Sector Roundup Asia-Pacific: Net Negative Bias Hits One-In-Five

Oct 6. 2020

Primary Credit Analysts Key Takeaways Terry E Chan, CFA Melbourne − Overall: Our net negative outlook bias has worsened, emphasizing the potential significant number of downgrades still to come. + 61-3-9631-2174 [email protected] − Assumptions and risks: While a general recovery is now underway, we project it will take one to three years for most sectors to normalize. Christopher Yip Hong Kong − What to look for: Recurring waves of COVID-19 infections, which could lead to the re-imposition of government restrictions on travel and people movement. An uneven trajectory of business and [email protected] consumer demand could weigh on credit conditions. +852-2533-3593

Senior Analyst Sushant Desai The net rating outlook bias has slightly worsened to negative 19% (one out of five issuers) as of August 2020, from negative 17% in May 2020. S&P Global Ratings took a slew of negative rating actions on Asia-Pacific Research Analyst issuers, including outlook revisions and CreditWatch placements, over the past six months. More than one in Michelle Hsiung three corporate and sovereign issuers saw such actions from March to end-August 2020 (see charts 1 and 2). The nonfinancial corporate sector was the hardest hit with a net outlook bias of negative 25% (see table 1). Corporates are struggling with a slump in demand and continued uncertainty over business conditions. Financial institutions are facing a second-order effect with a negative rating bias of 17%.

We calculate the net rating bias by deducting the percentage of negative outlooks and CreditWatch listings against the percentage of positive outlooks and CreditWatch listings. A minus figure indicates that the percentage of negative outlooks and CreditWatch listings exceeds the percentage of positive outlooks and CreditWatch listings; and a positive figure, vice versa.

Chart 1 Asia-Pacific Issuers As Shaken As Europe’s Regional breakdown of actions on corporate and sovereign issuers due to COVID-19 and oil prices

Percentage with rating actions Percentage no actions

North America

Latin America

EMEA

APAC

0% 20% 40% 60% 80% 100% The colors are based on percent impacted compared to total issuer population with the lighter blue indicating the most rating actions. Data as of Sept. 28, 2020. Source: S&P Global Ratings Research.

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Asia-Pacific Sector Roundup

Chart 2 Issuers Hit By COVID-19 And Oil Prices Rating actions by sector and region

Data as of Sept. 28, 2020. The colors are based on percent impacted compared to total issuer population with the darker pink and purple indicating the most rating actions. Source: S&P Global Ratings' COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date, published Sept. 29, 2020

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

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Asia-Pacific Sector Roundup

Table 1

Net Rating Bias Of Asia-Pacific Issuers By Sector, Aug. 31, 2020

Aug. Oct. Feb. May, Aug. No. of Notional 2019 2019 2020 2020 2020 entities average rating Auto OEM and suppliers -18% -17% -23% -71% -67% 36 BBB-

Building materials 12% -6% 0% -13% -20% 15 BBB-

Business services -23% -15% -8% -25% -36% 11 BB+

Capital goods -15% -15% -7% -15% -15% 39 BBB

Chemicals -2% -18% -20% -30% -46% 35 BBB-

Consumer products -18% -19% -20% -24% -21% 34 BBB-

Diversified 7% 6% 13% -7% -13% 15 A-

Hotels, gaming and leisure -25% -31% -25% -78% -67% 18 BB+

Media and entertainment -17% -29% -29% -22% -22% 9 BBB-

Healthcare 0% -11% -38% -38% -38% 8 BB

Investment company 0% 0% 0% 0% 0% 10 BBB+

Metals and mining -2% 2% -7% -24% -22% 55 BB+

Oil and gas -3% -9% -14% -34% -39% 28 BBB

Project finance 0% 0% 0% 0% 0% 0 --

Real estate development -8% -12% -8% -11% -11% 82 BB-

Real estate investment trusts 2% 2% -6% -25% -22% 51 A-

Retail -5% 0% 0% -31% -38% 16 BBB-

Technology -12% -19% -9% -17% -20% 41 BBB-

Telecommunications -29% -30% -32% -26% -26% 27 BBB+

Transportation cyclical -14% -19% -10% -55% -40% 20 BB+

Transportation infrastructure -3% -2% -3% -37% -31% 62 BBB+

Utilities -2% -2% 3% -5% -6% 97 BBB+

Total corporates -7% -10% -9% -25% -25% 709 BBB-

Financial institutions 12% 9% 8% -14% -17% 379 BBB+

Insurance 10% 11% 15% 1% -4% 180 A

Public finance 17% 16% 17% 2% -10% 93 A+

Sovereign 9% 9% 12% 4% -10% 21 BBB

Total issuers 2% 0% 1% -17% -19% 1,382 BBB+

Light blue colored cells indicate improvement from prior period, dark blue deterioration. Net ratings bias includes confidential ratings for all sectors with the exception of insurance and sovereign.

Corporate. The sectors with the most negative net rating bias remain hotels, gaming and leisure; auto; chemicals; transportation cyclical; and oil & gas (see table 1). Most of these sectors are exposed to the consumer-led slump in demand arising from government-imposed restrictions (e.g. lockdown) and self- imposed reductions in economic activity. We expect very weak global car sales in 2020, with the prospect of recovery highly uncertain. Gaming activity bottomed in the second and the pace of recovery depends on travel restrictions, and consumer behavior. In the chemicals sector, spreads remain below mid-cycle levels as subdued demand persists. In transportation cyclical, COVID-19 disruptions to people flows and supply chains have caused a slump in demand in Asia-Pacific. Airlines remain the most exposed segment. For oil and gas, production cuts and an economic recovery, albeit uneven, are boosting oil prices but recent increases in new COVID-19 cases pose a threat to demand.

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Asia-Pacific Sector Roundup

Financial institutions. Our net rating bias is negative 17% as of August 2020. We have taken significantly high numbers of negative rating actions on banks and finance companies in Asia-Pacific in Q2 2020, reflecting our view that COVID-19 will hit lenders hard.

We now expect many economies in the region to suffer deeper fallout than we previously estimated. Governments in many countries have struggled to control the outbreak and a vaccine is yet to be found. Consequently, we predict that credit losses will surge and earnings will fall across all banks in the region. In our view, most banking systems in the region won't stage a full recovery until 2023.

Downside risks include a more severe or prolonged hit to the economies which could happen if the U.S.-China strategic confrontation intensifies or if COVID-19 threatens greater economic spillover than we assume now. High private sector indebtedness and still-high valuations could trigger a disorderly correction in asset prices, which would heighten and prolong the asset quality problems.

Chart 3

Net Outlook Bias Distribution Of Asia-Pacific Issuers By Sector, Aug. 31, 2020

WATCHNEG NEGATIVE OTHER STABLE POSITIVE WATCHPOS

Gaming, hotels and leisure Auto Healthcare Transportation cyclical Chemicals Retail Oil and gas Business services Media and Entertainment Transportation infrastructure Technology Telecoms REITs Consumer products Capital goods Public Finance Metals and mining Building materials Financial Institution Real estate development Sovereigns Diversified Insurance Utilities

0% 20% 40% 60% 80% 100% REITS--Real estate investment trusts. Source: S&P Global Ratings.

