Capital Confidence Barometer

Transcription

1 October 2015 ey.com/ccb 13th edition Southeast Asia Capital Confidence Barometer Maintaining deal appetite in a volatile market environment

2 Maintaining deal appetite in a volatile market environment Predicting the market even for the next six months in a volatile, fast moving environment is a risky thing to do. But for those who are managing the capital agenda in businesses and industries, having a directional appreciation of what is at play is important. EY s Capital Confidence Barometer (CCB), which engages more than 1,600 senior corporate executives is our attempt to predict the M&A landscape and the economic fundamentals that will drive capital decisions over the next six to twelve months. Our 13 th edition of the Barometer results comes at a time when there have been some of the most contradicting trends that one would intuitively expect to drive conservatism in deal and capital decisions. The Barometer was conducted in August and September. Globally, the CCB finds that companies pursuing deals are at its peak in this decade. Deal intentions are at a six-year high, and many are seeking deals outside their core sector recognizing the blurring of boundaries in industries influenced by the innovative disruption and changing consumer preferences. This is against a backdrop where emerging markets have been experiencing some of the most challenging economic conditions that impact businesses since the GFC and the geo political tensions are consuming the whole world to a new sense of panic. In the context of Southeast Asia, our respondents have challenged us to take a pause and look hard at the deal and capital choices that businesses are making. After a sharp decline in deal appetite six months ago, respondents are saying that they are focused on acquisitions actively. It is intriguing that deal pipelines are all time high with 60% of the respondents saying that they are working on four or more deals, and 54% expect to complete two to three deals over the next 12 months. This appetite is emerging when currencies in all the major Southeast Asian markets have taken a heavy beating: Malaysia (33%), Indonesia (18%), Singapore (13%) and Thailand (10%). Commodities, particularly oil, gas and minerals have been subject to heavy price fluctuations. There is a strong expectation that interest rates will rise. All of this would intuitively drive business decisions to be conservative and look more towards preserving margins and restructure to face the headwinds. While all of these concerns remain, our Barometer results for Southeast Asia reveals that businesses are confident about the longer-term prospects in this region. They recognize the opportunity to consolidate growth, particularly when the conditions are challenging and see the potential of acquisitions in fragmented sectors. We hope these results will give you some interesting insights to the dynamism in this region and be bold to ride the new momentum in the ASEAN Economic Community. Harsha Basnayake Managing Partner ASEAN Region and Deputy Leader Asia-Pacific Area Transaction Advisory Services 2 I Capital ConfidenceBarometer

3 Deal appetite gathering momentum? EY s Capital Confidence Barometer (CCB) is a regular survey of more than 1,600 senior executives from large companies around the world conducted by the Economist Intelligence Unit (EIU). The respondent community is comprised of an independent EIU panel of senior executives and select EY clients and contacts. This report from our 13th Barometer provides a snapshot of our local findings from more than 120 executives in major Southeast Asian markets, in the context of global results. Our Global Capital Confidence Barometer finds that companies are pursuing deals at a rate not seen in this decade. Globally, deal intentions are at a six-year peak, and all signs in deal markets are pointing an upward trend. Deal outlook in Southeast Asian markets reveal that 42% of the respondents will actively pursue an acquisition in the next 12 months. This is significant, given that commodity and currency volatility that have impacted the major markets in Southeast Asia. Perhaps the currency depreciation and the challenges caused by volatility in certain sectors coupled with long-term prospects in Southeast Asia, are nudging companies to consider acquisitions to consolidate their positions. Do you expect your company to actively pursue acquisitions in the next 12 months? Expectations to pursue an acquisition 35% 40% 31% 24% 53% 40% 56% 38% 59% 42% Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 SEA Global 59% of companies believe that the M&A market will remain stable in the next 12 months 60% of companies have four or more deals in their pipeline Top investment destinations 1. Indonesia 2. United States 42% of companies expect to actively pursue acquisitions in the next 12 months 82% of companies plan an acquisition relating to their sector 3. United Kingdom 4. India 82% of companies are optimistic about the quality of acquisition opportunities 80% of companies will put organic growth efforts into innovation 5. Malaysia Capital Confidence Barometer 3

4 Macroeconomic environment Despite the volatile currency and interest rate environment, companies remain confident about growth prospects for their businesses. 67% of executives remain optimistic about the economic outlook for Southeast Asia 4 I Capital Confidence Barometer

