One country's slump isn't ruining the Asia300 profit party
Indian earnings are on the rise, and Southeast Asian majors are going strong
KENJI KAWASE, Nikkei deputy editor
HONG KONG -- The Asia300 -- Nikkei's curated selection of listed corporate standouts from across the region, excluding Japan -- took another knock last year, when its members' combined net profit suffered its first back-to-back decline in two decades. But remove Chinese companies from the equation and a decidedly more upbeat picture emerges.
A prime example is India, whose companies are in the midst of announcing their earnings for the year ended in March. Including market-consensus figures compiled by QUICK-FactSet, profit for the period at Indian companies in the Asia300 likely grew 18% on the year. Compare that to the 10% fall seen for the Chinese constituents.
Maruti Suzuki India, the country's largest automaker, on April 27 reported that its profit attributable to shareholders for the year ended in March came in at 75.09 billion rupees ($1.16 billion), up 37%. Its unit sales, meanwhile, rose 10% to 1.56 million cars. Chief financial officer Ajay Seth said the company "is on course to achieve its goal of 2 million vehicle sales in the year 2020."
"We still believe in the India story," Ayaz Ebrahim, head of the Asia-Pacific core team at J.P. Morgan Asset Management in Hong Kong, told the Nikkei Asian Review. Ebrahim said that even with all the uncertainty hanging over the country's information technology service companies -- including Tata Consultancy Services, Infosys and Wipro -- due to changes in U.S. visa policy under President Donald Trump, the outlook for India "wouldn't be influenced," because the country's growth narrative "is a domestically driven story."
Another bright spot is Southeast Asia, where companies have begun disclosing their results for the first quarter, which ended in March. Net profit for the period at Indonesia's largest food company, Indofood Sukses Makmur, rose 11% on the year to 1.2 trillion rupiah ($90.3 million), with revenue expanding 8% to 17.83 trillion rupiah. Profit at the company's core consumer products division, which includes instant noodles, milk, snacks and seasonings, climbed 16%. Citing its decision to divest from a Chinese vegetable processor, Nomura reiterated its "buy" rating for the company on May 4.
Southeast Asia's banking sector is also faring relatively well. The four largest Thai banks by assets -- Bangkok Bank, Krung Thai Bank, Siam Commercial Bank and Kasikornbank -- saw their combined net profit for the first quarter increase 8% to 38.91 billion baht ($1.12 billion), marking the third straight quarter of growth. Trimming their provisions for future defaults helped fuel the improvement.
In North Asia, too, companies are reporting stronger growth, especially in the high-tech sector. South Korea's Samsung Electronics on April 27 said its operating profit for the three months ended March totaled 9.9 trillion won ($8.73 billion), its highest quarterly profit since the third quarter of 2013. It attributed the strong performance to a robust semiconductor business. Its smaller domestic chip rival, SK Hynix, saw operating profit jump 339% to 2.5 trillion won.
Another South Korean powerhouse, LG Display, boosted its net profit to 679 billion won for the quarter ended March, up from just 1 billion won a year earlier, thanks to high demand for organic light-emitting-diode panels. Expecting demand for OLED, rather than liquid crystal display, panels to keep growing, Chief Financial Officer Kim Sang-don said in an April 26 conference call that the company will "invest 70% of our capital expenditure in big OLED panels and plastic OLED."
Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker, stayed on a solid growth path for the first quarter ended March, with net profit increasing 35% to 87.62 billion New Taiwan dollars ($2.9 billion), and revenue climbing 14.9% to NT$233.91 billion. According to co-CEO Mark Liu, the quarter through June is expected to yield smaller numbers due to a "severe inventory adjustment from our customers, particularly in the smartphone and PC markets." However, he said the supply chain correction would end by June. For all of 2017, the company is sticking with its previous projection of 5% to 10% revenue growth in U.S. dollar terms.
"We have seen one of the strongest earnings revisions in Asia ... in years," said Tuan Huynh, managing director and chief investment officer for the Asia-Pacific region at Deutsche Bank Wealth Management. "Asia as a whole, from both a political and economic standpoint, is the most stable it has been in 20 years."
The Asia300 stock index reflects this upbeat outlook. On May 9, the gauge hit a year-to-date high of 1,206.79, approaching its all-time high of 1,241.72, reached on April 28, 2015. The indexes for South Korea and Taiwan are powering along, with both climbing to new heights in the second week of May.
As ever, of course, risks abound. In addition to the geopolitical tensions and a sharper-than-expected rise in U.S. interest rates, Ebrahim of J.P. Morgan Asset cited China as an area of concern. The softening of the Chinese economy is "well priced in, but if 'softer' becomes 'harder' that would be a risk for the whole region."
Ebrahim is not alone in worrying about the China effect. Nomura analyst Angela Hong on May 2 downgraded the 2017 and 2018 earnings outlooks for South Korean automotive parts maker Hyundai Mobis due to "deepening concerns on Chinese sales."
South Korean businesses are being squeezed in China due to retaliation over Seoul's decision to deploy a U.S. anti-missile system. Mobis' major clients Hyundai Motor and Kia Motors have already seen their sales in China take a hit. Assuming the negative repercussions will not end anytime soon, Hong expects Mobis' utilization of its Chinese plants to remain low, putting pressure on its earnings.