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Asia-Pacific Sector Roundup

Insurance. The net rating bias is negative 4% as of August 2020. This reflects volatile investment markets on weakening capitalization. Slower macroeconomic conditions present headwinds to growth. Rates were already in "lower for longer" mode; now it's "lower for even longer." This and volatile capital markets may prompt insurers to hike risk appetite in their hunt for yield.

Foreign exchange (forex) volatility may affect Taiwan, Japan, and Korea players with big overseas investments. In addition, we anticipate insurers will review their actuarial pricing. Recurring waves of COVID-19 will prolong social distancing. This in turn displaces traditional insurance distribution channels (tied agency and bancassurance) as sales activities shifts online. Key risks include a flattening yield curve and revenue headwinds.

International public finance. The net rating bias is negative 10% as of August 2020. The slow recovery continues to threaten economic growth and undermine fiscal positions of local and regional governments (LRGs). Australian and Japanese LRGs have higher budgetary flexibility to respond to spending challenges. China and India, in comparison, remain dependent on central government actions to revive the economy.

Setbacks in containment could lead to further cuts to GDP forecasts for Asia-Pacific. Contagion fears will prevent travel and consumption, dragging down revenue for most LRGs, and some pandemic-sensitive public finance segments such as Australian universities.

Sovereign. The net rating bias is negative 10% as of August 2020. Geopolitical tensions add to complications amid a sluggish recovery from COVID-19. Debt is materially higher for most sovereigns due to policies to support growth and employment. Prolonged low interest rates should ease countries’ financing burden in the absence of risk events.

A sharp deterioration in investor sentiment in emerging markets could see swift reversals of capital flows out of these economies. The risk in abrupt reversals of capital flows is larger where, in response to lower global interest rates, governments ease domestic funding conditions to increase leverage in the public or private sector. If economic or labor market pressures mount further, China could allow faster credit growth to maintain social stability. Growing risks of financial instability would weaken China's capacity to provide sovereign credit support, with negative implications for other sovereigns in the region.

Structured finance. Consumer and business confidence will continue to determine the trajectory of the employment recovery, which is the key performance determinant for consumer asset classes, such as securitized auto loans or residential mortgage-backed securities. Government support measures are likely to continue to be managed over coming months with the full impact on borrower performance expected to take some time to be fully apparent.

Key risks include a second economic shock to China and Japan. Such shocks could be caused by further spread of the virus, or ripple effects from weak overseas markets to export-related sectors. Such an outcome, if prolonged, may feed through to consumer credit-backed and mortgage-backed loan performance. Another risk is the employment hit in Australia. The second round of lockdowns for the state of Victoria as well as restrictions on interstate travel will weaken employment in some sectors and geographies and may extend through to affected property markets in the longer term.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Katsuyuki Nakai Auto Tokyo + 81-3-4550-8748 Prolonged Coronavirus Cranks Up Ratings Strains [email protected]

Key Takeaways

− COVID-19 will likely knock global car sales to a 20% decline in 2020, with recovery highly uncertain thereafter.

− Downward rating pressure could also increase due to global supply chain disruptions.

− Asia-Pacific automakers still retain generally solid financial standing with low debt.

What's changed?

Downward rating pressure continues. Recovery prospects for global car sales and factory operations remain highly uncertain. Heavy research and development requirements, to make way for new technologies such as electric vehicles, add to strains.

Key risks

Severe sales weakness. Prolonged sales weakness in the U.S. and Europe would significantly hit automakers' earnings. An expanded COVID-19 outbreak in emerging markets may add to strains.

Supply chain troubles. A shortage of components, disrupted logistics, and labor shortages may cause kinks in global supply chains, disrupting auto production.

Key assumptions

Slow recovery in global sales. Global car sales are likely to increase 7%-9% in 2021, after dropping 20% in 2020. China will register a smaller decline (6%-9%) in 2020, compared with U.S. and Europe (more than 20%).

What to look for

Sign of earnings repair. We expect prolonged margin erosion could drive more downward rating actions among Asia-Pacific auto manufacturers.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Danny Huang Building Materials Hong Kong + 852-2532-8078 New Cases Could Throw A Spanner In The Works [email protected]

Key Takeaways

− Recovery is slowly progressing in the region, however pockets of COVID-19 resurgence could lengthen the process. Infrastructure investment, and to a lesser extent property investment, are supporting demand in China.

− Credit trends over the next few years are resilient, driven by our expectation of economic recovery and rated corporate efforts to deleverage by controlling capital expenditure (capex).

− Overcapacity, especially in China, may be a structural risk lasting beyond 2020.

What's changed?

Resurgence of new cases. As lockdown measures eased, some countries suffered upticks in new COVID-19 infections. Renewed social distancing measures could lengthen the process of economic recovery. China’s economy continues to improve, mainly supported by infrastructure investment and property investment.

Key risks

Rising infections. Second and third waves of COVID-19 have led to varying degrees of tightening rules across the region. Some places, including Hong Kong, have already started re-easing, while key cities in Australia, as a contrast, are maintaining their stricter controls. Failure to contain the virus will dampen demand; so, however, will prolonged restrictions on movement and travel.

Sharper global slowdown, slower recovery. Weaker-than-expected resumptions of economic activity in Asia-Pacific put pressure on building materials demand and prices. This adds to existing limitations, such as overcapacity and structurally declining infrastructure growth in China.

Key assumptions

Recovery to continue in coming quarters. We recently lowered our GDP forecast on India to a -9% contraction for the current fiscal year, compared to -5% previously. Otherwise, most of our regional outlooks remain little changed, though rising cases would slow the pace of recovery in 2021.

Curtailed capex and investment. We expect companies to restrain their capex and acquisitions over the next two years. Asia-Pacific economic growth, though gloomier than past years, still supports infrastructure investment.

What to look for

COVID-19 containment or vaccine. The pandemic's global path, and the speed of medical solutions such as vaccines, remain the ultimate determinant of economic recovery and demand for building materials. How governments balance the risk of rising cases and economic growth will drive different results among countries. Oversupply and liquidity risks remain for smaller players, particularly in China.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Makiko Yoshimura

Tokyo Capital Goods + 81-3-4550-8368 makiko.yoshimura Recession Will Continue To Depress Credit Quality @spglobal.com

Key Takeaways

− We expect a slow recovery in earnings and profits for Asia-Pacific capital goods companies.

− Credit metrics will likely deteriorate in 2020 in line with a weak global economy.

− Credit pressures for Asia-Pacific capital goods companies are limited compared with peers in the U.S. and EMEA.

What's changed?

Earnings recovery is not strong enough to change our net negative bias. Earnings of Asia- Pacific capital goods companies bottomed out in late March to June and have started to recover. While we have not taken material rating actions in the past quarter, our net negative bias on ratings outlooks reflects the earnings trend.

Key risks

Weak EBITDA is pushing leverage higher. While rated capital goods firms had been on a deleveraging track before the pandemic, the situation has obviously changed. Sharp drops in EBITDA and weak recovery prospects will increase leverage and reduce rating headroom.