5 Respondents remain optimistic amid slowing growth in the region Amid slowing growth in the region, executives remain optimistic about the economic outlook for Southeast Asia. Respondents from Vietnam and the Philippines, particularly, remain bullish as 90% expect their local economies to improve, followed by Singapore and Thailand (67%) and Indonesia (64%). With the exception of Malaysia, this feedback demonstrates that corporate leaders have become less sensitive to daily market volatility as the underlying growth story of the region with its over 625 million potential consumers remains intact. We believe that despite this optimism, a significant number of middle market businesses are impacted by the currency and commodity volatility in Southeast Asia. However, most regional businesses will be able to restructure their capital agenda demands and ride the wave. What is your perspective on the state of the local economytoday? Oct 14 Apr 15 Oct 15 4% 28% 57% Improving Macroeconomic environment 8% 17% Stable Declining 16% 68% 35% 67% Except for equity valuations, confidence in corporate earnings and other leading indicators remain high Despite significantly increased volatility of commodity and currency markets, the majority of respondents remain confident in corporate earnings and short-term market stability even though at lower levels than during previous survey periods. Confidence in equity valuations fell compared to previous Barometer results as valuations are still perceived relatively high by many market participants. Notwithstanding a potential rise in US interest rates, executives expect credit availability to continue to be boosted by quantitative easing programs in the Eurozone and Japan, as well as policy shifts in China. Please indicate your level of confidencein the following at the local level. 0% 4% 13% 0% 4% 12% 2% 5% 17% 0% 7% 9% 15% 8% 10% 21% 11% 16% 27% 26% 85% 88% 77% 79% 85% 72% 71% 69% 29% 60% 56% 76% Oct 14 Apr 15 Oct 15 Oct 14 Apr 15 Oct 15 Oct 14 Apr 15 Oct 15 Oct 14 Apr 15 Oct 15 Corporate earnings Short-term market stability 54% Equity valuations 40% 37% 15% Credit availability Improving Stable Declining Increased political instability, the situation in the Eurozone and increased volatility in commodities and currencies are key economic risks The concerns of respondents in Southeast Asia are very similar to those in other regions. Ongoing geopolitical tension in Eastern Europe, the Middle East and Southeast Asia, as well as the situation in the Eurozone, being one of the region s major trade partners, rank as executives top concerns. Currency and commodity shifts are a more immediate concern in the region with most currencies in markets such as Malaysia, Indonesia, Thailand and Singapore depreciating over 10% against the US dollar. Continued volatility in commodities challenges companies long-term planning assumptions. For companies reporting in US dollars, currency shifts may directly affect near-term earnings, potentially leading to negative investor impressions. What do you believe to be the greatest economic risk to your business over the next 6 12 months? Increasedglobaland regional political instability Economic andpolitical situation in the eurozone Increasedvolatility in commoditiesandcurrencies Slowinggrowth in key emergingmarkets Timingandpace of interest raterisesinthe US 2% 13% 22% 30% 33% Capital Confidence Barometer 5

6 Corporate strategy Increased volatility in commodities and currencies dominates board agendas but business fundamentals remain positive. 51% of executives name cost efficiencies as their organizations main focus 6 I Capital Confidence Barometer

7 Cost efficiencies are the primary focus of corporates Corporate strategy Which statement best describes your organization s focus over the next 12 months? Similar to the Global Barometer findings, Southeast Asian respondents expect to see cost reductions and operational efficiencies to remain a major focus for their businesses. However, growth has once again returned as a focus. Oct 15 Apr 15 27% 43% 45% 51% 6% 28% Despite the volatility in commodity prices, exchange rates and interest cost, the formation of the ASEAN Economic Community and the longer-term prospects for the region argue well for growth aspirations for many businesses in the region. Oct 14 Growth 64% Cost reduction and operational efficiency 23% 13% Maintain stability With commodity-focused industries still under cost pressure arising from reduced demands and prices, sectors such as infrastructure and technology are focused on continued organic and in-organic growth. None of the respondents in Southeast Asia was focused on survival, demonstrating the fundamental strength of businesses in this region. In most Southeast Asian countries, organic growth investment has dramatically shifted from conventional to innovative strategies to remain competitive Other than in Indonesia, companies have overall dramatically shifted their focus from core products and existing markets to the development of new products and markets to remain competitive. What is the primary focus of your company s organic growth over the next 12 months? More rigorous focus on core products/existing markets New sales channels Conventional 7% 13% The majority of companies in Indonesia are still focused on driving existing products and markets due to ever increasing demands from a rising middle class and a rather protected market. None of the Indonesian executives expressed interest in the expansion to new geographies. Increase research and development/ product introductions Exploiting technology to develop new markets/products Innovative 18% 51% Investing in new geographies/markets 11% Companies remain focused on hiring, but at lower pace The majority of executives plan to hire new talent or to keep the current work force size. As growth and cost efficiencies become high on the agenda, securing and maintaining the right mix of talent will remain a high priority. None of the surveyed companies in Indonesia, Thailand and Vietnam plan to reduce their workforce numbers. With regards to employment, which of the following does your organization expect to do in the next 12 months? Oct 14 Apr 15 Oct 15 3% 3% 6% 57% 32% 41% 40% 65% 53% Create jobs/hire talent Keep current workforce size Reduce workforce numbers Capital Confidence Barometer 7

