Tech Companies Focusing On Asia And Smart Devices Will Outperform

The author is Standard & Poor’s credit analyst Susan Chu

We consider the credit outlook for the Asia-Pacific technology sector to be largely stable in 2014. Some companies, however, still face stress because of competition or technological shift in their respective sub-sectors.

The softer economic prospects (including China-driven slowdowns) has resulted in reduced IT spending since the second half of 2012.

However, Asia-Pacific technology companies continue to grow and we expect strong demand for smart handheld devices will significantly benefit the industry’s supply chain in Asia.

In addition, most Asia-Pacific tech companies can maintain relatively stronger or gradually improving financial risk profiles, despite their exposures to the industry’s inherent volatility.

Measures to withstand expected economic slowdowns include keeping higher cash levels, pacing their capital expenditure or acquisitions carefully, or even discontinuing their nonprofitable business lines.

Over the long term, global economic growth and ongoing end-market demand along with technology advancement will continue to boost IT spending.

The negative ratings impact for the region’s tech sector is relatively low, and is largely comprised of Japanese players. Japan’s tech companies continue to encounter stiff competition from emerging premium providers or mass producers such as Korean or Chinese companies.

Asia-Pacific technology companies are mostly producers of hardware and semiconductors, which are generally transaction-based and sensitive to technological changes.

Software and services, on the other hand, have contractual revenue streams, which are often recurring in nature and tend to correlate with overall GDP growth.

While we expect softer economic prospects globally, regional economic growth would remain positive, and in turn, support the stable operating performance of most tech companies. This would be especially true for those targeting Asia as their major end markets.

On the other hand, as consumers continue to shift to smart handheld devices from personal computers (PCs), we expect sales of PCs, printers, and feature phones to decline further.

However, we expect the technology sector to grow around mid-single-digits in 2014, as strong sales in storage devices, tablets, and smartphones should outweigh the decline in PC-related sales. Such a shift in the market could result in the performance of the region’s tech companies diverging.

(The article has been edited for clarity)

China Expert network