Delay risk in recovery. Corporate spending and exports will not crawl toward recovery if the pandemic does not peak soon in some regions, as many health experts expect. Small, narrowly focused companies will be more vulnerable to further disruptions.

Key assumptions

Revenue and EBITDA in 2021 will linger below 2019 levels, with some exceptions in China. We can see some normalization in auto and Chinese infrastructure sectors. However, weak global economies and vulnerable consumer sentiment will lead to cautious capital investment and investment decisions. This is why overall earnings recovery will drag for Asia-Pacific capital goods companies.

What to look for

Widening business and geographic performance gap. We expect the possible delays in recovery for auto and aviation will be the most problematic for the capital goods sector. We also assume that U.S.-China trade tensions on semiconductors will create operational upheaval and delay decisions of capital spending. Investment-grade issuers in Asia-Pacific will still be resilient due to healthy leverage so far. But if demand stays weak, this may shave rating headroom.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Shawn Park Chemicals Singapore + 65-6216-1047 Petrochemical Spreads Show Technical Recovery [email protected]

Key Takeaways

− We see recent compression in petrochemical spreads as a technical rebound on lower feedstock prices.

− We expect spreads to remain below mid-cycle levels for the time being, given the subpar demand amid weak macroeconomics.

− Global capacity expansion plans will likely be delayed, which could accelerate the sector recovery over a longer time horizon.

What's changed?

Limited polymer spread improvement ahead. We see the recent improvement in polymer spreads as a chain reaction to collapsing crude oil, which normalized product prices. Although Asia-Pacific demand is picking up from a gradual opening of regional economies, at this juncture we are skeptical of a sustained spread recovery, due to ample supplies in the market.

Key risks

China fails to bounce back in 2021. Considering that China is the global demand driver for petrochemical goods, any unforeseen economic slowdown could further weaken the sector’s supply-demand balance.

Volatile oil prices. Big oil price moves – up or down – could pose risks to chemical producers. A sharp cost hike may not be fully passed on to product prices. On the other hand, a sharp decline in product prices could sideline buyers as they wait for the bottom before purchasing chemical products, resulting in weaker demand.

Key assumptions

Chemical sector to remain exposed to macro weaknesses in the region. We believe the chemical sector is among the sectors hit hardest by the panic. Our net ratings bias for Asia-Pacific chemical issuers is minus 44%. This compares with minus 2% a year ago.

What to look for

Polymer spreads to remain subdued on supply glut and limited demand recovery. We expect petrochemical product spreads to show limited recovery over the next 12 months as the supply glut persists. That's our base case. Keep in mind, however, that movements in this industry can be swift. If pandemic risk moderates, demand could quickly improve.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Flora Chang Consumer Products Hong Kong + 852-2533-3545 China Leads The Consumer Discretionary Goods Recovery [email protected]

Key Takeaways

− We expect China's spending on discretionary goods to gain momentum in the second half.

− The outlook for discretionary spending is bleaker elsewhere in region, especially in Southeast Asian countries where COVID persists and restrictions remain in place.

− To track diverging credit quality, focus on balance sheets, geographic and distribution channel diversification, brand positioning, and economic value-add.

What's changed?

Recovery of China underway but Southeast Asia lags. China's late-summer monthly retail data showed a recovery in sales of discretionary goods to 90%-100% of pre-crisis level, even for subsectors hardest hit such as apparel, jewelry, and home appliances. This, in our view, reflects a restoration of consumer confidence as China normalizes, with most lockdown restrictions lifted. Elsewhere in the region, we don't expect to see the same speed and magnitude of recovery, including in populous Southeast Asian countries.

Key risks

Second or third waves. Without containment, pressure on food service and discretionary goods would accumulate due to lockdown and negative wealth effects. Export-oriented firms may suffer as orders slow with case resurgences in other hemispheres.

Changing consumer habits and tastes is a risk that never changes. Companies' adaptability to shifts in consumer tastes, rising online sales, and mobile payments are key to survival in the medium to long term.

Key assumptions

COVID's clampdown will last into 2021 for most of Asia-Pacific. The hit will be mainly in supply chains and consumer sentiment, followed by potentially slow recovery if COVID mitigation measures are not effective.

What to look for

Longevity of COVID-19. The severity of the second and third waves and the timing of effective vaccines will be important to the consumers sector and company-specific forecasts and credit profiles. Consumer product companies' operating controls and their ability to manage liquidity may also differentiate credit quality.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Sharad Jain Financial Institutions Melbourne + 61-3-9631-2077 Risks Of A Slow Recovery Weigh On Banks [email protected]

Key Takeaways

− COVID-19 is hitting lenders hard. We have taken 50 negative rating actions on banks and finance companies in Asia-Pacific in the second quarter.

− The extent of banks' credit losses will become clearer when fiscal support from governments unwinds and banks end their loan-repayment moratoriums.

− Downside risks would intensify if the U.S.-China strategic confrontation heightens or COVID-19 inflicts greater damage to the region’s economies than we now assume.

What's changed?

COVID-19 is hitting lenders hard. We forecast that bank credit losses will rise and earnings will fall because of the pandemic's blow to the Asia-Pacific economies. During the second quarter, we took 50 negative rating actions on banks and finance companies in countries including Australia, India, Indonesia, Japan, Malaysia, New Zealand, and Thailand.

Support from authorities is aiding resilience. Fiscal, monetary, policy, and prudential support are providing buffers in the region. In addition, banks in many Asia-Pacific countries benefit from strong earnings capacity compared with European peers. As of Aug. 31, 2020, we had a stable outlook on 78% of financial institutions in the region.

Key risks

More severe downturn than our base case. A more severe or prolonged hit to the economies than our current baseline remains the main downside risk. This could happen if the U.S.-China strategic confrontation intensifies or if COVID-19 threatens greater economic spillover than we assume now. Such a scenario would almost certainly push banks' credit losses higher, drive their earnings lower, and amplify other risks.

Disorderly correction in asset prices. In many countries in the region, banks have high exposure to the property sector, and property prices and private sector debt remain high. These characteristics, along with economic uncertainty, could trigger a disorderly correction in asset prices, which would heighten and prolong banks’ asset quality problems.

Key assumptions

Strong economic rebound post the downturn. We expect that most banks will be able to absorb a multifold increase in credit losses. Bank earnings should start to improve with the economic recovery by the end of 2021. In our view, governments in most countries would support systemically important banks, if needed.

What to look for

The end of supports and moratoriums. Asset quality will become clearer when banks end their moratoriums on loan repayments and the governments reduce fiscal support. A number of households and businesses are likely to struggle to meet their financial obligations at that time, in our view. Interest margins for the banks are also likely to remain subdued, in line with the outlook for persistent low interest rates.

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Primary Credit Analysts Aras Poon Joel Yap Gaming Hong Kong Melbourne + 852-2532-8069 + 61-3-9631-2196 Don't Bet On A Quick Recovery [email protected] [email protected]

Key Takeaways

− We expect a slow revival from the second quarter's rock bottom because travel is still curtailed and in some cities, such as Melbourne, many casinos remain shuttered.