8 Capital allocation Fundamental global changes reshaping corporate strategies 30% What percentage of available capital will you allocate to each of the following? 15% Global 27% 28% Organic growth (e.g., investing in products, talent retention, research anddevelopment Inorganic growth (e.g., acquisitions, alliances and joint ventures) Improve balance sheet by reducing debt Returning cash to shareholders Companies are considering a full range of opportunities for allocating available capital The effective allocation of capital is a senior management team s most fundamental responsibility. At a time of modest global economic growth, executives are taking extra care to balance their allocations to support long-term strategic goals. A typical capital allocation strategy also strikes a balance between long-range planning and shorter-term imperatives. In the years immediately after the global financial crisis, many companies pursued share buybacks and other short-term measures, often under pressure from large or institutional investors. While these maneuvers satisfied various constituencies at a time of market challenge, executives were reminded of a perennial truth: a focus on short-term tactics can be at odds with building long-term value. Balance and frequency are key to successful allocation In this edition of the Barometer, we find executives beyond the financial-crisis mindset and employing a full range of available allocation tools. They are balancing financial prudence (reducing debt), rewarding existing shareholders (returning cash), and growing the business for the long term (organic and inorganic growth). Research consistently shows that those companies with the most active capital allocation processes will outperform and ultimately achieve higher returns than those with more passive or infrequent allocation approaches. In the new-normal environment of tempered global growth, continual reassessment of where to deploy and recycle capital is how companies sustain their growth trajectory and maximize value. Companies with the most capital allocation focuses are consistently shown to outperform those with more passive or infrequent allocation approaches In the context of Southeast Asia, capital allocation discipline will become far more important given the conglomerate construct of a majority of our businesses. As post-global financial crisis economic cycle matures and force to alter the cost of capital regime, capital restructuring in most of the major markets will force management and boards to become smarter in their capital allocation decisions. 20% 11% 33% SEA 36% 8 I Capital ConfidenceBarometer

9 Increased commodity, currency fluctuations are driving boardroom discipline Which of the following has been elevated on your boardroomagenda in the past sixmonths? Regulatory and competition/ antitrust oversight 2% 3% 4% Shareholder activism,including returning cash to shareholders Cybersecurity 21% 5% 5% 7% 7% 10% Reducing costs/ improvingmargins 40% Executives have accepted the reality of a low-growth global economy and the impact of this environment on their current operations. Greater currency volatility and fluctuations in commodity pricing are causing many to allocate their valuable boardroom time to protecting the bottom-line achievements generated over the last half-decade. For businesses based in this region. volatility in currencies and commodity pricing coupled with prospect of increasing interest rates have major strategy implications. For manufacturers to the export markets, the currency drop has been a great opportunity but for others who are dependent on import inputs in the products offered domestically and to some of the services such as oil field services, transport and chemical trading there are significant pressures to deal with. These challenges will alter the ways that companies have viewed their growth aspirations, allocated capital to different businesses and balance stakeholder interests. Globalization, entrepreneurship and digital have greatest near-term impact Among the megatrends affecting companies core business and acquisition strategies in the near term, the growth in economic influence of China, India and the wider Asian economy is expected to have the greatest impact. Additionally, the emergence of a more decentralized, entrepreneurial working world is an issue that executives are only beginning to grapple with. Fueled by the convergence of social, mobile, cloud and big data technologies, as well as growing demand for anytime anywhere access, the digitalization of the enterprise is disrupting all areas of corporate strategy. Which of the following will affect your core business and your acquisitionstrategy most in the next 12months? Global marketplace Acquisitions Digital future Top threeresponses Portfolio analysis, including strategic divestments (spin-off/ipo) 25% 33% 12% 21% 41% 56% 61% Increased volatility in commoditiesand currencies Boardroom agenda Entrepreneurship rising 10% 19% Core business Acquisitionstrategy Capital Confidence Barometer 9

10 M&A outlook Acquisition appetite is coming back with robust deal fundamentals and strong growth in deal pipelines dealmakers are prepared to walk away if valuation gaps are too wide. 42% of companies expect to actively pursue acquisitions in the next 12 months 10 I Capital Confidence Barometer

