2012 CFO Outlook Asia A Survey of Chief Financial Officers

Transcription

1 2012 CFO Outlook Asia A Survey of Chief Financial Officers Asia s Prospects Shine Relative to the West CFOs across Asia are combining optimism with caution. Will the Year of the Dragon prove that Asia is immune to the troubles of the West? Read the full story in our inaugural CFO Outlook Asia MAJOR FINDINGS The views of Asia s decision makers ECONOMIC OUTLOOK Upbeat on Asia, lukewarm on the world COMPANY PERSPECTIVE Growth anticipated in 2012 MERGERS & ACQUISITIONS Domestic focus FINANCING Funding growth at a higher cost

2 About the Survey For the past 14 years, Bank of America Merrill Lynch has commissioned an annual survey which interviews CFOs of mid to large sized U.S. companies. For the first time, this survey has been conducted in Asia. This inaugural 2012 CFO Outlook Asia report provides fresh insight into how large companies in the region assess the current and future state of seven Asian economies, the regional economy and the world economy. The survey also gathers valuable insight from CFOs in Asia about their company s revenues, profits, financial concerns and international activities. From 28th September to 30th November 2011, CFO Innovation Asia completed 465 interviews with financial executives in Australia, China, India, Hong Kong, Japan, South Korea and Singapore with annual global revenues of at least US$500 million. These executives came from a range of multi-national, regional and single country companies. The responses were weighted according to the size of the GDP of the countries to construct a composite picture of the Asian economy. China (38%) and Japan (35%) were given the heaviest weight, followed by India (11%), South Korea (7%), Australia (6%), Hong Kong (1%) and Singapore (1%). Since more than 85% of those surveyed for this study have C-Suite titles, and the most common job title is CFO, all participants are referred to as CFOs throughout the report. The statistical range of error for the total sample is plus or minus 4%. When significant differences are noted throughout the report, they are based on a 90% confidence level.

3 INTRODUCTION Asia s Prospects Shine Relative to the West Asia CFOs anticipate growth closer to home; economic fires from the West loom in distance As 2012 begins, CFOs across Asia are combining optimism with caution, tending to be upbeat about the prospects for their own companies in the year ahead while remaining mindful of the threats posed by economies in the West namely the European debt crisis and the U.S. budget deficit. CFOs in Asia predict regional and domestic growth for themselves and a rather cautious view of the West. However, all recognized that success in Asia is contingent upon the trajectory of the West s economic ailments. Will the Year of the Dragon prove that Asia is immune to the troubles of the West? Asian CFO s Look Inward to Expand Cautious optimism for Asia is the overriding theme of Bank of America Merrill Lynch s inaugural CFO Outlook Asia report. Bringing together responses from 465 CFOs across seven countries in Asia Australia, China, India, Hong Kong, Japan, Korea and Singapore the report looks to tap into the views of the finance chiefs of Asia s large corporations, building a detailed picture of the issues affecting those companies in the coming year. The report also identifies areas where growth and activity are most likely to be focused. The view of responses by country reveals some telling geographical variations across the region. Can Japan s economic outlook be so dim with a roaring Chinese dragon in the backyard? The first CFO Outlook Asia report could not come at a more opportune time. While the global financial crisis of 2008 is still fresh in the minds of CFOs around the world, there is widespread concern that the next 12 months could see the return of some challenging market conditions. In Asia, where the impact of the crisis was less severe than in Western economies, CFOs report they are upbeat on their own revenue expectations but they are far from complacent where economic factors are concerned, and confidence in the economy today is tempered by caution about the year ahead. China s Economic Dragon Fires Up Regional Growth China is a key area of interest within the survey s findings. The country s standing in the global arena was recognised a year ago when China was pronounced the world s second largest economy. In 2012, China is set to be a hub of M&A activity, according to the results of the survey, and CFOs across the region are concerned about the threat posed by competition from China but also need its continued growth. As well as providing insights into the nature of China s importance within the region, the report highlights the biggest challenges faced by finance chiefs in China and their plans for Meanwhile the survey also drills down into the views of Asia s CFOs on a wide range of topics including M&A plans, asset bubbles, the availability and cost of funding, capital expenditures and international trade. The credit crunch that plagues the West does not appear to worry the CFOs of Asia - only ten percent of CFOs saw credit availability fall last year. M&A activity is expected to rise with CFOs looking to buy in Asia, but bargains are not anticipated. Bank of America Merrill Lynch would like to take this opportunity to thank the many CFOs who took the time to share their views on these important topics. In future editions of this survey we will look to build on these findings and pinpoint how CFOs views are evolving over time. Matthew Koder Head of Global Corporate & Investment Banking, Asia Pacific

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5 Table of Contents 02 Major Findings 06 Economic Outlook 07 Current State Asia and the World Economy Australia, China, Hong Kong, India, Japan, South Korea and Singapore 08 Economic Forecast 08 Economic Concerns 10 Sensitivity to a Global Slowdown 11 Domestic Opportunities; Global Threats 12 Company Perspective 13 Revenue and Profit Expectations 16 Capital Expenditures 17 International Trade 18 Mergers and Acquisitions 19 M&A Activity 20 Purchase Price Multiples 21 M&A Targets 22 Spotlight on China 24 Financing 25 Financing Needs 26 Financing Purpose 27 Financing Types 28 Financing Availability 28 Financing Costs 29 Appendix A: Comparison with key results from U.S Large Corporate Outlook survey 30 Appendix B: Survey Demographics