− For rated operators, next year's EBITDA will likely remain 10%-20% below 2019 levels.

− Ongoing initiatives will help control the rise in leverage as cash flows remain weak or negative.

What's changed?

Limited near-term recovery with cost rationalizations, dividend cuts, and debt and equity raisings to soften the blow. Operators continue to find ways to preserve cash, although capital expenditure is expected to remain high given ongoing projects and competitive pressures.

Key risks

Cash keeps going out. Meaningful development activity or a resumption in shareholder distributions could slow recoveries in credit metrics, if earnings fail to cover outlays. Operators' ability to reduce leverage quickly will vary.

Gaming concession expiry. Macau's gaming concession will expire in June 2022 for all six operators, posing some risk. We do not presume any existing operators will lose their gaming licenses during rebidding.

Key assumptions

Japan integrated resorts remains an event risk. We expect an announcement of select operators in late 2021, at the earliest. We believe operators will not incur any major spending before 2022, and that integrated resorts won’t come online until 2026-2028.

What to look for

Pace of border restrictions lifted and end of quarantine requirements. For markets such as Macau or Singapore that are particularly dependent on external visitors, especially from China, meaningful recovery will only happen when more travel restrictions are lifted, including quarantines for new arrivals.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Eunice Tan Insurance Hong Kong + 852-2533-3553 Lower Rates Intensify The Yield Chase [email protected]

Key Takeaways Rating Distribution*

− Negative rating bias as volatile investment markets weaken capitalization. AAA AA+ − Prolonged low interest rate environment prompts riskier investments to boost yields. AA − Slower macroeconomic conditions impedes growth momentum. AA- A+ A What's changed? A- BBB+ Lower for…even longer. Low growth, low rates, and volatile capital markets create BBB mounting challenges for returns. To cope, insurers may increase investment risk appetite. BBB- & lower Foreign exchange (forex) volatility may affect Taiwan, Japan, and Korea players with big 0 10 20 30 40 50 60 overseas investments. In addition, we anticipate insurers will review their actuarial pricing. Outlook Distribution* Recurring COVID waves dampen sales channels. Traditional insurance distribution Negative Stable Positive channels (tied agency and bancassurance) are seeing displacement as sales activities shift online. Social distancing in Asia-Pacific will drag on growth momentum through the All 11% 83% rest of the year. For Hong Kong's insurers, we expect a drastic contraction of 2020 premiums because cross-border restrictions limit arrivals from China-based customers. IG 11% 83% Key risks 0% 20% 40% 60% 80% 100% Flattening yield curve. Asset-liability mismatches could worsen for life insurers. We anticipate increasing reinvestment challenges as insurers review both investment and insurance pricing assumptions. Potential hikes of reserve provisions could further narrow capital buffers for insurance companies.

Revenue headwinds to persist beyond 2020. Prolonged social distancing and higher "Yield chasing to beat unemployment point to declining top lines and increasing lapses/surrenders. A slow low interest rate signals economic recovery will undermine trade-related insurance (marine cargo and credit) and riskier investments to come" mortgage insurance providers. COVID-19 induced business interruptions and event cancellation claims may hit profitability.

Key assumptions COVID-19 Impact Capital buffers will narrow. Financial market volatility and lower prospective earnings will eat into capital. Increasing frequencies of natural catastrophes in Asia-Pacific will also Insurance raise reinsurance-related costs.

Capital markets volatility What to look for Impact 1 - Lower for longer interest rate - Reinvestment risk Yield chase to pick up. Investment appetite will rise for credit and market risks. While recent buoyant stock markets may see unrealized investment gains on interim results, Insurance claims - Spike in business interruption/ market volatility continues to strain capital buffers. Impact 2 event cancellation claims - Economic slowdown hits mortgage Pent-up demand for greater insurance awareness. COVID-19 will bring about stronger and credit consumer awareness on insurance protection, particularly for health and medical coverage. The social distancing initiatives ramp up insurers’ digital distribution strategies. Insurance growth slow-down Impact 3 - Reduced disposal income Non-modeled risks. Urbanization and changing weather patterns make it harder to model - Lowered insured values risks. Events such as China’s floods, Japan's typhoons, and Australia’s bushfires require insurers to revisit catastrophe budgets, including reinsurance arrangements. Source: S&P Global Ratings.*Confidential ratings not included. Data as of Aug. 31,2020. YTD--Year to date. IG--investment grade. SG--speculative grade. spglobal.com/ratingsdirect Oct. 6, 2020 13

Asia-Pacific Sector Roundup

Primary Credit Analyst Clifford Kurz, CFA Media And Entertainment Hong Kong + 852-2533-3534 If COVID-19 Persists, Even Online Sales Could Lose Steam [email protected]

Key Takeaways

− New COVID-19 cases in Asia-Pacific have delayed re-opening efforts and economic recovery, hitting traditional media companies and entertainment venue operators.

− Media streaming, online games, and some e-commerce platforms have performed well, however, prolonged economic recovery could hurt future growth prospects.

− Liquidity remains the key concern for many of the smaller media and entertainment companies, especially those exposed to live events.

What's changed?

The pandemic's persistence slows reopenings of entertainment venues. The industry remains split. Slow re-openings threaten revenue and profits for companies exposed to movie theaters and live entertainment. Some brand advertising-dependent online platforms are also vulnerable. Other online services such as certain e-commerce platforms, media streaming and online games continue to experience strong user engagement and resilience, especially in China.

Key risks

U-shaped economic recovery. Advertising is highly correlated to economic growth. A prolonged recovery path would likely result in a sharper decline and slower recovery of advertising revenues, including online advertising. E-commerce platforms and online value-added services could be more insulated initially, but not immune to a prolonged economic downturn.

Liquidity crunch. Smaller media and entertainment companies could face more severe liquidity issues, especially those with heavy exposure to live events, given little or no revenues during the outbreak. Tightening credit markets, particularly for high-yield issuers, will exacerbate liquidity issues for these companies.

Key assumptions

Advertising revenue will decline in 2020. Offline advertising such as print, billboards, and television will record sharp declines this year, while some online advertising (especially brand advertising) may also see significant revenue deceleration in the region. Online advertising focused on direct response advertising should hold up better.

What to look for

Pace of economic recovery. Lingering effects of COVID-19 or a resurgence could result in a slower recovery for the industry, especially those with exposure to live events. Even if most social distancing restrictions are lifted, consumers may be slow to return to events with crowds, given safety concerns. In addition, the toll on economic growth as a result of the virus could reduce advertiser spending.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Minh Hoang Metals and Mining Sydney + 61-2-9255-9899 A Grinding Road to Recovery [email protected]

Key Takeaways

− The road to the recovery remains a key source of uncertainty and could undermine growth, shifting market sentiment and adding volatility to commodity prices.

− Commodity prices remain soft, but fiscal stimulus may help the sector.

− Prudent balance-sheet management will provide some buffer for ratings to withstand volatility, while access to funding remains key for highly indebted producers.

What's changed?