11 Acquisition appetite is trending upwards Acquisition appetite is trending upwards after a very low score reflected in April While it is early to predict whether this trend will continue, it is important to appreciate what is driving the current deal appetite in Southeast Asia. Among all emerging markets, economic prospects in a much more integrated ASEAN has been appealing to many investors. Currency devaluations across markets have made valuations mode attractive for both buyers and sellers. Do you expect your company to actively pursue acquisitions in the next 12 months? Expectations to pursue an acquisition 35% 40% 31% 24% 53% 40% 56% 38% M&A outlook 59% 42% Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 SEA Global and deal fundamentals remain high Deal fundamentals are up when it comes to the likelihood of closing deals and the quality of acquisition opportunities while executives have slightly reduced their confidence in the number of acquisition opportunities. In addition to the long-term prospects in the region, the relative performance of currencies has potentially impacted deal sentiments. Please indicate your level of confidence in the following at the local level. Quality of acquisition opportunities Likelihood of closing acquisitions % of positiveattitude Deal metrics 42% 54% 56% 79% 72% 76% Number of acquisition opportunities 61% 68% 79% Oct15 Apr15 Oct14 Appetite to walk away is almost equally balanced with wanting to close the deal This result reflects a balance appetite to close deals. It is the right attitude to take in this region given the many challenges that will confront both buyers and sellers. Competition from other buyers and valuation gaps between buyer and seller expectations have been the main reasons for failed to complete or canceled acquisitions in the last 12 months. Concern over regulatory scrutiny ranks a close third, as we see the effect of increased intervention by regulators, however this varies across Southeast Asia with Singaporean executives being the least concerned (12%) and Indonesian the most (30%). Have you either failed to complete or canceled a planned acquisition in the past 12 months? If yes, what was the primary reason? 6% 8% 17% 19% 50% Investor or board scrutiny Yes, 48% No, 52% Concerns about regulatory or antitrust reviews Competitionfrom otherbuyers Issues uncovered during due diligence Gap between buyer and seller expectations too wide Capital Confidence Barometer 11

12 M&A outlook Executives remain cautiously optimistic for the M&A market in the next 12 months Our current Barometer shows stable deal-market sentiment accelerating, with a particular shift in the past 12 months from those expecting improvements to those anticipating a phase of stability. With deal sentiments at an all-time high globally, the majority of executives expect the M&A market to remain stable despite economic volatility in the region. What is your expectation for the M&A market in the next 12 months? Improving Stable 23% 29% 33% 59% 59% 76% Declining 1% 8% 12% Oct15 Oct14 Oct13 Medium-size deals mirror availability of targets The majority of executives expect to pursue deals in the lower middle market (< US$251 million) over the next 12 months. A market characterized by medium-size targets as well as a shortage of sizeable acquisition targets is a reality that many executives have already built in their acquisition strategy. The deal values also reflect the mid-market construct in Southeast Asia. As we have consecutively predicted any investor who approaches these markets to do mega-deals is likely to face challenges because of this inherent limitation. 2% What is your largest planned deal size in the next 12 Months? Oct 14 Apr 15 Oct 15 3% 95% 9% 33% 58% 4% 17% 79% Less than US$250m US$251m US$1b Greater than US$1b 12 I Capital ConfidenceBarometer

13 M&A outlook Deal pipeline reflect resilience Despite market volatility, deal pipeline has shown remarkable resilience. 60% of the respondents have indicated that they are working on four or more deals, currently. 71% expect this pipeline to increase. 54% of the respondents expect to complete two to three deals over the next 12 months, and 75% confirms that this is more than the number of acquisitions completed over the past 12 months. All of these are staggering indications given that most Southeast Asian companies have historically carried very thin corporate development teams. With nearly 48% prepared to walk away from the deals that they come across, one would expect that executives have the discipline to consider all opportunities that are brought to their attention. We also see these indicators to reflect an opportunistic spike in deal volumes, given the depreciation in currencies in the region and the stress that many mid-market businesses are facing given the commodity pricing volatility and low growth in emerging markets. >= How many deals of all sizes do you have in your pipeline today? 5% 5% 7% 5% 4% 12% 14% 14% 17% 19% 21% Oct15 Apr15 Oct14 28% 39% How do you expect your deal pipeline to change over the next 12 months? 55% 55% Oct 15 71% 25% 4% Apr 15 61% 37% 2% Oct 14 Increase Nochange Decrease 82% 18% How many acquisitions do you expect to complete in the next 12 months? >=5 12% 21% 4 5% 13% 3 2 2% 27% 27% 23% 1 12% 58% Oct15 Apr15 Is this more or less than the number of acquisitions you completed in the prior 12 months? Oct 15 75% 21% 4% Apr 15 19% 76% 5% More The Same Less Capital Confidence Barometer 13