6 Major Findings Key findings of the 2012 CFO Outlook Asia are summarised below. These reveal how CFOs in Asia view the economy of where they are based, as well as the regional and world economies. The findings also provide insights into corporate performance, M&A plans, financing needs and the actions being taken in response to the possibility of another downturn. Economic Outlook On a weighted basis, with the assessment of respondents from China and Japan given the most weight because these countries account for more than 70% of Asia s regional economy, CFOs generally have a more positive view of Asia s economic prospects than they do of the world economy. Asian Economy: CFOs give the current state of the regional economy an average score of 5.9 on a scale of 1 to 10, with 1 being extremely weak and 10 being extremely strong (for comparisons with figures from the U.S. survey see Appendix A). This is higher than their rating for the world economy, and is higher still for the Asia ex Japan region at 6.5. CFOs rate the state of Asia's economy (ex Japan) as strong at 6.5 out of 10 Chinese Economy: China based CFOs give this economy an average score of 7.5, the highest score given to the seven Asian economies surveyed, despite a slowdown in GDP growth as the government fights inflation and moves to avert asset bubbles. Hong Kong Economy: CFOs based in Hong Kong give this economy an average score of 6.1, which is lower than either Australia or China. This result reflects Hong Kong s exposure to the risks in Europe and the U.S. because of its reliance on financial services and exposure to international trade. Indian Economy: India CFOs that we surveyed give this economy an average score of 6.1. While the country is more inward-looking than others in Asia, and therefore more insulated from negative global trends, it is struggling with inflation and a precipitous fall in the value of the local currency. Japanese Economy: Respondents based in Japan are the most pessimistic. They give an average score of 4.1, the lowest of the seven economies surveyed. The country has yet to recover from the bursting of its asset bubble economy in the 1990s and a quick succession of prime ministers is unhelpful. World Economy: CFOs give the state of the world economy an average score of 4.7, more than a full point lower than their assessment of the regional economy. Australian Economy: Respondents in Australia give this economy an average score of 6.6, reflecting the country s mining and commodities boom. South Korean Economy: CFOs based here give this economy an average score of 6.0, higher than Japan and about the same level as Hong Kong and India. Through its huge conglomerates, South Korea is particularly exposed to the global economy possibly explaining its relatively low score, second only to Japan. Singaporean Economy: CFOs based in Singapore give an average score of 6.4, which is slightly higher than Hong Kong, its peer in terms of exposure to world trade and status as a financial centre CFO Outlook Asia

7 Major Findings Whilst Asian CFOs remain positive about the outlook for 2012, their optimism is more tempered. Thirty eight per cent say GDP growth in their own countries will be flat while 27% believe it will contract. Only 32% see an expansion. The most cautious are CFOs in Japan, where 44% say their country s GDP growth will contract in In China 55% anticipate flat GDP growth in that country, as do 40% of CFOs in Singapore and 38% in Korea. This cautiousness may be traced to concerns about the potential impact of a wide range of influences on their country s economy. On a scale of 1 (not a concern at all) to 10 (significant concern), the European debt crisis registers at 7.7, making it the region s biggest worry. The other significant concerns include the U.S. budget deficit/debt ceiling (7.4), oil prices (6.9), economic slowdown in China (6.9), domestic politics (6.7) and inflation (6.6). 32% expect GDP growth to rise in their countries in 2012 CFOs in Asia are also worried about potential asset bubbles that could hinder economic growth in their country. The top concerns are real estate prices and energy prices (58% each). The majority are also concerned about rising local currencies (51%). CFOs in Hong Kong (96%), Singapore (86%), South Korea (76%) and China (73%) are the most worried about property prices. Asked how sensitive Asia s economies are to a global slowdown, the CFOs of Asia s large companies give an average score of 7.0 on a scale of 1 (not at all sensitive) to 10 (extremely sensitive). Company Perspective For all the worries about the macro-economic picture, the majority of CFOs in Asia (58%) still forecast revenue increases in More than half of CFOs (52%) also expect higher profits, particularly those in India (68%), Australia (60%) and Singapore (54%). That said, Asia s CFOs recognise that financial factors can upend expectations in these volatile times. On a scale of 1 (no concern at all) to 10 (significant concern), revenue growth garners an average score of 7.3, making it the most serious financial concern along with cash flow (7.1). Other significant financial concerns include strength of the local currency (6.9) and domestic competition (6.7). Unemployment levels do not seem to be a serious concern in Asia it is given a score of 5.0. Labour costs (6.6) and consumer confidence (6.3) are more immediate worries. Asia s companies are split between those that plan to increase capital expenditures in 2012 (39%) and those that intend to keep capex at 2011 levels (38%). Only 16% expect lower capex in the year ahead. Asia remains outward-looking where international trade is concerned. Sixty-six per cent of companies surveyed sell to foreign markets, 57% buy products and services abroad and 56% have international operations. The proportion of exporters is highest in Singapore (86%), Japan (77%), Hong Kong (66%) and China (64%). Sixty-four per cent of the companies that sell to foreign markets expect sales to expand in Asian markets, indicating that intra-asian trade is likely to remain robust in Sales to the U.S. and Western Europe, the traditional destinations of Asian exports, are not expected to grow by many CFOs only 35% of companies that sell to the U.S. and 33% of companies selling to Western Europe expect higher sales. Unsurprisingly CFOs expected more growth to come from the emerging economies than from the developed economies. After Asia, South America was the second region where CFOs most expected to see revenue growth with 40% expecting growth here. This was followed by Africa (34%), the Middle East (32%) and Eastern Europe (31%) CFO Outlook Asia 3

