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>Rocks on Stocks (MACQUARIE RESEARCH)
Cash burn accelerates.....
Event
· We assess the rate at which cash positions of companies will deteriorate.
Impact
· The cash positions of Asian corporates are deteriorating quickly. Net debt/equity increased from 17% to 24% in 2008, reversing a near decade long trend of falling debt levels and cash accumulation.
· 2009 will be much worse. Even though revenue across Asia only came off slightly in 2008 (it eased from 24% to 22%), cashflows fell 7%. There is a leveraged impact on the bottom line.
· What will happen to cashflow in 2009 when revenue contracts 9% (as analysts now assume), a shocking step down from 2008? Analysts are only assuming another 10% contraction in cashflow but it could be a lot worse. There is clearly a lot of confidence in the ability of companies to rescue their cash position by cuts to costs and working capital. There are 30 companies in Asia that are assumed to save at least US$1bn from such initiatives.
· Analysts have already been under-estimating cash burn. In the current reporting season, the shocks have been in cashflow. For example, forecasts for China’s 2009 revenue have been revised down 6% since the start of the year, but cashflow forecasts have been cut by 23%. The equivalent numbers are 3% and 35% in Hong Kong, and 10% and 22% in Korea.
· Based on these current optimistic assumptions, the cash shortfall in Asia is set to be US$160bn (ie, the amount that capex and dividend plans exceed operating cashflows). However, a figure closer to US3$00bn would not be a surprise. This has three implications:
· The amount of extra capital required will be enormous. In 2008, US$131bn in debt and US$31bn in equity were raised. Much more will be required this year.
· Capex plans will have to be scaled back, and for some companies this will place their competitive position at risk. It is also very negative for companies that supply capital goods.
. Dividends will need to be cut.
Outlook
· All our stock screens highlight the usual suspects of Korea and Taiwan at the country level, and autos, transport, tech, capital goods and materials at the sector level. We would not be chasing stocks in these categories until there are more tangible signs of economic stabilisation.
· Figures 7 and 12 contain stocks at risk, either because hopes from cost and working capital cuts are high, or because cash shortfalls are enormous.
Analysis
· Asia’s financial position deteriorated during 2008. Debt levels rose with net debt-to-equity
increasing from 17% to 24%. This reversed a near decade long trend of falling debt levels and
cash accumulation.
· The increase in debt was greatest in India and Korea, although in Korea’s case, it was a doubling from a low base. Net debt rose in every country except Singapore.
To see full report : ROCKS ON STOCKS
Impact
· The cash positions of Asian corporates are deteriorating quickly. Net debt/equity increased from 17% to 24% in 2008, reversing a near decade long trend of falling debt levels and cash accumulation.
· 2009 will be much worse. Even though revenue across Asia only came off slightly in 2008 (it eased from 24% to 22%), cashflows fell 7%. There is a leveraged impact on the bottom line.
· What will happen to cashflow in 2009 when revenue contracts 9% (as analysts now assume), a shocking step down from 2008? Analysts are only assuming another 10% contraction in cashflow but it could be a lot worse. There is clearly a lot of confidence in the ability of companies to rescue their cash position by cuts to costs and working capital. There are 30 companies in Asia that are assumed to save at least US$1bn from such initiatives.
· Analysts have already been under-estimating cash burn. In the current reporting season, the shocks have been in cashflow. For example, forecasts for China’s 2009 revenue have been revised down 6% since the start of the year, but cashflow forecasts have been cut by 23%. The equivalent numbers are 3% and 35% in Hong Kong, and 10% and 22% in Korea.
· Based on these current optimistic assumptions, the cash shortfall in Asia is set to be US$160bn (ie, the amount that capex and dividend plans exceed operating cashflows). However, a figure closer to US3$00bn would not be a surprise. This has three implications:
· The amount of extra capital required will be enormous. In 2008, US$131bn in debt and US$31bn in equity were raised. Much more will be required this year.
· Capex plans will have to be scaled back, and for some companies this will place their competitive position at risk. It is also very negative for companies that supply capital goods.
. Dividends will need to be cut.
Outlook
· All our stock screens highlight the usual suspects of Korea and Taiwan at the country level, and autos, transport, tech, capital goods and materials at the sector level. We would not be chasing stocks in these categories until there are more tangible signs of economic stabilisation.
· Figures 7 and 12 contain stocks at risk, either because hopes from cost and working capital cuts are high, or because cash shortfalls are enormous.
Analysis
· Asia’s financial position deteriorated during 2008. Debt levels rose with net debt-to-equity
increasing from 17% to 24%. This reversed a near decade long trend of falling debt levels and
cash accumulation.
· The increase in debt was greatest in India and Korea, although in Korea’s case, it was a doubling from a low base. Net debt rose in every country except Singapore.
To see full report : ROCKS ON STOCKS
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