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Earnings gloom aside, Asia Inc. is positioned for growth

Regional growth outlook is good and M&A appetite remains strong

KENJI KAWASE, Nikkei deputy editor | China

HONG KONG -- Don't start fretting just yet. Even though Asia's leading companies are set to log their first back-to-back drop in aggregate annual net profit since the Asian financial crisis, there are plenty of reasons to believe corporate Asia is still on a growth track.

For one, the region's macroeconomic prospects remain solid. The International Monetary Fund's latest forecast shows that emerging and developing Asia -- including China, India and five Southeast Asian countries -- will grow 6.4% this year and 6.3% next year, faster than anywhere else in the world. Looking at the longer term, the Asian Development Bank projects baseline annualized growth of 5.3% until 2030 for the Asia-Pacific region.

"We are looking at a double-digit earnings growth for Asia ex-Japan this year," said Suresh Tantia, Asia-Pacific equities investment strategist at Credit Suisse. His optimism stems from improvements in three factors that have been weighing on earnings: Commodity prices are finally creeping up, Chinese economic data indicates a rebound, and the deflationary environment is being reversed.

Asian companies are not the only ones benefiting. Multinationals from the U.S., Japan and Europe with stronger brands and more sophisticated products and services are also leveraging their strengths throughout the region.

Big buyers

Manishi Raychaudhuri, Asian equity strategist at BNP Paribas, says this could be a reason Asian earnings remain disappointing despite the overall uptrend in the region's economies. "As of now, we struggle to find companies with global customer franchise and strong brand names with footprints across the world in non-Japan Asia, with some exceptions in South Korea," he said. At the same time, though, he pointed to the nascent trend of Asian companies "becoming big acquirers of global brands as a consequence of the earnings and cash flow generated over time."

According to Dealogic, the 11 Asian countries and regions represented in the Nikkei Asia300 Index, which excludes Japan, spent $750 billion on mergers and acquisitions last year. This was still smaller than companies in North America, but it approached the figure for Europe and far exceeded that for other emerging markets -- almost four times the total for Latin America, the Middle East and Africa combined.

Samsung Electronics splashed out $8 billion for U.S.-based Harman International Industries last November. The largest acquisition ever by a South Korean company, the purchase is Samsung's attempt to switch focus from IT and mobile to connected cars and autonomous driving. "We see substantial long-term growth opportunities in the auto technology market," President and chief strategy officer Sohn Young-kwon said.

Li Ka-shing, the richest man in Hong Kong, has used M&A deals to build a global business empire. His most recent move involved a 7.4 billion Australian dollar ($5.6 billion) offer for Australian energy company Duet Group, made in January by a consortium that included Li's flagship CK Hutchison Holdings.

That deal is still awaiting regulatory approval, but through its acquisitions over the past decades in utilities, telecommunications, properties and more, CK Hutchison has succeeded in diversifying its revenue sources well beyond its home market. For the first half of 2016, half of its 180 billion Hong Kong dollar ($23.1 billion) revenue and 59% of its HK$29.4 billion earnings before interest and tax came from Europe, while Hong Kong and mainland China combined now account for less than a fourth of the total.

There are, however, a few possible headwinds in store for corporate Asia. Along with a further slowdown in China's growth, Tantia of Credit Suisse points to "very high household debt, especially in South Korea, Thailand and Malaysia" as a major risk. The low interest rate environment has kept the issue in check, but further policy tightening by the U.S. Federal Reserve could bring it to the surface.

Raychaudhuri of BNP cited unfavorable demographic shifts in most Asian countries. Even for the ones still reaping demographic dividends from their young populations, such as India and Indonesia, the rise in automation could hinder the creation of much-needed jobs. Diverting funds to infrastructure "is an imperative" for Asian governments, he said, and that means they "need to have fiscal discipline and cut subsidies."

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