8 Mergers and Acquisitions (M&A) The key trend observed when asking CFOs about their intentions for M&A was the focus on domestic acquisitions. Over 50% of CFOs considering M&A in 2012 were looking to do so in their home nation. Thirty-four per cent of CFOs surveyed expect to participate in a merger or acquisition in Of those forecasting M&A activity, 83% intend to be the acquiring company. The foremost reason cited for planned M&A is to ensure growth (74%), followed by industry consolidation (39%). 34% Expect to engage in mergers and acquisitions in 2012 When viewing the group together, the main acquisitions targets are Chinese assets and companies (53%), reflecting the strong domestic M&A scene in China as well as the attraction of this market for companies in Hong Kong and Singapore. Twentynine per cent of CFOs are interested in targeting the U.S. Only 22% of the region s CFOs say purchase prices in their industry as a multiple of EBITDA will fall in Thirty-one per cent expect values to rise, while 28% believe purchase prices will stay at 2011 levels.

9 Major Findings Financing Thirty-seven per cent of companies in Asia expect their borrowing needs to increase in 2012, with another 37% forecasting that their borrowing needs will remain the same. Only 11% will not borrow at all. The majority of CFOs did not experience a credit crunch in Asia in 2011, with 45% having seen credit availability remain at the same level as the previous year. Thirty-nine per cent even say that credit availability had somewhat increased or significantly increased (27% and 12% respectively). Asked what types of financing their company plans to use in 2012, 68% of CFOs in Asia say they will borrow from a bank. Not surprisingly, at a time of increasing cash balances, 44% also indicate that their company will use internal sources or self-funding. The high proportion of companies that will use self-funding is consistent with Asia s generally conservative approach to business. It may also be a direct result of expectations that the cost of capital will increase in % of CFOs in Asia believe this is the case. 44% of CFOs will use internal capital as a source of financing

10 Economic Outlook

11 Economic Outlook Economic Outlook Upbeat on Asia; lukewarm on the world Current state Q: How do you rate the current state of the economy of the country where you are based and of the world economy overall? Economic Performance Asia is a collection of diverse countries that differ in size, population, economic and political systems, ranging from China s mix of command and capitalist approaches to the free market philosophies in Australia, Hong Kong, Japan and Singapore. What is the collective judgement of the region s CFOs? Despite the potential negative effect on Asia from the fiscal and economic problems of Europe and the U.S., the CFOs of Asia s large companies are relatively positive about the current state of Asia s economy, giving an average score of 5.9 on a scale ranging from 1 (extremely weak) to 10 (extremely strong). In contrast, CFOs have a more cautious view of the world economy, giving an average score of 4.7 more than a full point lower than their rating for Asia. Whether the economic performance of Asia can decouple from developed markets is a topic that has been contested for many years. Although the survey shows that CFOs are more positive about the Asian economies than the developed world, they do believe that the region would be negatively impacted by a global slowdown. The survey results indicate some level of support for this theory from Asia s CFOs at least where current economic conditions are concerned. Outlook for Local and World Economy Australia Hong Kong South Korea 6.4 Singapore 4.5 Country Performance 5.9 Asia weighted 4.7 While the overall score for Asia is Current state of the local economy positive, there are significant variations Current state of the world economy in the average scores given for each of the seven Asian economies. Japan garners the weakest average score of 4.1 reflecting its inability to shake off the economic stagnation that resulted from the bursting of its asset-bubble economy in the 1990s. In contrast, China scored an average of 7.5, the highest among the economies surveyed. CFOs of the remaining Asian countries are also positive on economic prospects: Australia (6.6), Singapore (6.4), India (6.1), Hong Kong (6.1) and South Korea (6.0) although with these five economies all in a close range, China s score stands out as clearly the strongest economy in the group. China India Japan CFO Outlook Asia 7

12 Economic Forecast Q: Looking ahead to 2012, do you expect the economy of the country where you are based to expand, contract or stay the same? The current level of confidence in the region s economy weakens when we look out to Thirty-eight per cent say their local economy will experience flat GDP growth, while 27% expect a contraction. Pessimism is particularly rife in Japan, where 44% of CFOs expect GDP growth to slow in the coming year. Still, 32% are positive and optimism is most evident in India, where 76% forecast expansion in 2012, and Australia, where 54% expect to see growth. In China, the world s second largest economy, CFOs are more cautious, with 55% predicting flat growth. Economic Outlook - No Clear Direction Stay the same 38% Decline/Don t know 3% Expand 32% Contract 27% Stay the same Contract Expand Decline/Don't know Economic Concerns Q: How would you rate your concern about macroeconomic influences on the economy of your country? The caution in 2012 is not surprising given the negative news flow about the severe fiscal and economic problems in Europe and the U.S. and the possible next wave of a second global downturn. Indeed, Asia s CFOs are particularly worried that events in the West may have a negative impact on the business economy. On a scale of 1 (not a concern at all) to 10 (significant concern), the European debt crisis gets an average score of 7.7, making it the top concern. The next most pressing concern is the issue of the U.S. budget deficit/debt ceiling, at 7.4. One country stands out for being relatively unconcerned about the problems of the West. India gives a grade of 6.1 to the European debt crisis and 6.4 to U.S. budget deficit/debt as concerns all other countries rate these concerns at 7 or higher. Only half of the Indian enterprises in this study sell to foreign markets, for example, compared with 64% in China, 77% in Japan and 86% in Singapore. CFOs of large companies in India may regard their economy as partly insulated from the problems in Europe and the U.S., although GDP growth slowed in the wake of the 2008 global financial crisis CFO Outlook Asia