A sluggish rebound. With Asia-Pacific emerging from different stages of lockdowns but still far from resuming full-blown industrial production, most metal prices are struggling to return to pre-COVID-19 levels.

Key risks

Demand risk for commodities remains in focus. Prolonged economic weakness due to COVID-19 remains a significant downside risk to demand for key commodities, shifting market sentiment and adding volatility to commodity prices.

Cash flow strain. Commodity price volatility may hit operating cash flows for miners and metals producers. Any pronounced resumption in capital spending or inflexibility in shareholder distributions may erode liquidity, refinancing prospects and balance sheets.

Key assumptions

Elongated recovery path. We expect the path to recovery to be slow and uneven until a vaccination program is well developed and extensive. Our base-case envisages an elongated recovery path with a return to pre-COVID-19 levels by 2022, at the earliest.

What to look for

COVID-19, China, and global trade. Given that China accounts for over half of global demand for raw materials, a prolonged weakness in demand from its downstream sectors may strain the sector. Use of stimulus may play a meaningful role in any recovery.

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Primary Credit Analyst Danny Huang Oil and Gas Hong Kong + 852-2532-8078

Production Cuts And COVID-19 To Drive Oil Prices [email protected]

Key Takeaways FFO/Debt*

− China is leading the demand recovery, though air traffic remains constrained and Global Asia-Pacific 35.0% recent global increases in COVID-19 pose a fresh threat. 30.0% − Our US$50/bbl assumption in 2021 and 2022 assumes potential oil supply will limit 25.0% upside. 20.0% 15.0% − Soft demand has squeezed Asian refining margins. The pace of demand recovery will 10.0% be a bigger driver for refining margins than oil prices. 5.0% 0.0% 2019a 2020f 2021f What's changed? Debt/EBITDA (Median, Adjusted)* Oil prices seem to be stabilizing though downside risk remains. Brent oil price has strengthened to the US$40-45 per barrel (bbl) range due to a gradual recovery of demand Global Asia-Pacific 5.0x and the generally satisfactory execution of production cuts by OPEC+. However, the resurgence of COVID-19 in some hotspots could pose a risk to demand if more countries 4.0x resume or tighten lockdown measures. 3.0x

2.0x

Key risks 1.0x

Prolonged pandemic. If the pandemic does not stabilize or peak soon in most countries, 0.0x economic recoveries will be delayed, subsequently dragging on oil demand and prices. 2019a 2020f 2021f Liquidity and refinancing risks are more elevated for small and midsized companies which COVID-19 Heat Map generally have less flexibility in its operations and less robust bank relationships. Oil & Gas Structural change in oil demand. More and more governments are setting target dates for COVID-19, recession and High banning sales of fossil fuel vehicles. Although these dates are at least a decade from now, O&G impact it clearly shows that electric vehicles and other new energy vehicles will take over Potential negative long -- traditional fossil fuel vehicles in the long run, thereby constraining oil demand. term industry disruption

Key assumptions 2020 Estimates Vs. 2019 Revenue EBITDA Incremental US$40/bbl Brent for 2020. Although Brent oil price has recovered to US$40-US45/bbl decline decline borrowings range lately, we believe downside risk prevails as reignition of new cases could dampen 25% to 50% 40% to 60% 5%-10% demand again and oil supply could resurface if oil prices stay resilient. We assume Brent 2021 Estimates Vs. 2019 oil prices will average US$40/bbl in 2020, rise to US$50/bbl in 2021 and 2022, and US$55/bbl thereafter. Revenue decline EBITDA decline 10% to 20% 20% to 30% What to look for Issuer Ratings Statistics (YTD Aug 2020) COVID-19 containment and supply response by oil producers. How COVID-19 evolves, including when a vaccine will be available, remains the key driver for economic recovery IG SG Total and oil demand. The magnitude of supply increases as oil recovers is also key; resumption Ratings 29 6 35 of normal output by OPEC+ and the U.S. would tip the oil balance and drag prices. Downgrades 3 2 5

Upgrades 0 1 1

Source: S&P Global Ratings. *All figures are converted into U.S. dollars using historic exchange rates. Forecasts are converted at the last financial year-end spot rate. FFO--Funds from operations. a--Actual. f-- Forecast. YTD--Year to date. IG--investment grade. SG--speculative grade.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Susan Chu Public Finance Hong Kong + 852-2912-3055 Slow Recovery Adds Fiscal Strain [email protected]

Key Takeaways

− The slow recovery continues to threaten economic growth and undermine fiscal positions for local and regional governments (LRGs).

− China has more room than India to mitigate constraints on LRGs, though LRGs in both countries remain highly dependent on fiscal measures led by central governments.

− Australia, including LRGs and universities, and Japan are supported by their higher budgetary flexibility as they await recovery.

What's changed?

Spike of negative ratings outlooks. In addition to linkages to negative sovereign rating actions, LRG credit profiles are pressured by declining revenue and rising debt-funded spending.

Key risks

Virus duration. Setbacks in containment could lead to further cuts to GDP forecasts for Asia-Pacific. Contagion fears will prevent travel and consumption, dragging down revenue for most LRGs, and some pandemic-sensitive public-finance segments such as Australian universities.

Slowing property markets. Property-related revenue accounts for a large portion of some LRGs' revenues, especially in China and Australia, making them sensitive to market volatility in real estate.

Key assumptions

Varying scope for countercyclical measures. Most LRGs will not raise tax rates, hence they will unlikely recover their revenue bases soon. Slowdowns will spur LRGs to increase spending, further risking their fiscal standing. Still, Australian and Japanese LRGs will have higher discretion to respond with deficit spending. China has stricter deficit caps and India's are already stretched; this feeds through to less flexibility for their LRGs.

What to look for

Policy shifts. We could see increased stimulus to boost economies. Any aggressive LRG fiscal expansion could lead to lingering, longer-term erosions of credit quality.

spglobal.com/ratingsdirect Oct. 6, 2020 17

Asia-Pacific Sector Roundup

Primary Credit Analyst Matthew Chow Real Estate Development Hong Kong + 852-2532-8046 Sales Recovery On Track For Major Market China [email protected]

Key Takeaways

− We expect China's national home sales to increase up to 5% in 2020. Sales are still under pressure for Indonesian developers, however.

− Domestic funding in China could get tougher, in our view. Policy curbs are already starting to emerge following land-price surges in some mainland cities.

− Rating pressure remains for developers grappling with weaker liquidity amid slowing revenue recognition and tighter margins. These are mostly in China and Indonesia.

What's changed?

Policy tightening in China. As the sector's recovery gains momentum, administrative measures are back. Funding policies are also tightening. Authorities have capped notional amounts for domestic bond refinancing for developers. A dozen large players face leverage tests for bank loan increases; this requirement could be rolled out more broadly, in our view.

Key risks

Refinancing in China. While we believe that most developers will be able to withstand some funding tightening given the sales recovery, those with tighter liquidity profiles and reliant on debt-fueled growth may not fare well if further measures are implemented.

Margin declines may still be underestimated. Margins will undoubtedly trend lower in China, given land prices rising and potential price cuts in some lower-tier cities amid economic weakness. The downtrend could be worse that some developers are planning for, and that will feed through to higher leverage.

