Asia's companies seek a different style of leverage
The wounds from the region’s financial crisis may have healed on company balance sheets but the trauma remains
Since restructuring balance sheets post the late-1990s crisis, Asian companies have enjoyed an uninterrupted build-up of cash reserves and a corresponding reduction in debt levels. According to ABN Amro, in 1998, the nadir of the crisis, average net debt to equity was 60.5%. That ratio has fallen dramatically to around 25% now and will drop below 20% in 2006.
The lack of gearing is now suppressing returns on equity of Asian companies, says ABN Amro, an important factor in valuation. And companies face pressure to improve their capital management or return cash to shareholders. Dividend pay-out ratios have risen steadily as a result. The Asia ex-Japan dividend pay-out ratio now stands at 39%, according to research from Citigroup, the world’s second highest behind Europe. In 2000, Asia’s ratio was just 24%. In Malaysia, Singapore and Taiwan, companies are now returning more than 50% of earnings in dividends.
Citigroup has calculated another neat way to demonstrate just how much cash Asian companies are hoarding. Based on free cash flow forecasts, it reckons that 37% of Asian companies under its coverage could privatize themselves in less than five years, amounting to a return of capital of some $432 billion.