Profits emerge as new focus in corporate Asia

By James T. Areddy

HONG KONG (Dow Jones): Whether stock markets ultimately manage a full recovery from the pummeling of last week, analysts say they expect the new economy's jolt to further focus corporate Asia on the bottom line.

By adding a new layer of skittishness among potential funding sources, the mini-crash has highlighted a need for companies to mark themselves as profit centers, they said.

Asia's equity markets have been the region's key source of new funding during the revival of economic growth in the past year. That is due partly to the global trend where equity finance has been behind most technology funding.

But it is also by default, as continued caution by Asian banks has found them largely on the sidelines.

Last week's market bump, where some regional markets set records for single-day selloffs, means that initial public offerings will become a lot harder to pull off at a time when other sources of new money simply aren't very much available. And analysts are pondering what will attract investment.

"Now, I think they want value with growth," said Jim Walker, chief economist of Credit Lyonnais Asia Ltd. "Three weeks ago, all they wanted was potential for growth."

Since there has been some rebound in the markets, analysts are reluctant to say the IPO window has been shuttered, only that a screen has been put in front of it to filter out "the fluff" from "the stuff," according to Walker. "There is going to be a refocusing," he said.

Companies that can show profit growth or at least a compelling indication that investment will lead to near-term profits should continue to draw investment, analysts said.

But "you really have to make the story very clear," said an official at a U.S.-based investment bank in Hong Kong.

Partly that's because of the investment already made. The market downturn has served as a reminder that "there are these concentration issues" in some firms of too many mandates from a narrow range of businesses, according to the U.S. investment banker.

Nevertheless, going forward, "it's an odd situation because you aren't going to turn business down," he said. Further, investors haven't shown much interest during the recent past in sectors outside of the new economy, he added.

Walker noted that the weakness in markets could foster a type of regional schism, where money continues flowing toward North Asia but not to Southeast Asia.

If investors aren't completely driven away from the technology sectors, he said the way existing companies use technology, rather than the way new companies develop it, could emerge as an important yardstick of confidence.

And there is more room for that in the northern parts of the region, since "there are much bigger 'old' economies in Taiwan and Korea" that make technology equipment or could modify their businesses to take advantage of technologies, he said.

If such an environment were to emerge, Southeast Asian companies will on balance have "a very tough job" of attracting funding compared with their northern neighbors, he added.

Markus Matthews, an analyst at ING Barings in Singapore, said that since the sentiment of investors globally has been shaken in recent days, he's counting on Asian companies to draw more money from home.

"I think it has to come from domestic sources," he said.

But since economic growth has now taken hold broadly across the region, "there is liquidity in these economies again, and I think (funding) has to be somehow from that," such as with more local-currency bond issuance, he said.

Even before the stock market slump, Asian companies were reporting efforts to lift profits in the absence of new lending. One key way is by squeezing out efficiencies to improve profit margins.

The chief executive of a Hong Kong manufacturing company said that when Asian economies were growing fast in the mid-1990s, rewards came from continual expansion and it was tough to identify efficiencies.

Now, with slower economic growth, "all of a sudden, you have more room to improve your efficiencies and quality," he said.

In a way, the CEO concluded, that's a "luxury."