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A woman tries out augmented reality glasses with the Samsung Galaxy S9 Plus phone at the Mobile World Congress in Barcelona in February.   © AP
Cover Story

Asia Inc. comes roaring back in 2017

Nikkei Asia300 companies reap historic profits as tech demand booms

BANGKOK -- Asia's big corporations posted record profits in 2017 following several lackluster years, with the technology sector in particular taking advantage of solid demand for devices like smartphones and consumer appliances.

Samsung Electronics was the region's most profitable company last year, taking home a net profit of 41.3 trillion won ($38.7 billion) up from 22.4 trillion won a year earlier. Semiconductors were a key driver of the growth, as chip prices rose amid a strong economic expansion around the world, and Samsung made serious inroads into contract chip manufacturing.

Operating profit in the business jumped to 35.2 trillion won from 13.6 trillion won.

Amid fierce competition, including from China, Samsung is investing heavily in its semiconductor business. The company broke ground on a new state-of-the-art system chip factory in Hwaseong, near Seoul, in February. The company plans to spend $6 billion to bring the plant to life.

"Hwaseong will become the center of the company's semiconductor cluster," said Kim Ki-nam, president and CEO of Samsung's Device Solutions, the division overseeing contract chipmaking and the group's mainstay memory chip business.

Samsung's net profit surged in 2017, underpinned by its semiconductor business.

Asian companies suffered in 2015 and 2016 amid an economic slowdown in China and a drop in resource prices. But last year, two decades on from the 1997 Asian financial crisis, their profits reached new heights as the global economy enjoyed the strongest levels of synchronized growth since 2010. Stock prices made big gains around the world, including in laggards such as Japan and Europe.

Out of 330 companies on the Nikkei Asia300 list, 120 companies had announced 2017 results by the beginning of March, with 70% posting improved results on a net earnings basis from the year before. When analyst forecasts for the remaining components are added in, 278 companies with comparable data going back 10 years saw a combined 23% net profit jump in 2017.

Analysts expect the profit trend to continue this year, but there are worries -- most notably of the possibility that the administration of U.S. President Donald Trump could spark a full-blown trade war. Rising interest rates, led by the U.S. Federal Reserve, are another concern. In the tech sector, a maturing smartphone market could dent profitability at Asian component makers.

Toru Nishihama, chief economist at Dai-ichi Life Research Institute, said he expects profits at Asian companies to continue expanding this year, but by a smaller margin compared with 2017. "Technology companies in Taiwan and South Korea supplying components to Chinese electronic makers could suffer if the U.S. accelerates its retaliation against China's intellectual property abuse," said Nishihama.

Nishihama added that market players are wary about how long the global economic expansion will continue. "There is a chance that the growth could peak out in the second half of the year, which would weigh on Asian companies' profitability," Nishihama said.

For now, though, technology companies are enjoying robust demand, with South Korean technology companies playing a key role in last year's record-smashing profits. SK Hynix enjoyed dramatic growth thanks to a sharp increase in demand for memory chips. The company's net profit surged 260% to 10.6 trillion won in 2017.

"Last year, demand in the memory market rose drastically, driven by products for servers amid the proliferation of data centers," SK Hynix said. The company added that there was only a limited increase in supply because manufacturers did not spend enough on expanding capacity.

LG Electronics posted a net profit of 1.7 trillion won in 2017 -- a 22-fold increase from a difficult 2016. It was the biggest rise among the 120 companies that have announced results and was largely the result of strength in premium home appliances and TVs.

LG Display also logged improved results last year after its flagship OLED screens were adopted by major TV manufacturers, such as parent LG Electronics and Sony.

South Korea's LG group showed off its display prowess at the CES 2018 consumer technology trade show in Las Vegas in January.   © Getty Images

About 40 of the 278 Asia300 companies we analyzed are manufacturers for the information technology sector or provide services to the industry. Together, their net profit jumped 62% in 2017 to $106 billion.

Taiwan's technology sector also showed strong results. Innolux, the island's leading liquid crystal display maker and owned by Hon Hai Precision Industry, saw net profit surge to 37 billion New Taiwan dollars ($1.27 billion) from NT$1.8 billion in 2016. Rival AU Optronics booked a net profit of NT$32.3 billion in 2017, up more than 310% from 2016.

Both were hit by a serious supply glut and downturn in the market in late 2015 and the first half of 2016. But they have benefited from a rebound in LCD panel prices since the second half of 2016.

Net profit at Nanya Technology, the world's fourth-largest dynamic random access memory chip maker, expanded nearly 70% to NT$40.2 billion. "The market condition looks very healthy at least through the first three quarters of 2018," President Lee Pei-ing told reporters at the end of February, citing data center servers, new artificial intelligence features on various devices and cryptocurrencies.