13 Economic Outlook An economic slowdown in China is a significant concern across Asia, garnering an average score of 6.9 (as did concern over oil prices). This is understandably a concern within China (8.1), but Australia is particularly worried too (7.8), as is Hong Kong (7.5). These two countries are highly exposed to the Chinese growth story. The Australian mining industry is dependent on Chinese demand, while Hong Kong re-exports made-in-china products and provides China with financial services. Domestic politics (6.7) are a concern in Asia, particularly in China (7.2), which is due to change its top leadership in Inflation is also a significant concern (6.6) in the region as a whole except in Japan (4.1), where the risk is deflation. Inflation anxiety is highest in China (8.8), where the consumer price index hit a three-year high of 6.5% in July China s inflation rate slowed to 4.2% in November, but CFOs in that country are evidently still worried about inflation. Hong Kong (7.3) and India (7.2) are two other economies where inflation is a top concern. Both have seen consumer prices rise sharply in Credit availability does not rank as high in the list of concerns for the region as a whole (5.9), although it is a key worry in Australia (7.3), China (6.9) and India (6.7). Credit is less of an issue in Japan where CFOs rate their concern about credit availability at just 4.6. Global Issues Are Greatest Concern Rating scale 1 (not a concern at all) to 10 (significant concern) European debt crisis US budget deficit/debt ceiling Economic slowdown in China Oil prices Domestic Politics Inflation Credit availability Conflicts in the Middle East Regulatory Issues such as Basel III, Dodd-Frank, local regulations Economic slowdown in India Terrorism CFO Outlook Asia 9

14 Q: Which of the following potential asset bubbles is a concern in terms of the negative impact on economic growth in the country where you are based? Potential asset bubbles are also a concern for CFOs because of the negative impact these can have on the economy and businesses. Of the seven asset bubbles listed, real estate and energy prices (both 58%) are key concerns. High property values are especially worrying in Hong Kong, where nearly all CFOs (96%) flag it as a concern. Real estate is also a big concern in Singapore (86%), South Korea (76%) and China (73%), though this may have lessened given the recent fall in Chinese real estate prices. Overinflated property prices were, of course, a key factor behind the mortgage crisis in the U.S., which contributed to the ongoing economic malaise there. CFOs in Australia are concerned about a bubble forming in energy prices (66%) because of the high energy usage in its mining industry. Energy prices are the main worry in Japan (63%), but for a different reason. Enthusiasm for nuclear energy has waned there because of the nuclear accident in Fukushima in 2011, which means there will be higher demand for natural gas and oil to fire power plants. Asset Bubbles Energy prices Currencies 51% Mining Oil 48% Rare earths 25% Gold 21% 19% Totals do not add up to 100% because multiple answers are allowed. 58% Real estate 58% Sensitivity to a Global Slowdown Q: How would you rate the sensitivity of economic growth of the country where you are based to a global slowdown? If the problems in Europe and the U.S. cause a global economic slowdown in 2012, the CFOs of Asia s large companies believe the region s economy will be negatively affected. Asked how sensitive the economies of their own countries are to a global slowdown, on a scale of 1 (not at all sensitive) to 10 (extremely sensitive), the CFOs give an average score of 7.0. With an average score of 7.7, Japanese CFOs surveyed regard their country as most exposed to a global slowdown. Like Japan, Singapore (7.5) and South Korea (7.4) are major exporters. Hong Kong (6.7) is exposed to world trade too, but this is countered by China (6.6), which is encouraging domestic consumption to wean the economy from too much reliance on exports. Spending by Chinese tourists in Hong Kong is helping keep consumer sales strong there. With a score of 6.1, Australian CFOs consider their economy as the least sensitive of the seven economies. Notably, Australia was one of the developed countries which was least affected by the 2008 global financial crisis. Sensitivity to Global Slowdown Rating scale 1 (extremely sensitive) to 10 (not at all sensitive) Japan 7.7 Singapore 7.5 South Korea 7.4 Asia, weighted 7.0 Hong Kong 6.7 China 6.6 India 6.3 Australia 6.1 Don t know and decline to answer responses were stripped out in calculating average scores CFO Outlook Asia