14 M&A outlook Valuation gaps have widened Our respondents have indicated that there is a widening gap in valuation expectations between buyers and sellers. What is interesting though is that this expectation gap has not really dampen the deal appetite or the deal opportunities. Oct15 Apr15 7% How do you think that buyers expectations currently compare to sellers (valuation gap)? 37% 71% 52% 11% 21% Executives are beyond near-term volatility As might be expected in an active deal market, asset valuation multiples are elevated compared with historical levels. All indications in this Barometer results point to a relatively confident attitude toward asset valuations, particularly when one takes into consideration two factors: the implication of current devaluation in the SEA market; and many sellers, particularly those that have been forced to let go some of their businesses due to pricing and demand volatility in their sectors are now prepared to sell or merge. Significantly higher (25% or more) The gap is small(<10%) Oct15 Apr15 Do you expect the valuation gap betweenbuyers and sellers in the next 12 months to: 40% 50% Somewhat higher (10% 25% gap) Nogap 46% 57% 4% 3% Widen Stay thesame Contract Globally, deal values return to pre- GFC levels Globally, M&A deal values have returned to 2007 levels, although volumes remain low. EY modeling backs a strong relationship between M&A values and gross domestic product, and indicates considerable headroom in the current cycle. This theme will be true if the Eurozone returns to previous level of deal making and China continues the current trend of consumer-led growth. The critical challenge to executives and boards that are focused on Southeast Asian markets will be the relative growth prospects in this region given the fast changing economic and consumer demographics. Oct15 Apr15 Increase What do you expect the price/valuation of assets to do over the next 12 months 33% 58% Remain at current levels Decrease 31% 11% 66% Global M&A value as a share of global GDP 10% 8% 6% 4% 2% M&A/GDP Value(US$t) 5t 4t 3t 2t 1t ValueUS$t M&Avalueas% of GDP Source: Dealogic, OEF & EY analysis 14 I Capital ConfidenceBarometer

15 Significant challenges to deal success Integration and poor cost assumptions are biggest challenges Even though Southeast Asian companies are mostly pursuing acquisitions inside their sector, they often fail to achieve planned synergies. Synergies are closely tied to integration. Integrating a new acquisition into optimized structures to realize cost synergies is a delicate exercise. This may require unbundling of key processes and rebundling to fit a buyer s operating model. Companies can exploit revenue-based synergies if the merging businesses either find they can command a price premium via enhanced capabilities (such as product innovation or time to market) or they boost sales volume through increased market coverage (by geographic or product-line extension). However, these same synergies can be undermined if the integration is rushed or insensitive to the acquired company s market and culture. For example, sufficient time must be spent on preserving acquired brand value and customer relationships. Poor operating cost assumptions rank highly among the factors leading to deals not meeting expectations. Companies are often challenged in estimating the future run rate for an integrated asset, with overreliance on benchmarks as a foundation for cost modeling. Integration faces further digital challenges As companies increasingly acquire digital assets with different cultural and operational models, integration becomes even more challenging. The need to retain acquired talent and expertise is paramount. Integration considerations have long needed to be part of the front-end deal strategy now more than ever in an increasingly digital world. For acquisitions completed recently, what was the most significant issuethat contributed to deals not meetingexpectations? 7% Sales volume declines/ loss of customers 8% 8% Product/sales price and margin deterioration What part of your deal process has been most affected by advances in digital technology? Cyberattack fears impact deal making Poor operating cost assumptions 17% 26% Poor execution of integration Failure to achieve synergies 28% Heightened media attention and greater corporate awareness of cyber risk are contributing to increased scrutiny at the C-suite and board level. Almost 90% of executives view cybersecurity as a significant risk, either medium or high, to their deal process. A majority of companies perform cybersecurity due diligence as a standard procedure. They are increasing their focus outside of IT when considering cybersecurity risks to transactions. Areas of focus include business relationships such as customers and vendors, as well as joint ventures and affiliates of the target company. Strategic value overestimated/ purchase price multiple too high What is your assessment ofthe current risk of a potential cyber attack/breach of your deal process? Do you perform cybersecuritydue diligence on yourtransactions? Due diligence High Always Post-merger integration Medium Sometimes Low 58% 20% 14% 8% There hasbeen noimpact Never Sourcing and selecting opportunities 69% 20% 11% 67% 25% 8% Deal challenges and risks Capital Confidence Barometer 15

