Divergent fortunes for Asia-Pac capital-goods companies: S&P

Singapore

RATING agency Standard & Poor's said in a report that capital goods companies in the Asia-Pacific could face divergent rating trends, depending on their exposure to different segments and regions.

Credit analyst Abhishek Dangra said: "Chinese and Australian capital goods companies will face continued weakness in the key segments of mining and construction machinery, while we expect Japanese players, aided by a weaker yen and higher technological capabilities, to improve their performance."

Improving industrial production will increase orders for capital goods, but there will be a lag due to existing over-capacity in many underlying industries.

The rating agency expects lower capital expenditures across emerging markets and in many key industries, slowing the demand for capital goods.

Soft commodity prices will also curb spending growth in resources companies, S&P said.

Meanwhile, steady but below-potential economic growth in the Asia-Pacific over the next year will likely lead to subdued revenue growth for rated capital goods companies, given their large reliance on their home markets. Earnings margins for these companies are expected to be largely stable, S&P said.

Speculative-grade companies "will need to better manage their working capital cycles to improve cash flow", S&P said.

To sum up, downside risks remain and uncertainties on global economic growth over the next two to three years can hurt the growth in the order book, profitability and financial metrics for the industry, S&P said.

"If the US recovery unexpectedly sputters, exporters will be hit. Weaker global economic prospects can drag capital expenditures lower across sectors, slowing the growth in demand for capital goods.

"In the Asia-Pacific, key risks are China's slower growth and faster economic rebalancing away from investment in fixed assets than we expect."