN.

Raychaudhuri believes that a cutback in capex is likely to lead to an increase in Free Cash Flows (FCF), citing an inverse correlation between FCF/sales and FCF margin between 2006 and 2015.

Indonesia, Malaysia, Thailand and Taiwan have been the most consistent FCF generators, with positive FCF in every year across the past decade. India and China, on the other hand, were the most inconsistent in FCF generation.

Most sectors will see an increase in FCF margin over 2016 and 2017, with notable exceptions being Chinese Consumer discretionaries, Indonesian Energy, Philippines Consumer staples, Utilities, Thai Energy, Healthcare and Materials and Taiwan Consumer staples and Technology, says Raychaudhuri.

Meanwhile, sharp capex cut by Asian corporates implies likely improvement in Asset turnovers and Return on Capital, even with moderate increase in toplines. Fortunately, this improvement in capital efficiency is likely to play out at a time when cost of capital is declining (with EM central banks forecast to follow “looser for longer” monetary policies) – leading to likely expansion in ROCE–WACC gaps.

Consumer proxies in China, India, Korea, Thailand, Taiwan and select few industrials and materials in China and India are likely to benefit from sharpest widening of ROCE–WACC gaps.

On a sectorial basis, the sectors with the sharpest widening gaps are either the consumer-orientated ones with relatively less capex intensity such as staples, discretionaries, telecom and Chinese Tech or the more capital-intensive cyclical sectors such as Industrials and materials.

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