The second quarter results season to date is very disappointing for Asia ex-Japan, and going forward revenues look likely to remain quite soft, notes UBS.
Niall MacLeod and team at UBS in their August 20, 2015 research note titled: “ Earnings: the good, the bad and the ugly” point out with earnings holding up relatively better than revenues, margins are beating forecasts.
Disappointing Q2 results for Asia ex Japan
MacLeod and colleagues point out that the Q2 results season to date is very disappointing for Asia ex-Japan, though Japanese corporates have put on a much better show. The analysts note for APAC, earnings have come in slightly ahead of expectations with a net 5% of companies beating consensus forecasts, despite a weak top-line that witnessed a net 4% of companies missing expectations.
However, when Asia ex-Japan is considered, the picture is much bleaker. The analysts point out that a net 9% of companies missed earnings, with even more companies missing revenue expectations:
MacLeod et al. note margins are beating forecasts. The analysts recall their positive stand on the outlook for margins in the region as they believed lower commodity costs should be a boon to margins in 2015. They also point out that margins are on the rise and they estimate that they rose for a second successive quarter in Q2. However, revenues were especially weak. Revenues are running at about -5% year/year in Asia ex Japan, and broadly flat if one includes Japan:
The analysts point out that this earnings season has been especially ugly for Malaysia and Taiwan, but Indonesia and Korea too have suffered heavy earnings downgrades on the back of the recent results:
Lower commodities dragged top-line growth
Alluding to the reasons for the revenue weakness, the UBS team focuses on three issues. First, MacLeod and colleagues point out that lower commodities, while supportive for margins, have been a drag on top-line growth especially in commodity sensitive sectors and countries. They argue that while the fall in commodity prices can support margins for many sectors as input costs fall, for the top-line it acts as more of a drag, especially in commodity-linked countries.
MacLeod et al. note direct revenue weakness for the commodity producers with negative revenue growth for energy and materials, while at country level, Malaysia, Singapore, Thailand and Indonesia have witnessed deteriorating top-line growth that can be partly attributed to weaker commodities:
The analysts attribute the softness in domestic demand as the second factor for revenue weaknesses. The following heat-map of manufacturing PMIs highlights weakness in many of the emerging Asia economies:
Relatively disappointing export growth has also been a drag on Asian revenues. By looking at the big exporters in emerging Asia (Korea and Taiwan), you can see that export growth to the U.S. has slowed while China and Europe remain weak:
The following table shows the UBS analysts’ heat-maps capturing the changes to consensus EPS forecasts at a sector and regional level, with blue indicating upgrades and red signifying downgrades:
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