Key assumptions

Property sales in China back in growth mode. National sales increased 0.4% in the first seven months, signaling solid demand in most higher-tier cities following the initial COVID- 19 shock. However, sales in Indonesia are unlikely to see revival, given the ongoing coronavirus outbreak dampening activity.

What to look for

Revenue recognition and policy trend. Construction delays in China earlier in the year is still feed through to project delivery, making it harder to predict developers' revenue. Any further policy tightening, especially around developers’ financing, could have a profound impact on liquidity and growth prospects.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Esther Liu Real Estate Investment Trusts Hong Kong + 852-2533-3556 Some REITs At Risk Of Losing Investment Grade Status [email protected]

Key Takeaways

− The sector's rating trend continues to be negative. We note an uptick in potential "fallen angels" to non-investment grade among Asia-Pacific REITs.

− Landlords will see rents fall and vacancies pick up, but the intensity will vary greatly among property quality and type.

− Valuation decline will mainly be driven by weaker cash flow expectations as the pandemic lingers.

What's changed?

More negative rating trend. Our net negative rating bias (as measured by negative outlook and CreditWatch placements) has deepened. Retail REITs are particularly vulnerable in a prolonged pain scenario because many increased leverage to fund rental losses from the first wave of COVID-19.

Key risks

Persistent social-distancing measures. Hotel and retail REITs have yet to significantly bounce back. Subdued retail spending in many regions is leading to more cautious leasing plans by tenants.

Lower asset values. Weaker rents and cash flow will further cut asset values. Retail may take a longer period to rebound to pre-pandemic levels, while office may be looking at a structural demand shift, especially in cities with weaker demand and higher supply. This could hurt credit quality and refinancing capabilities.

Key assumptions

Recovery in 2022. Amid a global recessionary climate and persistent social-distancing measures, we expect overall EBITDA could fall up to 10% in 2020 and stay flattish in 2021 for rated REITs in Asia-Pacific.

What to look for

High vacancy rates to linger. Our current expectations is for weaker occupancy rates. A vicious downward cycle will become a risk if the pandemic hampers economic activity for an extended period of time.

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Asia-Pacific Sector Roundup

Primary Credit Analysts Sam Playfair Retail Melbourne + 61-3-9631-2112

New Waves Of COVID Spur New Ways Of Retailing [email protected]

Key Takeaways

− Second COVID-19 waves in many Asia-Pacific markets will keep home consumption high relative to out-of-home discretionary consumption.

− The pandemic has accelerated the shift in consumer behavior toward e-commerce and highlighted the importance of operating omni-channel platforms.

− While the overall credit quality of our rated regional retailers remain steady compared with that of global peers, some vulnerable credits have been severely hit.

What's changed?

Cautionary savings could hurt consumption. The phased lifting of social distancing restrictions and government stimulus measures have supported gradual improvements in retail sales. However, as the COVID-19 induced global economic downturn persists, the propensity of consumers to save discretionary income will likely grow.

Key risks

Additional waves of COVID-19. Further spread of the pandemic would weigh on discretionary retailers by causing higher unemployment, depressed wages growth, and constrained consumer sentiment. Socially distanced retailing could become the new normal. This raises credit quality risks for retailers with a high sensitivity to shifting tastes, consumer behavior, and reduced consumer discretionary spending. Maintaining creditworthiness will hinge on how quickly they adapt to the new normal.

Elevated investments in omni-channels. Continued in-store physical distancing restrictions are likely to multiply financial burdens on retailers, as they are forced to invest in e-commerce infrastructure amid accelerated digital disruption. This could pressure liquidity positions of vulnerable credits leading to higher refinancing risks at a time of depressed operating cash flows.

Key assumptions

Challenging deleveraging paths. Many retailers have focused on improving liquidity cover through additional financing measures amid the turbulent operating environment. In cases where leverage metrics are elevated, we expect elongated deleveraging paths amid a sluggish recovery in consumer demand.

What to look for

Rationalization of retail store footprint. Continued declines in in-store foot traffic, further share loss to alternate retail channels, and shifting consumer preferences for e-commerce will continue to weigh on "brick and mortar" footprints. Store rationalization and right- sizing of locations are expected to accelerate as retailers recalibrate their infrastructure to changing consumer behavior.

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Asia-Pacific Sector Roundup

Primary Credit Analyst KimEng Tan Sovereign Singapore + 65-6239-6350 Lower Interest Rates Help Cushion Credit Quality [email protected]

Key Takeaways Rating Distribution*

− Geopolitical tensions add another complication to recovery from COVID-19. AAA AA+ − Debt is materially higher for most Asia-Pacific sovereigns due to policies to support AA growth and employment. AA- A+ − Prolonged low interest rates should ease countries’ financing burden in the absence of A risk events. A- BBB+ BBB What's changed? BBB- & lower BB+ and lower Virus upended credit assumptions. After bringing down COVID-19 infections, some 0 1 2 3 4 5 6 7 8 9 countries have seen resurgences and many re-imposed measures that are needed to cap infection rates. As the pandemic drags on, hopes are dimming for a strong economic Outlook Distribution* comeback in 2021. Budget deficits that have opened up this year might not quickly close. Negative Stable Positive Lower global interest rates and energy prices. A renewed deterioration in the economic All 19% 71% outlook has cut demand for commodities. Despite crude oil's recent rebound from its low in late April, the price remains well below levels at the beginning of the year. Further, central SG 13% 75% banks have eased monetary policies. Given significant uncertainty over the duration of the IG 23% 69% pandemic, interest rates and energy prices look likely to remain relatively low for a while.

0% 20% 40% 60% 80% 100% Key risks

Sudden capital swings. A sharp deterioration in investor sentiment in emerging markets (EM) could see swift reversals of capital flows out of these economies. Reversals risk is larger in EM countries where governments ease domestic funding conditions to increase leverage in the public or private sector. "Intensifying U.S.-China tensions increase global China's deleveraging wanes. If economic or labor market pressures mount further, China economic uncertainties." could allow faster credit growth to maintain social stability. Growing risks of financial instability would weaken China's capacity to provide sovereign credit support, with negative implications for other sovereigns in the region.

Key assumptions COVID-19 Impact No sustained, serious market disruptions due to U.S.-China relations. Trade tariffs and Industry other measures between the world's two largest economies have so far had moderate economic effects. We expect that bilateral tensions will not escalate such that more - Economic growth for 2020 damaging measures follow. Impact 1 collapsed as both domestic and external demand hit What to look for

Deteriorating U.S.-China relations. The pressures of a looming presidential election and - Commodity exporting economies Impact 2 see hit to fiscal and external metrics still-elevated COVID-19 infection rates has hardened U.S. attitudes toward China. While as prices and volume shipped fall our base case does not assume an escalation in tensions, this is a risk. Apart from the direct economic effect, the associated uncertainties could also trigger volatility in international financial markets and capital reversals from emerging Asia. - Government debt sees significant Impact 3 increases across many sovereigns

Source: S&P Global Ratings. *Confidential ratings not included. Data as of Aug. 31,2020. YTD--Year to date. IG--investment grade. SG--speculative grade. spglobal.com/ratingsdirect Oct. 6, 2020 21

Asia-Pacific Sector Roundup

Primary Credit Analyst Narelle Coneybeare Melbourne Structured Finance + 61-2-9255-9838 narelle.coneybeare Consumer Asset Classes Will Be Further Tested @spglobal.com

Key Takeaways

− Employment recovery is the key determinant for consumer asset class performance, in our view, and prolonged pandemics in Japan and Australia could test resilience.