15 Economic Outlook Domestic Opportunities; Global Threats While companies in Asia are generally optimistic about the outlook for regional economies, they remain on guard against the economic threats originating from the West, and as such, will adopt more conservative and domestically focused business plans for the years ahead. levels of concern on this point. Overall, on a scale of 1 (not at all sensitive) to 10 (extremely sensitive), Asia's sensitivity to a global slowdown was rated 7.0, with Japan deemed the most sensitive country and Australia the least. CFOs in Asia see opportunities within their own markets in the coming 12 months. While the world economy was rated 4.7 points out of a possible 10, the average score for Asia was significantly greater at 5.9. If Japan is taken out of the equation, the picture is even stronger with an average unweighted score of 6.5 across the remaining countries. For China, the world s second biggest economy, the figure was an impressive 7.5. However, confidence in the Asian economy today does not automatically equate to optimism going forward. While CFOs were relatively positive about the current state of their economies, the prognosis for the coming year was more cautious, with only 32% of CFOs expecting the economy of their own country to expand in 2012 and a similar number (27%) anticipating contraction. Only 25% of CFOs from China expected the economy to expand in the coming year. The survey finds that this more guarded outlook is directly related to the threats emanating from further afield as Asia s CFOs are clearly keeping a close eye on the unfolding economic problems in the West. Their two greatest economic concerns were the Eurozone debt crisis (7.7) and the U.S. budget deficit (7.4). The question is to what extent these factors will impact on the Asian markets and the results of the survey indicate significant The business focus of Asia s CFOs for the year ahead also point to a markedly domestic slant. The top reason cited for the purpose of financing was expansion within the country at 55%. Meanwhile, companies looking to grow by acquisition are largely planning to focus their efforts within the region. Over half of all CFOs considering M&A were doing so in their home nation in particular in China (86%) and South Korea (80%). When taken as a group, the top target market for M&A activities was China with 53% of those considering M&A looking here followed by Japan (32%), the U.S. (29%) and India and Western Europe (both 20%) again, showing a strong Asia focus. With so many companies in Asia focusing on opportunities within the region, it is unsurprising that CFOs in Asia regard domestic competition (6.7) as a much more significant concern than foreign competition (5.5). This focus on domestic opportunities tallies with the CFO s greater level of confidence in the Asian economy than in the global economy. In summary, CFOs in Asia see opportunities within their own markets in the coming 12 months but the economic threats from the U.S. and Europe are significant and CFOs believe these could have a negative impact on the countries of Asia CFO Outlook Asia 11

16 Company Perspective

17 Company Perspective Company Perspective Growth anticipated in 2012 Revenue and Profit Expectations Q: Do you expect your company s revenues and profits to grow, contract or stay the same in 2012? Despite the consensus expectation for flat economic growth in 2012, the majority of CFOs in Asia (58%) still expect their own companies revenues to grow this year. The most optimistic are CFOs based in India (77%), followed by those in Singapore (64%), China (60%) and South Korea (60%). The most pessimistic country is Japan, where only 49% of CFOs expect revenue expansion. While 58% of CFOs in Asia expect revenues to increase in 2012, fewer (52%) forecast rising profits. This indicates that some companies are sacrificing profit margins to obtain greater market share. This appears to be the case in Korea, where only 42% of CFOs expect rising profitability compared with 60% who forecast higher revenues. The gap between revenue and profitability expectations is also quite wide in China (60% and 49%), Singapore (64% and 54%), India (77% and 68%), and Hong Kong (58% and 50%). Revenue & Profits to Grow in 2012 Australia China Hong Kong India Japan 60% 49% 58% 50% 49% 49% 58% 60% 77% 68% South Korea 42% 60% Singapore 64% 54% Revenue Profits 2012 CFO Outlook Asia 13

18 Q: In your company, how much of a financial concern are company specific issues? While Asia s CFOs are attuned to the obstacles that may stand in the way of growth, on a scale of 1 (no concern at all) to 10 (significant concern), revenue growth is the top financial concern (7.3). Cash flow (7.1) is another key worry, particularly in China (9.0), where the government has been tightening bank credit to fight inflation and prevent the formation of asset bubbles, although this policy is beginning to be reversed. Currency strength (6.9) is also a significant concern, especially in China (7.1), which is under pressure from the U.S. and other countries to let the renminbi rise against the U.S. dollar. It is also a concern in Australia (7.0), and Japan (6.7). While the fortunes of the renminbi (7.2) are a key concern in China, this is much less of a worry for Asia as whole (5.6). Domestic competition (6.7) was a more pressing concern than foreign competition (5.5), echoing the trend revealed throughout this document, that Asian CFOs are more confident about regional economies than the world economy. Unemployment is the least of the financial concerns in Asia (5.0). In this tight employment market, labour costs (6.6) are understandably a significant financial concern for companies. This is especially true in China (8.3) and Australia (7.6). Credit availability is not such a serious financial concern for Asia as a whole (5.7), but it is much more top of mind in Australia (7.1) and China (7.0). Focus on Revenue Growth & Cash Flow Revenue growth Cash flow Strength of your currency Domestic competition Labour costs Domestic Consumer confidence Energy costs inc. oil & gas Regulatory issues Corporate taxes Credit availability Global cross-border trade Domestic politics The renminbi Foreign competition Domestic unemployment CFO Outlook Asia

19 Company Perspective Q: Where do you expect foreign competition to come from? Thirty-five per cent of CFOs flagged foreign competition as a significant financial concern. Asked where they expect those rivals to come from, 72% point to China, which is encouraging companies to go regional and global. Seventy per cent say competition is coming from the U.S., where companies are looking for growth elsewhere given the difficulties in the U.S. economy. Foreign competition is also expected to come from Western Europe (53%), Japan (50%), South Korea (48%) and India (46%). It must be noted, though, that Asia s companies are more concerned about domestic competition than foreign rivals, as shown by the average scores given to these two financial concerns (6.7 vs. 5.5). Foreign Competition China Greatest Threat China US 76% 72% Western Europe Japan South Korea India 59% 53% 53% 49% Canada East Europe South America Australia Middle East Central America 29% 29% 27% 24% 24% 21% Africa 11% 2012 CFO Outlook Asia 15

