China Looks Toward Stable Growth
Ernst & Young’s latest Capital confidence barometer reveals that China remains the most attractive destination for investment, followed by India, the U.S., Brazil and Indonesia.
Robert Partridge, Transaction Advisory Services Leader of Greater China at Ernst & Young says, “Despite a slowing of the country’s rapid rate of economic growth, Chinese companies continue to have low levels of debt and are in a strong position to expand their market positions and take advantage of high-value deal opportunities. Chinese companies, however, are more focused on optimizing capital in this environment. Seventy percent of respondents say they will reduce already low debt-to-capital ratios over the next year. Forty-four percent will focus on optimizing their capital positions, by a combination of releasing cash, improving working capital, optimizing the tax structure or integrating previously acquired businesses.”
Despite this, Chinese companies are more opportunistic when it comes to Eurozone opportunities, nearly twice as likely as their global counterparts to consider M&A, with 42% choosing this option compared with 22% of global executives. They are also more likely to opt for using excess cash to finance organic growth and again more likely than global executives to use extra cash to finance M&A.
Chinese investors upbeat about global prospects, looking to maintain stability at home
As concerns about the Eurozone have begun to subside, Chinese executives have become more bullish about prospects for the global economy than they had been in October. They are also even more upbeat than global respondents, with 69% saying the global economy is improving, compared with 52% in the global sample. At the same time, just 18% believe conditions are improving in their own markets, compared with 50% of global executives who saw improvement in their local economies.
Despite robust balance sheets, companies focus on preserving market positions
Bernard Poon, Transaction Advisory Services Leader of Hong Kong and Macau Region at Ernst & Young says, “Chinese companies continue to benefit from strong balance sheets in April 2012, with just 16% of those surveyed planning to refinance loan or debt obligations in the next 12 months, a drop from 30% six months ago, and significantly lower than the 34% of global companies that face refinancing over the next year. A significant majority of Chinese executives (70%) expect their already low debt-to-capital ratios to decrease further over the next year, compared with just 34% of global executives who expect a similar decrease.”
However, maintaining their current market positions remains the key priority for Chinese respondents, rather than focusing on expanding through organic growth or mergers and acquisitions. Just 35% of Chinese executives said their company would focus on growth over the next year, compared with 52% of global companies. Chinese companies are also less likely to pursue acquisitions over the next 12 months than they were six months ago, with just 22% saying they expect to pursue M&A in the next year, compared with 31% of global respondents.
Robert Partridge comments, “While slower rates of growth at home are having an impact on Chinese companies’ capital agenda, continuing concerns about high valuations are also helping to cool their appetites for M&A. Indeed, 78% of Chinese respondents said the valuation gap is the primary reason for not pursuing M&A in the next 12 months, compared with 28% of their global counterparts.”