But not all technology companies were so fortunate. Taiwanese electronic parts maker Lite-On Technology suffered a 72% plunge in net profit last year to NT$2.6 billion as it was hit by unsuccessful investments and rising competition from Chinese rivals. Asustek Computer lost market share in both computers and handsets in the face of ferocious competition. Its net profit for 2017 fell 19% to NT$15.5 billion.

Oil rises, airlines struggle

The strong performance was not confined to tech, however. Asia's commodities companies, which suffered from lower prices for oil, coal and metals as China's appetite for basic materials began to slow, enjoyed a rebound in 2017.

Banpu, Thailand's biggest coal miner, saw net profit soar 370% to 7.9 billion baht ($253 million), largely on the global rise in coal prices and power-generating capacity. Demand for coal rose sharply last year, particularly in Southeast Asia.

Last year "was a strong year for global coal prices, as they started rising sharply for the first time after suffering through a sluggish trend during 2011-2016," said CEO Somruedee Chaimongkol.

Thai oil and gas conglomerate PTT posted a 43% rise in net profit thanks to higher oil prices, a stronger baht and cost cutting that kept the company competitive. Tevin Vongvanich, president and chief executive, expects global oil prices to rise further in 2018 with both OPEC and non-OPEC countries continuing to cut output.

"PTT has raised its average oil price assumption this year to $60-65 a barrel, up from the previous forecast of $55 a barrel made late last year," Tevin said.

Last year was Posco's strongest in five years, with net profit doubling to 2.7 trillion won at the South Korean steelmaker. Steel prices rose on reduced output in China, largely as a result of environmental restrictions, the company said in January.

"The Chinese government is cutting its excessive capacity, lowering its retail stockpiles to the lowest level," Yoon Duk-il, head of the company's financial bureau, said in a conference call.

Flag-carrier Thai Airways slipped back into the red, hit by higher fuel costs and intensifying competition. (Photo by Ken Kobayashi)

Lower oil prices in 2015 and 2016 helped airlines, but higher fuel costs exacerbated the effects of tough competition among Asia's carriers last year. Two Southeast Asian airlines fell into the red. At a critical point in its restructuring plan and just a year after posting a small profit -- its first in four years -- Thai Airways International lost money. The flag carrier ended up with a net loss of 2.1 billion baht in 2017 on heavy competition, which pushed down fares, and rising fuel expenses, according to stock exchange filings released on Feb. 26. On the same day, another flag carrier, Garuda Indonesia, announced it would cut unprofitable routes and renegotiate contracts to cut costs after a $216.5 million net loss last year.

But Malaysian budget carrier AirAsia managed to lift net profit by 1% last year even amid harsh competition and rising fuel costs. Flag carriers may be weighed down by the inefficiencies often seen in government-backed companies.

Food companies and retailers enjoyed stable growth in 2017 thanks to growing populations and rising wages in emerging Asian economies. Revenues at Nestle India topped 100 billion rupees ($1.53 billion) in 2017 -- a milestone for the local unit of the Swiss food company, which entered India over a century ago. Nestle India's net profit climbed 22% to 12.2 billion rupees. CP All of Charoen Pokphand Group, which operates the 7-Eleven convenience store chain in Thailand, booked a net profit of 19.9 billion baht, nearly 20% more than the year before.

For the first time in seven years, net profits increased in all 10 markets where the 278 Asia300 companies in this report operate. South Korea, where 34 of them are based, led the pack with a 48% jump. Five markets that saw decreased profits in 2016, including Singapore and China, managed to turn things around.

Each of Singapore's three biggest banks generated higher net interest income thanks to increased lending.   © AP

The positive effects rippled into the financial sector as well. Oversea-Chinese Banking Corp., Singapore's second-largest bank by asset size, marked a record net profit of 4.1 billion Singapore dollars ($3.11 billion) in 2017, up 19% from a year earlier. Backed by steady economic growth in Southeast Asia, income in its wealth management business shot up 43% to S$3.2 billion. "Our wealth management business has been sustainably growing, and growing at a fairly high speed," CEO Samuel Tsien said at a news conference on Feb. 14.

The economic growth helped Singapore's banking sector as a whole. All three major banks, including DBS Group Holdings and United Overseas Bank, increased lending, resulting in higher net interest income than a year earlier.

South Korean players also enjoyed a boost, with Hana Financial Group and KB Financial Group posting the two largest profit gains among Asian financial companies in 2017.