20 Capital Expenditures Q: Do you expect your company s level of capital expenditures in 2012 to be higher, the same or lower than in 2011, or are you holding off on capital expenditures? Among all CFOs surveyed, 39% expect capital expenditures for 2012 to be higher compared with such spending in The rest are more conservative, opting to keep capex at 2011 levels (38%), lower spending (16%) or holding off from making capital expenditures altogether (3%). CFOs that are keenest to increase capital expenditures are those in China (48%), India (42%) and Australia (40%). CFOs in Asia were more aggressive in terms of capex in 2011, with 46% of CFOs saying their companies capital expenditures were higher than in 2010, indicating the increased caution of CFOs today. Capex Spend Decelerating Year on Year Australia 20% 34% 42% 16% 42% 40% China 13% 24% 60% 12% 31% 48% Hong Kong 16% 52% 32% 16% 48% 34% India 10% 41% 47% 19% 38% 42% Japan 8% 51% 35% 18% 43% 31% South Korea 18% 47% 29% 22% 44% 29% Singapore 14% 34% 42% 24% 40% 26% Asia, Weighted Average 12% 38% 46% 16% 38% 39% Lower than last year? About the same as last year? Higher than last year? CFO Outlook Asia

21 Company Perspective International Trade Q: Do you sell to, buy from, or have operations in foreign countries? Most of Asia s large companies are outward looking: 66% sell to foreign markets, 57% buy from foreign markets and 56% have operations in foreign countries. CFOs surveyed in Japan were the most internationally focused with 77% of their companies selling to foreign markets in addition to having operations abroad. Singapore is similarly outwardly-oriented with 76% of its large enterprises having operations overseas, followed by Hong Kong (72%). The least outwardly-focused are companies in China and India where, in both countries, just 39% had operations in foreign markets due to the huge opportunities in their domestic markets and government policies to promote domestic growth. Q: In which markets do you anticipate sales growth? Sixty-four per cent of CFOs in Asia expect their company s sales to grow in other Asian markets, indicating their belief that intra-asian trade will remain strong in CFOs who most anticipate higher sales in Asian markets are based in Australia (79%), Japan (73%), Hong Kong (70%) and South Korea (67%). South America is seen by 40% of CFOs as a growth area, while Africa is also an area of focus at 34%. Traditionally, Asian exports are destined for the developed markets of the West, but only a third of CFOs in Asia anticipate higher sales in the U.S. (35%) and Western Europe (33%). CFOs based in Hong Kong are the least enthusiastic about opportunities in the West only 27% of them expect stronger business in the U.S. and just 15% have the same expectations in Western Europe. CFOs in China (31%), South Korea (33%) and Singapore (33%) also anticipate relatively low sales growth in the West. Asia Key for Foreign Growth Asia (other than own country) 64% South America U.S. Africa Western Europe Middle East Eastern Europe Mexico or Central America Canada 40% 35% 34% 33% 32% 31% 29% 26% 2012 CFO Outlook Asia 17

22 Mergers and Acquisitions (M&A)

23 Mergers and Acquisitions (M&A) Mergers and Acquisitions (M&A) Domestic focus M&A Activity Q: Does your company plan to participate in any mergers or acquisition activities in 2012? In 2012, 34% of CFOs expect to be involved in M&A activities, particularly those based in China (49%) and in Singapore (42%). The least likely to do M&A are companies in South Korea (22%), Australia (22%) and Hong Kong (26%). Chinese CFOs Ready For M&A Australia 26% 52% 22% China 16% 35% 49% Hong Kong 24% 50% 26% India 34% 37% 29% Japan 44% 34% 22% South Korea 9% 69% 22% Singapore 32% 26% 42% Decline /Don't know No Yes Q: What are the primary reasons for M&A activities? The overriding reason for M&A activity in Asian companies is to ensure growth (74%), which is the reason given by all CFOs in Hong Kong planning to embark on this activity. Less common reasons include industry consolidation (39%), acquiring technology (26%) and enhancing production capabilities (25%). Government directives, sometimes cited as a driver of M&A in China, do not figure prominently among the reasons, even in China only 3% of CFOs based there say they are doing M&A because the government wants them to CFO Outlook Asia 19

24 Purchase Price Multiples Q: Do you think that the purchase price for companies in your industry as a multiple of EBITDA will increase, decrease or stay the same in 2012 compared to 2011? Some companies that plan to acquire assets or firms in 2012 may have to pay higher prices for them. Thirty-one per cent of CFOs in Asia expect that the purchase price for companies in their industry as a multiple of earnings before interest, taxes, depreciation and amortisation (EBITDA) will increase in However, 28% expect the multiple to stay the same, while 22% believe it will fall. A relatively high 12% say they do not know. A higher purchase price as a multiple of EBITDA is most commonly anticipated in India (41%), Australia (38%) and China (37%). Forty-two per cent of CFOs in Hong Kong expect lower purchase prices there. M&A Multiples Increase Australia 26% 24% 38% China 25% 27% 37% Hong Kong 42% 22% 18% India 18% 36% 41% Japan 18% 27% 22% South Korea 29% 36% 31% Singapore 26% 26% 24% Increase Stay the same Decrease CFO Outlook Asia