16 Sector outlook Closer look at sectors 82% of Southeast Asian respondents intend to make a deal within their sector. This is a significant contrast to the Global respondents view where just 48% of respondents expecting to do a deal outside their sector. The Global view appears to recognize the blurring sector boundaries while the view of Southeast Asian respondents reflect the opportunity to consolidate in our markets. Oil and Gas M&A activity in the oil and gas sector is expected to increase as National Oil Companies (NOCs) of resource seeking countries use the opportunity of lower valuations to acquire good quality assets. The market environment remains challenging as crude oil and gas prices continue to be volatile. Oil and gas companies are increasingly focusing on cost reduction and operational efficiency. In a world of declining prices, top executives are looking to strengthen business and achieve growth through financial, operational and portfolio resilience. In the region, NOCs and companies operating in resource holding countries are expected to accelerate efforts to reduce costs, while NOCs and companies in resource seeking countries such as Indonesia may use this opportunity to acquire high quality assets. Growing demand for energy in the region requires significant investment in infrastructure and will necessitate significant capital raising in the region in partnership with major corporations and financial investors. These forces will drive M&A activity in the region. Healthcare At the beginning of 2014, the Indonesian Government introduced mandatory universal health coverage (UHC). In doing so, it demonstrated its commitment to the goals of the Millennium Declaration that it had signed in September There are already more than 140 million participants in Indonesia s UHC system and by the end of 2018, the goal of the Government is that all over 250 million Indonesians citizens and residents are publicly insured. With a massive shortage of health care infrastructure, private investors have already discovered opportunities from UHC and are investing in the sector that promises stable returns. In the context of the other Southeast Asian markets, healthcare will continue to draw significant investor and government attention given the changing population demographics and growing middle class. We expect provider care and medical instruments and technology sectors to become high on investors agenda. Metal and mining A metal and mining sector coping with a sharp fall in commodity prices offers opportunities for countercyclical investors and those with strong financial positions. The sharp fall in commodity prices such as coal put pressure on producers and the sector is likely to remain focused on business resilience rather than exploring options for growth. Retaining financial flexibility is expected to be a recurring theme going forward, and the current environment may see further consolidation amongst peers, with scale helping secure capital or position for a future cyclical recovery. However, the declining price also brings opportunities to those companies with strong financial positions. In Southeast Asia region, we also see rising interest from financial investors in miningrelated assets for countercyclical acquisitions. Real estate The real estate cycles in various Southeast Asian countries are at different stages though directionally, the appetite of real estate developers to do large developments and M&A have softened due to the weakened credit market and fear of US interest rate increase impact on asset prices. However, outbound interest remains healthy in key gateway markets such as Australia and UK due to the need to diversify their geographical and currency risks. In addition, these large developers are also looking internally to resolve any refinancing issues that may arise in the next 12 months to ensure flexibility if they have to react to a market downturn. 16 I Capital ConfidenceBarometer

17 Consumer and industrial products Power and utilities EY Transaction Advisory Sector Leaders in Southeast Asia The rise in middle class and increased disposable income across the Southeast Asian economies has fueled consumer products companies to pursue both organic and inorganic growth. This positive sentiment is in the backdrop of a number challenges faced by Consumer Products companies, including changing consumer tastes and preferences, intense competition from local players and multinationals as well as volatility in currency and commodity markets. Consumer Products companies will need to ensure a well-thought strategy is in place to navigate through these challenges but will need to strike a balance between short-term pressures and medium to long term growth opportunities and allocate capital accordingly. The current volatile environment also provides opportunities for multinationals to enter new markets. Technology In Southeast Asia, the technology sector is seeing the continued rise of investment. 25% of the total number deals involved the technology sector in 2014 and the trend is expected to continue. This increased activity is not surprising, given the significant number of technology funds that have established a presence in the region, particularly in Singapore, over the past 24 months. Within technology sector, the increasing number of US$50m-plus investments has been related with e-commerce business. For last two years, technology companies have attracted worthy levels of investments and we expect that more e-commerce companies in Southeast Asia will attract large capital investment. Activity in SEA's power and utilities sector remains buoyant as additional generation capacity is needed in most markets to address growing demand and increase in electrification ratio. Indonesia's state-owned utility firm is notably keeping the private sector's business development teams busy responding to its call for 35 GW of additional generation. Recycling of capital is also on the agenda with ongoing M&A opportunities in Malaysia and Indonesia. After the October 2015 announcement that ASEAN member countries have agreed to a collective renewable energy target of 23% of the region's energy mix, SEA will likely play a bigger role in renewable energy, particularly in larger markets such as Indonesia, Thailand and the Philippines. Governments, investors and lenders will also be closely monitoring the results of the COP21 Paris, which may shape the future of Southeast Asia's power generation fuel mix that is currently heavily dependent on coal. Innovations in solar and wind technologies are slowly but surely making renewables a competitive source of energy. Governments in ASEAN are paying attention and adopting or improving the regulatory frameworks to promote and increase the share of renewable electricity. Abhay Bangi Healthcare and Life Sciences abhay.bangi@id.ey.com Geophin George Consumer and Industrial Products geophin.george@sg.ey.com Gilles Pascual Power & Utilities gilles.pascual@sg.ey.com Karan Khemka Education Parthenon EY karan.khemka@parthenon.ey.com Luke Pais Private Equity luke.pais@sg.ey.com Lynn Tho Government & Public Sector lynn.tho@sg.ey.com Patrick Hanna Financial Services patrick.hanna@sg.ey.com Sanjeev Gupta Resources sanjeev-a.gupta@eg.ey.com Seng Leong Teh Real Estate seng-leong.teh@id.ey.com Capital Confidence Barometer 17

18 M&A outlook Top 5 investment destinations Long-term growth prospects in Indonesia, stronger growth in the United States and the United Kingdom are making these countries popular investment destinations. India and Malaysia also remain attractive destinations for investors, notwithstanding recentconcerns about their economic growth and stability. 1. Indonesia 2. United States 3. United Kingdom 4. India 5. Malaysia Indonesia s long term prospects has never been in doubt. Many of our middle-market businesses have operated in challenging economic conditions. I believe that the growth opportunities in this market remain strong. The fall in Rupiah has also added the attractiveness of Indonesia. David Rimbo, Transaction Advisory Services Market Segment Leader in Indonesia 18 I Capital ConfidenceBarometer