Thailand was the lone exception, due to lingering concerns over its economy. Combined net profits at Bangkok BankKrung Thai BankSiam Commercial Bank and Kasikornbank came in at 132.9 billion baht, down 13% on the year. The figure fell for the first time in two years on an increase in nonperforming loans. State-owned Krung Thai Bank suffered the biggest drop of the four, at 31%.

In real estate, Singaporean developer UOL Group's net profit tripled to S$891 million, while its revenue increased 46% to S$2.1 billion. The consolidation of an affiliated property company, United Industrial Corp., boosted the numbers. Deputy CEO Liam Wee Sin said the "Singapore-centric" company intends to increase overseas exposure through acquiring offices, serviced apartments and hotels in global gateway cities.

Vietnam's Vingroup enjoyed a 74% jump in net profit to 4.2 trillion dong ($184 million). It sold 11,000 units of property, and a subsidiary that operates shopping malls expanded its portfolio to the equivalent of 1.1 million sq. meters.

THAAD tensions bite South Korean companies

Many of the companies that suffered a significant downturn did so because of unusual circumstances. For example, several South Korean companies suffered from retaliatory measures by Chinese authorities over Seoul's deployment of the U.S.-developed Terminal High Altitude Area Defense missile shield last March.

Lotte Shopping was one of the hardest-hit Asia300 companies. The retail affiliate of South Korean-Japanese conglomerate Lotte Group suffered a 136 billion won net loss in 2017, following a 168 billion won net profit the previous year, after most of its outlets in China were forced to suspend operations. Lotte Group had offered a golf course as a site for hosting the THAAD equipment.

Lotte Shopping now plans to sell its supermarket chain in China. DB Financial Investment analyst Cha Jae-heon said THAAD was the reason for Lotte's troubles last year. The "decline in Chinese tourists also took a heavy toll on the company's department store sales," Cha said.

AmorePacific Group, the largest cosmetics producer in South Korea, suffered a 40% net profit drop to 489 billion won for 2017.

Hyundai Motor also took a hit from from Chinese retaliation. The automaker's net profit plunged 25% to 4 trillion won due to poor sales in China, its largest market.

This even hurt Chinese enterprises. BAIC Motor, a Hong Kong-listed subsidiary of China's state-owned Beijing Automotive Group, announced on Feb. 13 that its 2017 net profit would drop about 65% from 6.36 billion yuan ($1.0 billion) the year before. The company blamed intensifying competition in the local passenger-vehicle market, as well as sluggish demand for South Korean vehicles, which led to a sales decline at Beijing Hyundai Motor, a 50-50 joint venture with Hyundai.

A taxi in the Chinese capital bears the Beijing Hyundai logo. (Photo by Kosaku Mimura)

Hyundai affiliate Kia Motors was also hit, with net profit tumbling nearly 65% to 968 billion won last year. Other Hyundai affiliates experienced difficulties as well. Autoparts maker Hyundai Mobis' net profit halved to 1.5 trillion won in 2017, while Hyundai Steel's dropped 16% to 716 billion won.

Meanwhile, profits are expected to continue their upward march in 2018, though not to the extent seen in 2017. Analysts predict that the 278 companies will enjoy another 14.9% increase in net profit this year to a new record high. But the Asia300 Index has fallen since major Asian companies began announcing full-year results in January, due in part to concerns about rising interest rates and the Trump administration's protectionist policies.

Concern is growing among investors that Asian technology companies could face a slowdown. Global smartphone shipments slipped 0.5% to 1.46 billion units in 2017, according to the U.S.-based research company IDC. Production cuts for the iPhone X and sluggish sales of Chinese smartphones have also reportedly weighed on memory chip prices.

"LCD prices were relatively stable through 2017, but we really need to watch closely whether that would be sustainable in 2018, as there are several newly built panel facilities by several Chinese display makers that just went into production or will go into production," said Annabelle Hsu, an analyst at IDC.

She said both Innolux and AU Optronics could face some price pressure from Chinese competitors such as BOE Technology Group and China Star Optoelectronics Technology this year.

The U.S. and Europe have begun to taper back the unprecedented monetary easing launched in the aftermath of the 2008 financial crisis. With the global economy at a crossroads, Asian companies could face yet another key test of their resilience.

Nikkei staff writers Kim Jaewon in Seoul; Cheng Ting-Fang in Taipei; Mayuko Tani, Kentaro Iwamoto in Singapore; Yukako Ono, Apornrath Phoonphongphiphat in Bangkok; Kiran Sharma in New Delhi; Erwida Maulia in Jakarta; and Tomomi Kikuchi, Tamaki Fukui in Tokyo contributed to this article.

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