25 Mergers and Acquisitions (M&A) M&A Targets Q: Which region or regions is your company focusing on for M&A? Domestic focus is the overriding theme when it comes to M&A it seems that in an uncertain world, CFOs are focusing on what they know best. The only instances where more than 50% of respondents stated they were considering M&A were in relation to respondents domestic markets. The only exceptions to this were the CFOs of Hong Kong and Singapore, who were also significantly considering Chinese acquisitions (69% and 57% respectively), highlighting their strong economic and cultural links with this country. Twenty-nine per cent of CFOs who say their company will engage in M&A will target the U.S., while 20% will look at deals in Western Europe. More opportunities may arise in these Western markets as their economic problems put pressure on companies to downsize or sell assets to survive. Domestic Targets for M&A Australia China Hong Kong Singapore India Japan South Korea Australia China India Japan South Korea U.S. Canada Central America South America Western Europe Eastern Europe Africa Middle East > 50% 30 50% 15 30% 0 15% Chart shows subset of respondents looking to engage in M&A. CFO domicile on horizontal, country of interest for M&A on vertical CFO Outlook Asia 21

26 Spotlight On China The ongoing multi-year economic growth trajectory of China continues to garner commentary both from within the country and from outside. Having accounted for 25% of global growth in 2011, the view on China is central to the global view. And as the survey reveals, that view is one of economic confidence, both from its own CFOs (giving a score of 7.5 points out of 10) and from CFOs in other Asian countries (7.3). The flipside is the potential negative impact if this trend were to reverse: for the CFOs surveyed, economic slowdown in China was the third greatest economic concern (rated 6.9). CFOs in China remain focused on growth. Over half of the CFOs surveyed were looking to increase capital expenditure in 2012 (the highest across all nations surveyed) and 72% were considering financing for domestic expansion. Domestic focus was also key for those considering M&A with 86% considering M&A in China. While China CFOs are focusing on domestic expansion, over half see other countries in Asia as markets to grow sales in the coming year. And this has been recognized by their counterparts outside of China. Chinese companies are seen as a significant threat by their peers across the region. For companies citing foreign competition as a key concern, China was the country of greatest concern, with 72% pointing to foreign competition from China as a particular worry. Japan was the country reporting the highest level of concern about competition from China (79%). With the spotlight on China, what are China s CFOs most concerned about? When asked to assess the impact of

27 Mergers and Acquisitions (M&A) economic concerns on their businesses, China CFOs were more concerned than any others, scoring 7.0 on average across the 11 issues compared to the group average China of 6.2. The remains issue they very were much most concerned a developing about was economy, albeit one inflation whose (8.8) and sheer they were scale far means more concerned that it on influences this every other point than economy CFOs from in other countries region. (group average: 6.6) even though inflation in China had started to decline for the first time in two years by the time the survey was underway. Understandably, an economic slowdown in China was another particular concern for Chinese CFOs (8.1). External influences were also cause for concern, although in contrast to the group average, China ranked the U.S. budget deficit (8.0) as a greater concern than the European debt crisis (7.8). The only issue that Chinese CFOs were not concerned about was a potential slowdown in India (4.9 compared to a group average of 5.3), reflecting limited business relations between the two countries. On the question of financial concerns, China s CFOs were again the most concerned group with an overall average score of 7.2 compared to the group average of 6. They were more concerned about cash flow, domestic competition and corporate taxes than any other nation. China remains very much a developing economy, albeit one whose sheer scale means that it influences every other economy in the region. The confidence with which it is continuing its economic ascent has benefitted regional economies to date but this relationship is not entirely symbiotic, and a slowdown in China, caused by either internal or external factors, would have repercussions for the region.

28 Financing

29 financing Financing Funding growth at higher cost Financing Needs Q: Do you expect your borrowing needs to increase, decrease or stay the same in 2012 compared with 2011? Consistent with the outlook on capital expenditures, 37% of companies in Asia plan to increase borrowings in The rest will keep borrowing at the same level as in 2011 (37%), decrease their borrowings (11%) or not borrow at all (11%). Borrowing intentions are notably higher in Australia (54%), the market that has flagged credit availability as a significant financial concern. Forty-nine per cent of companies in China also intend to increase their borrowings in Only 11% of companies will decrease their borrowing, indicating that enterprises in general still see growth opportunities in Borrowing Needs Increasing Increase 36.8% Do not plan to borrow 10.7% Decrease 10.7% Decline/Don t know 5% Stay the same 36.7% Decrease Stay the same Increase Do not plan to borrow Decline/Don t know 2012 CFO Outlook Asia 25

30 Financing Purpose Q: For what purpose are you currently considering financing? Companies in Asia intend to borrow as well as utilise other forms of financing primarily to expand within their domestic market (55%). It is reasonable to assume that when the outlook is uncertain, as is suggested by this survey, that CFOs focus on what they know best: operations in their own countries. Indeed, CFOs based in India (76%) and China (72%) are the most aggressive in expanding domestically. In contrast, only 34% of companies in Japan will grow their business within that country and the same proportion plan to use financing to expand abroad. Fifty per cent of CFOs will use financing for working capital while 48% will use it for capital expenditure. The CFOs of large companies in China (59%), India (57%) and Australia (56%) are the most likely to use financing for working capital, while companies in India (67%) and China (65%) are also the most likely to utilise financing for capital expenditure. Refinancing, restructuring, recapitalisation and turnaround financing are not key financial activities in Asia, which is understandable given the growth environment in the region. Financing: Domestic Focus Expansion within country 55% Working capital Capital expenditure 50% 48% Acquisition Expansion outside of country Refinancing Restructuring 25% 29% 34% 43% Recapitalisation Turnaround financing 17% 20% CFO Outlook Asia

