Fri, Jun 28, 2019 - Page 11 News List

Companies’ earnings to disappoint: ratings firm

TRADE TIFF:Taiwan Ratings said that if Washington hikes tariffs on US$300 billion of Chinese goods, it would be ‘especially painful for Taiwan’s tech firms’

By Crystal Hsu  /  Staff reporter

Many local corporations look set for disappointing earnings results this year, as a bitter US-China trade dispute persists, extenuating demand for exports, Taiwan Ratings Corp (中華信評) said yesterday.

The assessment came before a planned meeting tomorrow between US President Donald Trump and Chinese President Xi Jinping (習近平), in which the two sides might bridge trade differences or deepen frictions and hurt the global economy.

An upcoming round of tariff US increases would be particularly severe for Taiwan’s export-oriented technology firms, which base a large proportion of their production in China, Taiwan Ratings analyst Jin Dong (董瑾) said.

Trump has threatened to raise tariffs on another US$300 billion of Chinese goods, including smartphones and laptops, for which many Taiwanese firms supply critical components.

“The levying of higher tariffs on technology goods is especially painful for Taiwan’s tech firms. The next six months to one year could see an ill-timed clash of rising production costs and shrinking demand, especially in China,” Dong said.

Companies in the cargo services and commodities sectors are also likely to experience pressure on their credit profiles due to the upcoming round of tariff hikes, she said.

Volatile commodity prices could swiftly erode already tight margins in these sectors amid softening end-demand and intense price competition, she added.

The likelihood of credit risks spreading to other corporate and financial sectors would pick up as the trade dispute drags on, Taiwan Ratings said.

Nevertheless, most Taiwanese corporations have the capacity to withstand a modest weakening in their credit metrics, it said.

Most local firms have high cash balances and capital buffers, supported by their improving debt leverage over the past two to three years, Dong said, adding that this should provide some relief from a potential fall in cash flow on their debt leverage and credit metrics.

The tariff dispute has less of negative effects on the financial services sector due to banks’ constrained exposure to the Chinese market over the past 12 months, Taiwan Ratings analyst Eunice Fan (范維華) said.

However, bank asset quality could deteriorate if the trade row bites heavily into corporate borrowers’ earnings and subdues their repayment ability, she said.

The credit profiles of financial institutions, insurers and money market funds in Taiwan are likely to remain stable over the next six months, supported by generally good capitalization, disciplined risk management and ample market liquidity, Fan said, adding that the financial services and fund sectors held up well to volatility in the first half of the year.

However, foreign exchange volatility would continue to constrain the returns of Taiwanese life insurance companies given their heavy dependence on overseas investment returns to fund their policy costs, she said.

Cybersecurity and technology upgrades would weigh on credit profiles of firms in the financial services and corporate sectors through their impact on baseline costs and fundamentals, she added.

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