19 Purandar Rao, Transaction Advisory Services Market Segment Leader in Singapore, discusses the current market conditions and outlook for the M&A market in Southeast Asia How is the current sentiment among corporates in Southeast Asia? I sense a cautious optimism in the market, with a very real eye on global macroeconomic conditions, which could get worse if the Federal Reserve eventually decides to increase interest rates. Political concerns and economic challenges in two of the large regional economies, Indonesia and Malaysia, with weakening currencies and increasing deficits certainly do not help to improve corporate sentiment. However, while downside risks to the global economy still exist, there is an over-whelming confidence from our clients that conditions are improving. This is also reflected in the results of the current Barometer. What is currently high on the corporate agenda of Southeast Asian companies? Get the house in order. We see companies starting to streamline operations, clean up their balance sheets and make their organizations leaner or shrink to grow. Where do you see opportunities and challenges for investors? Investors can benefit from lower valuations in commodity industries. There is also more talent in the market as companies have reduced their recruitment activities. Merger integration remains challenging: my observation is that most of mergers destroy shareholder value if not managed well. Capital Confidence Barometer 19

20 M&A outlook Selected markets in Southeast Asia and their key characteristics Singapore Malaysia Indonesia Being the M&A hub in Southeast Asia, Singapore is an indicator for other markets in the region. The city state has seen record M&A activity this year despite slow economic growth. This can be explained by business owners in stressed sectors looking to raise capital, tightening debt markets, or valuing arbitrage opportunities through privatization and spin offs. While downside risks to the global and regional economy still exist, there is an overwhelming confidence in the Singaporean business community that conditions are improving. Key opportunities are seen in lower valuations in commodity industries, good talent available in the market, opportunity for Asian companies to really make a quantum leap in their size and operations. Singapore s medium to long term fundamentals as a growth and consolidation platform for Southeast Asia remain strong. Local and foreign investors are generally cautious about the Malaysian and regional economic outlook. A general wait and see attitude towards domestic business expansions in view of the modest economic outlook and local currency devaluation. Despite political uncertainties, there continues to be strong foreign investor interest in Malaysia. Astute investors are focusing on Malaysia s sound and attractive economic fundamentals, infrastructure expansions and long-term growth prospects. In the past five years, FDI into Malaysia grew 50% CAGR ( ) reflecting investors' confidence in Malaysia. It is important to note that Malaysian corporates continue to seek technology and synergistic business acquisitions around the region. As Malaysia advances towards a developed nation status by 2020, transport infrastructure remains a priority with the construction of the MRT and LRT Lines and a number of other major infrastructure projects in the pipeline, including the KL- Singapore High Speed Rail and the upgrading of its regional airports. Strategic investors with a longer-term investment view of Malaysia s innate economic strength, particularly its diversified economic base and its undervalued currencywill be open to a wide array of M&A and investment opportunities across Malaysia s growth corridors. Malaysia's newly launched Principal Hub Incentive may well spur MNCs to locate their operations hub in the country. Indonesia has recently seen an economic slowdown, declined FDI inflows and increased outflows from its capital markets, as well as a drop in the Rupiah, mainly on the back of a widely expected increase in interest rates by the Fed and weaker prices for the country s coal and palm oil. Despite negative headlines on the country s economic status, business sentiment in Indonesia remains robust and the country is relatively shielded against direct impacts from an economic slowdown in China as exports to China represent less than 2% of Indonesia s 2014 GDP1. The Government under President Joko Widodo has introduced various measures to revive slowing growth from currently 4.7% (Q3 2015) to its ambitious target of 7% -- through increased Government spending on infrastructure projects and universal health care but also by introducing new tax holidays of up to 25 years. Business Monitor International (BMI) in its latest September 2015 economic outlook foresees Indonesia among the three bright stars in Southeast Asia due to its large and young population base, wealth of natural resources and the efforts of the current government to restructure the economy. 20 I Capital ConfidenceBarometer