− Pressure looks to have eased in China, judging from stabilized delinquency rates in auto-loan ABS and RMBS.

− Government support measures will remain in place over the coming months, which could delay the full impact on borrower performance.

What's changed?

Worst is behind us in China. Pressure has eased in China, as indicated by stabilized delinquency rates in auto-loan asset backed securities (ABS) and residential mortgage backed securities (RMBS). The cumulative default rate increased only slightly during the height of China's outbreak. The story is different in Japan and Australia, where infection rates are not yet under control, and could hinder economic recoveries.

Key risks

Second economic shock to China and Japan. Such shocks could come from virus resurgence, or ripple effects from weak overseas markets to export-related sectors. Such outcomes, if prolonged, may feed through to consumer credit-backed and mortgage-backed loan performance.

Employment hit in Australia. The second round of lockdowns for Victoria as well as restrictions on interstate travel will hit employment in some sectors and geographies and may extend through to affected property markets in the longer term. Some mitigation on employment comes via government support that ties incentives to maintaining jobs. Lenders also have extended timeframes for repayment by hard-hit borrowers.

Key assumption

Temporary hits to growth. Ratings should be stable, with low levels of speculative-grade ratings and structural supports to cushion some deterioration. Diversified consumer asset pools mitigate event risks.

What to look for

A tick-up in default rates. The cumulative default rate will rise on RMBS in China as "default" kicks in after arrears are 90 days past due. For our rated deals, we estimate the additional default rate due to COVID-19 to be 30-60 basis points based on the arrears trend in the past two quarters, and our economic view. There is no rating effect for now in light of our rating stress assumptions and credit enhancements provided. In Australia, the level of loans under temporary “hardship” arrangements should moderate. If they don't, this will be a signal that jobs might not come back even amid broader recovery.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Raymond Hsu, CFA Technology Taipei + 886-2-8722-5827 Higher IT Infrastructure Spend Only Partly Offsets Risks [email protected]

Key Takeaways

− COVID-19, high inventories, and tech trade tensions could cause revenue and EBITDA losses for Asia-Pacific tech companies over the next three to four quarters.

− Faster digitalization will likely accelerate investments in cloud computing and 5G infrastructure and partly offset weaker corporate and consumer spending, facilitating a gradual recovery beginning in 2021.

− An extended pandemic or escalating tech disputes could lead to downgrade triggers for companies with low rating headroom.

What's changed?

Destocking and demand loss. Inventories accumulated to avoid trade-related disruptions is an overhang on new orders. New U.S. export rules for semiconductors and related equipment could start hitting companies with high supply exposure to Huawei Technologies Co. Ltd.--particularly those in China--in the fourth quarter. These may worsen revenue strains for the sector over the next 12 months.

Key risks

Oversupply. Oversupply risk remains significant, despite growing caution in capital spending. Tech frictions have motivated the Chinese government to promote advanced manufacturing of items such as semiconductors and display panels, adding oversupply pressures in 2021 and beyond with likely prolonged weak demand.

Technology shifts and rising production costs. Faster technology shifts present material risks with increased capital expenditure needs and shortened product lifecycles. The pandemic and trade tariffs could accelerate such risks, forcing diversification of manufacturing facilities and increasing production costs.

Key assumptions

Insufficient demand lift from faster digitalization. Accelerating spending on 5G mobile communications and cloud computing induced by COVID-19 may be insufficient to fully offset weaker corporate and consumer spending and U.S.-sanctions related business disruptions. In our view, the hardware segment's revenue and EBITDA won't recover their 2019 levels until first-half 2022. IT services companies could see a faster recovery, by the second half of 2021.

What to look for

Still elevated credit risk. A prolonged epidemic and escalating trade and tech frictions between the U.S. and China could cut cash flows significantly. Rating headroom could run out for more vulnerable companies if market conditions do not recover to previous levels by late 2021 or early 2022.

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Asia-Pacific Sector Roundup

Primary Credit Analyst JunHong Park Telecommunications Hong Kong + 852-2533-3538

The Disruptions Are Not All COVID-Related [email protected]

Key Takeaways

− The telecom sector's low cyclicality and utility-like demand characteristics should limit its correlation to weak macroeconomic conditions amid COVID-19.

− However, we see ongoing downward pressure for some operators due to stiff competition and large capital investments.

− Data traffic should expand on rising connectivity demand, but telecom operators face risk of disruptions in roaming services and business-to-business (B2B) operations.

What's changed?

Rising connectivity demand. Continued restrictions on movements in Asia-Pacific should support ongoing data traffic growth with rising connectivity demand. However, higher unemployment and lower consumer spending could weigh on some operators’ roaming, pre-paid wireless, and B2B businesses.

Key risks

Deeper recession. Although benefitting from utility-like demand characteristics, deeper economic recession with reduced spending on telecom services and rising bad debt could dent the region's telecom operators. We currently assume modest revenue and profitability decline in 2020, followed by a sector recovery in 2021 and onwards.

Aggressive pricing and intense competition. Competition remains intense with deepening cuts in wireless tariff pricing or aggressive marketing in many Asia-Pacific countries such as Malaysia, Singapore, Thailand, and Taiwan. The planned entrance of new operators in Japan (Rakuten Inc.), Singapore (TPG) and Philippines (Dito Telecommunity Corp.) will further increase wireless market competition.

Key assumptions

Merge to converge. We expect continued merger and acquisition activity in the region given the fixed-mobile and media-telecom convergence trend. In Korea, KT Corp. plans to acquire a cable-TV operator (Hyundai HCN) to strengthen its pay-TV market position, similar to its competitors'(SK Telecom Co. Ltd. and LG Uplus Corp.) recent acquisitions. In Australia, the merger of TPG Telecom Ltd. and Vodafone Hutchison Australia Pty Ltd. should ease competitive pressure.

What to look for

Growing 5G services. Korea made its first 5G rollout in April 2019, followed by Australia and China. Despite potential revenue growth opportunities from higher 5G wireless tariffs, telecom operators need to manage investment burdens for 5G spectrum auctions and network expansions. Also, developing new and profitable 5G use-cases remains challenging for all operators.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Xin Hui Zu, CFA Transportation Cyclical Beijing + 86-10-6569-2923 Takeoff Will Be Delayed [email protected]

Key Takeaways

− Disruptions to people flows and supply chains have ruptured transport demand. Recovery could be gradual and vulnerable to shocks until new-waves risk subside.

− Airlines are the most exposed and volumes will remain grounded. Aircraft lessors can handle temporary disruptions, but a prolonged drop in air travel and the possible failures of some airlines may expose them to a significant second-order effect.