31 financing Financing Types Q: What type of financing does your company plan to use in 2012? Those CFOs who will increase borrowings or keep them at the same level as in 2011 (representing 74% of the total sample) were asked what type of financing their company plans to use in Their responses confirm the key role that banks play in Asia s business growth. Sixty-eight per cent of CFOs will use bank loans. CFOs in China (79%) and India (71%) are the most likely to choose bank finance. The second most popular source of financing is self-funding (44%), an indication of the level of cash reserves. Since the Asian financial crisis of 1997, many of the region s enterprises have adopted a conservative approach to business, opting to save funds for a rainy day rather than increasing dividends or conducting stock buybacks, for example. This conservative philosophy stood these companies in good stead during the 2008 global financial crisis and may serve them well again in the event of another downturn. Cash Reserves a Key Source of Funding Bank loans 68% Internal sources or self-funding 44% Asset-based financing Cash flow financing Leasing Public debt or equity Syndicated loans Commercial paper 33% 29% 29% 28% 27% 26% Securitisation Private debt Commercial real estate 16% 16% 20% 2012 CFO Outlook Asia 27

32 financing Financing Availability Q: Over the last year has the credit available to your company increased, decreased or stayed the same? Despite the uncertain global economic environment, 45% of CFOs in Asia say that the amount of credit available to their companies today has changed little in the last year. This is particularly true of Japan (62%), South Korea (56%) and Hong Kong (54%). Thirty-nine per cent of CFOs say credit availability has either somewhat increased (27%) or significantly increased (12%). This figure is even higher in China (49%), despite a government clampdown on bank lending there. In Australia over half of CFOs reported increased availability of credit in the past year. Credit Availability Increasing Australia 6% 10% 28% 36% 20% China 4% 9% 31% 32% 17% Hong Kong 4% 16% 54% 12% India 9% 40% 33% 14% Japan 5% 62% 20% 4% South Korea Singapore 9% 2% 6% 56% 48% 20% 20% 16% 12% Significantly increased Somewhat increased Stayed the same Somewhat decreased Significantly decreased Financing Costs Q: Do you expect your financing cost of capital to increase, decrease or stay the same in 2012 compared to 2011? Credit may be available in Asia, but 47% of CFOs say their cost of capital will increase in 2012, an indication that they expect interest rates to rise. Rates have already been raised in India, China and Australia, and so it is not a coincidence that these are the countries where expectations of increased cost of capital are high. Cost of Capital Increasing Australia China 10% 5% 29% 30% 56% 61% Hong Kong 6% 40% 50% India 15% 22% 62% Japan 17% 48% 28% South Korea 9% 49% 33% Singapore 6% 44% 38% Increase Stayed the same Decrease CFO Outlook Asia

33 Appendix A Appendix A Comparison with key results from U.S Large Corporate Outlook survey Asia US US$500 million+ US$500 million+ ECONOMIES World economy rating 4.7/10 45/100 Local economy rating 5.9/10 48/100 Percentage expecting local economy to grow in % 48% Percentage expecting local economy to contract in % 11% PEOPLE, PRODUCTS AND PERFORMANCE Company revenue expected to grow in % 66% Company profits expected to grow in % 48% Plan to increase capital expenditures in % 40% Plan to keep capital expenditures at 2011 levels in % 31% FINANCING Borrowing needs to increase in % 21% Borrowing needs to remain the same in % 64% Believe the cost of capital will increase in % 27% MERGERS AND ACQUISITIONS Expect to participate in M&A in % 49% Will be the acquiring company in M&A activity in % 86% INTERNATIONAL TRADE Percentage selling into foreign markets 66% 52% Percentage buying products and services abroad 57% 69% Percentage with international operations 56% 56% 2012 CFO Outlook Asia 29

34 Appendix B Appendix B Survey Demographics Asia Companies Job Title Chief Financial Officer 42% Vice President of Finance/Director of Finance 21% Chief Executive Officer 11% Financial Controller 7% Executive Vice President of Finance 6% Other Senior Vice President 5% Chairman of the Board/Board Member 3% Treasurer 3% Chief Operating Officer 2% Global Sales US$500 million to less than US$1 billion 50% US$1 billion to less than US$2 billion 16% More than US$2 billion 34% Countries India 21% Japan 20% China 16% Australia 11% Hong Kong 11% Singapore 11% South Korea 10% CFO Outlook Asia

35 The survey results and interpretations in this report are not intended, nor implied, to be a substitute for the professional advice you would receive from a qualified accountant, attorney or financial advisor. Always seek the advice of an accountant, attorney or financial advisor with any questions you may have regarding the decisions you undertake as a result of reviewing the information contained herein. Nothing in this report should be construed as either advice or legal opinion. Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ( Investment Banking Affiliates ), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., all of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed Bank of America Corporation. Survey prepared February ARN5W570.