21 M&A outlook Selected markets in Southeast Asia and their key characteristics Thailand Philippines Vietnam Southeast Asia s second-largest economy, Thailand, has seen significant political volatility, and continues to remain in political transition. Corporate sentiments on economic outlook remains positive but companies have kept close eye on government spending to boost the local economy, global oil price and currency fluctuation. Some companies are expecting stable or declining corporate earnings and equity valuations. On the M&A market, an increasing number of transactions from both inbound and domestic deals have been observed by market insiders. Volatile market sentiments and a lower Thai Baht have opened up M&A opportunities for those who are able to factor in uncertainties of economic conditions in their valuations. The business sentiment on the local economy is very positive and this is voiced by out by many analysts and economists, as well as by executives in various sectors. While the Philippines remains a very good location for investments, particularly in consumer related sectors due to its good demographics, it has lagged behind most Asian countries due to certain factors, largely the inadequacy of infrastructure and the perception of corruption. Additionally, restrictive laws and regulations, including foreign ownership restrictions, have historically damped some investor interest. However, this is changing. The Government under President Aquino has made progress in improving the country s infrastructure and public governance by increased transparency and accountability of government agencies with positive effects on investor confidence. Economic reforms have helped increase the FDI to an all-time high of over US$6 billion in BMI in its latest September 2015 economic outlook foresees the Philippines among the three bright stars in Southeast Asia due to its ongoing political and economic reforms gaining traction. Additionally, the country s economy is largely consumerdriven, i.e., less dependent on exports (which represent 29% of its 2014 GDP) and slowing economy in China. The corporate sector is upbeat about the country s economic performance, as GDP growth is forecast to grow from 6.2% in 2015 to 6.9% in Factors underpinning this optimism include improved macroeconomic stability, the recently-concluded Trans- Pacific Partnership (TPP) and other free trade agreements, a reduction of foreign ownership restrictions and a range of institutional reforms. BMI in its latest September 2015 economic outlook foresees Vietnam among the three bright stars in Southeast Asia due to a sustained export resilience, ongoing reform measures by the government which is expected to improve the country s investment climate. Key challenges include a lack of corporate transparency, especially from the perspective of foreign buyers; current delays in the passage of sub-legislation governing M&As; and a general lack of domestic awareness around post-m&a integration issues such as cultural conflicts. Companies are aligning their agendas to take advantage of M&A opportunities. The corporate sector is increasingly cognizant of the coming M&A wave as a result of the ASEAN Economic Community coming into effect at the end of this year. Capital Confidence Barometer 21

22 About this survey The Global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas EY s framework for strategically managing capital. It is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). Our panel comprises select global EY clients and contacts and regular EIU contributors. In August and September, we surveyed a panel of more than 1,600 executives in 53 countries, 123 from Southeast Asia; more than 50% were CEOs, CFOs and other C-level executives. Respondents represented 19 sectors, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, diversified industrial products, and construction and real estate. Surveyed companies annual global revenues were as follows: less than US$500m (30%); US$500m US$999.9m (18%);US$1b US$2.9b (24%); US$3b US$4.9b (8%); and greaterthan US$5b(20%). Global company ownership was as follows: publicly listed (57%), privately owned (33%), family-owned (7%) and government/state owned (3%). 22 I Capital ConfidenceBarometer

23 For a conversation about your capital strategy, please contactus: Global and Regional PipMcCrostie Global ViceChair Transaction Advisory Services pip.mccrostie@uk.ey.com Follow me Market Segments Purandar Rao Singapore Market Leader Transaction Advisory Services purandar.rao@sg.ey.com JohnHope Asia-Pacific Leader Transaction Advisory Services john.hope@hk.ey.com David Rimbo IndonesiaMarket Leader Transaction Advisory Services david.rimbo@id.ey.com Harsha Basnayake ASEAN Regional Managing Partner and Asia-Pacific Deputy Leader Transaction Advisory Services harsha.basnayake@sg.ey.com George Koshy Malaysia Market Leader Transaction Advisory Services george.koshy@my.ey.com Contacts Ratana Jala Thailand Market Leader Transaction Advisory Services ratana.jala@th.ey.com Renato Galve Philippines Market Leader Transaction Advisory Services renato.j.galve@ph.ey.com Anthony Duong Vietnam Market Leader Transaction Advisory Services tony.duong@vn.ey.com Ruwan Fernando Sri Lanka Market Leader Transaction Advisory Services ruwan.fernando@lk.ey.com Competencies Seng Leong Teh Transaction Support seng-leong.teh@id.ey.com Vikram Chakravarty Capital Transformation & Operational Transaction Services vikram.chakravarty@sg.ey.com Benjamin Koesmoeljana Transaction Tax ben.koesmoeljana@id.ey.com Andre Toh Valuation & Business Modeling andre.toh@sg.ey.com Rajagopalan Seshadri Restructuring rajagopalan.seshadri@sg.ey.com Lynn Tho Infrastructure Advisory lynn.tho@sg.ey.com Luke Pais Mergers & Acquisitions luke.pais@sg.ey.com Joongshik Wang Corporate Finance Strategy joongshik.wang@sg.ey.com Capital Confidence Barometer 23

24 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Transaction Advisory Services How you manage your Capital Agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you re preserving, optimizing, raising or investing capital, EY s Transaction Advisory Services combine a unique set of skills, insight and experience to deliver focused advice. We help you drive competitive advantage and increased returns through improved decisions across all aspects of your Capital Agenda. APAC no: ED None 2015 EYGMLimited. All Rights Reserved. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specificadvice. ey.com/ccb