Wed, Jul 21, 2004 - Page 10 News List

S&P predicting lower earnings growth in 2005

FORECAST The ratings service cited rising oil prices and interest rates, plus Beijing's efforts to rein in its economy, as factors affecting business

By Jackie Lin  /  STAFF REPORTER

The business sector is likely to maintain a high rate of earnings growth in the second half of this year, but that robust momentum may cool next year as the nation's economic recovery is expected to slow down, the Standard & Poor's Ratings Services (S&P) said yesterday.

Rising interest rates and oil prices, as well as China's effort to put the clamps on its overheating economy, will all contribute to the deceleration of companies' growth momentum, which has been buoyed by increasing domestic demand and strong exports, S&P said.

The slowdown, however, "should not be exaggerated because the nation's economic fundamentals remain sound," John Bailey, director of S&P's corporate and infrastructure ratings, said at a press conference.

Tony Tsai (蔡東松), a Taiwan Ratings Corp (中華信評) analyst, agreed, saying this year's rosy economic performance means higher comparison standards for next year and that no sector is likely to see continued strong momentum.

"It is hard to forecast now which sectors would register slight growth or decline, or remain unchanged," he said.

Taiwan Ratings is the local arm of S&P.

China's macro-control measures are not expected to negatively affect Taiwanese electronics and machinery manufacturers, which make up the majority of China-bound shipments, as these industries are largely driven by re-

exports, Bailey said.

But the companies that have invested heavily in real estate and construction could face greater downside risks, he warned.

China remains the largest export destination for local companies, taking US$70 billion or 25 percent of exports, according to S&P.

Another issue highlighted at the press gathering was the potential refinancing risks stemming from convertible bonds.

While many companies have seen convertible bonds as pure equity plays, Procomp Informatics Ltd's (博達科技) unexpected default on a corporate bond payment last month shows that companies have underestimated the potential refinancing risk, Bailey said.

Procomp, the nation's first gallium arsenide epitaxial (GaAs) wafer foundry, failed to pay a NT$2.98 billion bond on June 16 despite financial reports showing that it had NT$6.3 billion in cash.

The default led to a suspension of trading of Procomp shares on June 23 and the detention of the company's chairwoman, Sophie Yeh (葉素菲), on June 27.

"Given that Taiwan high-tech companies' stock prices have weakened recently, some of these convertible bonds many not be converted into equity, which could mean they face liquidity pressure. This is an area that needs to be closely monitored," Bailey said.

Securities and Futures Bureau figures show there has been a substantial increase in the number of domestic and overseas convertible bonds bought in recent years.

As domestic bonds are usually issued by smaller start-up companies, whose stock prices have fallen short of expectations this year, they might face refinancing pressure, Bailey said.

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