Technology sector outlook positive for Asia-Pacific: Fitch

This year's outlook for the technology sector in the Asia-Pacific is relatively positive, with a stable outlook for most companies, a ratings agency said in a report on Friday.

Demand will continue to increase for most technology products, Fitch Ratings said in the report, which covers sectors such as integrated circuit foundry services, personal computers, thin-film-transistor liquid-crystal-display (TFT-LCD) panels and consumer electronics products.

In particular, consumption for mobile handsets, personal computers and audio-visual products will grow continually, the UK credit risk evaluator said.

Fitch said sales should also increase on falling prices, rising market penetration, and new product designs and applications.

Economy analysts recently raised projections for IT companies in view of higher spending on technology equipment, in expectation of Microsoft Corp's introduction of Windows Vista scheduled for the end of this month.

In Asia excluding Japan, technology companies are "likely to deliver the fastest earnings growth" this year, Manish Nigam, an analyst at Credit Suisse Group in Singapore, wrote in a note to investors earlier this month.

Taiwan's Hon Hai Precision Industry Co (鴻海精密) and its handset unit Foxconn International Holdings Ltd (富士康控股) may benefit from Apple Inc's launch of iPhone, Macquarie Securities Ltd said recently.

"Although the long-term underlying operating environment for the technology sector will remain cyclical due to technological advancements, intense competition and lumpy capital investments, conditions are expected to be relatively stable in 2007," Lee Chee Leong (李進良), head of Fitch's Asia Pacific telecom, media and technology team, said in the report.

"Sound capacity planning decisions for the capital-intensive technology industry will continue to drive sector demand-supply dynamics and influence the financial health of companies," he wrote.

The TFT-LCD panel producers provide an example. The sector has been generating negative free cash flow over the past few years because of hefty capital expenditure.

But major firms like Taiwan's AU Optronics Corp (友達光電) are planning to restrain capacity growth, which Fitch said could improve sector supply-demand conditions as well as help mitigate product price declines and improve cash generation.

"Although leverage buyout transactions by private equity firms could occur in certain markets or sub-sectors, major consolidation activity that materially changes the industry's structure is less likely," Lee wrote.

Operating margins and earnings will also be affected by continuing pricing pressures because of production efficiency gains, product commoditization, and intensifying competition, it added.

Nevertheless, Fitch said in the report that it expected tech firms would be able to generate positive free cash flow and reduce their requirement for incremental leverage.