− Package express, postal services, and logistics companies are less exposed given their focus on domestic markets.

What's changed?

Prolonged disruptions. The demand shock to regional transportation companies is not over, given recent escalations in containment measures regionally and globally. Even for China-- an "early exiter"--sporadic clusters of infection still exist which require targeted containment measures and dampen people’s willingness to travel.

Key risks

Liquidity crunch. Liquidity remains the key credit driver for weaker transportation companies and most airlines, especially in cases where prolonged disruption expose firms to extended stressed cash flows. Government aid packages may alleviate the strain on airlines.

A longer bottom to the U-shaped recovery. We don't expect Asia-Pacific economic activity to return to the pre-COVID-19 trend until 2023. However, permanent income losses and labor market shocks threaten an even more drawn-out recovery.

Key assumptions

Global air traffic won't return to normal until 2024. We expect air passenger traffic to drop 60%-70% in 2020. In 2021, it will still be 30%-40% down from a 2019 base, and we foresee only a gradual recovery to pre-COVID-19 levels by 2024. The path to normalization will likely be uneven across countries.

What to look for

Pace of demand recovery. Downward rating strains may increase as ongoing economic recessions further hit spending and consumer confidence. Recovery also depends on government guidelines for reopening travel.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Abhishek Dangra Transportation Infrastructure Singapore + 65-6216-1121

Cash Flows Will Stay Tight [email protected]

Key Takeaways

− Cash flows are only slightly improving amid a gradual resumption of economic activities.

− Airports won't likely normalize until 2024. Road traffic may recover by 2021 in Asia- Pacific; it has already largely recovered in China.

− Selective access to domestic banking systems add extra layers of strain for speculative grade credits.

What's changed?

COVID casts a longer shadow. Continuing international travel restrictions, social distancing, and economic sluggishness together create downside risks for the transportation infrastructure sector.

Key risks

Elevated macro risks. Uncertainty in virus containment timing, second and third wave of outbreak, lower economic growth and intensifying strategic confrontation between U.S. and China continue to pose risks to the sector.

Weaker support. In our view, the capacity for government or parent support is weakening. Local and regional governments face fiscal challenges. Limited fiscal space for sovereigns, lower ability or willingness to support are also overhangs on ratings.

Key assumptions

Lasting damage. The pandemic will leave lasting scars on Asia-Pacific governments and private sectors. This is because the various measures needed to deal with the COVID-19 emergency will lead to higher debt and weaker balance sheets.

Some flexibility in capex spending. Capital spending will remain on an upward trajectory in the region, due to significant infrastructure deficits. However, we expect some expenditure deferrals or adjustments, given stressed corporate finances and potential erosions of structural demand.

What to look for

Divergence in restrictions. We may see further lifting of restrictions in China and Singapore, while India and Australia and New Zealand may go the other direction, with extensions or tightening.

Funding and liquidity conditions. Speculative-grade issuers and their counterparties are more at risk of any worsening of liquidity and funding conditions.

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Asia-Pacific Sector Roundup

Primary Credit Analyst Parvathy Iyer Utilities Melbourne + 61-3-9631-2034

Hardship And Renewables Spend To Delay Deleveraging [email protected]

Key Takeaways

− We see near-term strains on cash flows and working capital, in part due to continuing hardship support for customers.

− China capex growth will stay on track, mostly to meet renewables targets, while India's will likely slow.

− Mixed rating headroom and liquidity will enable companies to withstand indirect effects of COVID-19.

What's changed?

Signs of a higher demand curve. Industrial and commercial demand are showing signs of recovery in the region, while residential demand remains good due to work-from-home arrangements in many countries. However, customer hardship support, relief for collections or deferred payments, and weak counterparties will strain working capital and delay any deleveraging plans.

Key risks

Market access for liquidity. Given its essentiality, we see the sector as fairly resilient. Even so, post-COVID risks can increase bad debt levels and weaken balance sheets. Liquidity remains stretched for Chinese private renewable-energy firms in contrast to investment-grade utilities benefitting from monetary easing.

Regulatory reforms and fuel contracts. Long-term supply gaps and grid constraints point to capacity additions. Tariff relief measures are likely to be temporary but can weaken regulatory frameworks if extended or if shortfalls are not compensated. Invocations of force majeure clauses is an added risk.

Key assumptions

Profitability hits and boosts. Demand recovery and tariff changes to pass through fuel costs will be a key variable to the risk profile. We factor in some delayed collections and potential bad debt in our earnings forecast for the next 12 months. Lower open-market power prices and retail price controls can also weaken earnings for independent power producers. On the other hand, lower fuel costs support the profitability of Chinese power producers and city gas distributors.

Capex growth to resume. While capital expenditure has slowed in the past three months, we expect it will slowly pick up in markets due to fiscal stimulus, reforms, demand improvement, renewables, and network capacity improvements.

What to look for

Liquidity to support working capital shifting to investment. Chinese state-owned power producers continue large capital expenditure to expand renewables via both self-builds and acquisitions. Indian operators are expected to calibrate spending in light of lower demand growth and tight funding conditions. While some rating headroom remains in the sector, aggressive growth can bring risks.

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Sector Roundup Asia-Pacific: Net Negative Bias Spikes To One In Six Issuers

Appendix 1 Related Research

– Credit Conditions Asia Pacific: Recovery Roads Diverging, Sept. 29, 2020 – COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date, Sept. 29, 2020 – COVID-19 Heat Map: Updated Sector Views Show Diverging Recoveries, Sept. 29, 2020 – Economic Research: Asia-Pacific's Recovery: The Hard Work Begins, Sept. 24, 2020

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Asia-Pacific Sector Roundup

Appendix 2

Table 2

Asia-Pacific Sectors: S&P Global Ratings' Assumptions And Forecasts

Sector Effect* Comment

Auto High COVID-19 will likely knock global car sales to a 20% decline in 2020, with recovery highly uncertain thereafter.

Downward rating pressure could also increase due to global supply chain disruptions.

Asia-Pacific automakers still retain generally solid financial standing with low debt.

Building Medium Recovery is slowly progressing in the region, however pockets of COVID-19 resurgence could lengthen the materials process. Infrastructure investment, and to a lesser extent property investment, are supporting demand in China.

Credit trends over the next few years are resilient, driven by our expectation of economic recovery and rated corporate efforts to deleverage by controlling capital expenditure (capex).

Overcapacity, especially in China, may be a structural risk lasting beyond 2020.

Capital goods Medium We expect a slow recovery in earnings and profits for Asia-Pacific capital goods companies.

Credit metrics will likely deteriorate in 2020 in line with a weak global economy.

Credit pressures for Asia-Pacific capital goods companies are limited compared with peers in the U.S. and EMEA.

Chemicals High We see recent compression in petrochemical spreads as a technical rebound on lower feedstock prices.

But spreads remain below mid-cycle levels and will likely remain so, given subdued demand amid weak macroeconomics.

Global capacity expansion plans will likely be delayed, which could accelerate the sector recovery over a longer time horizon.

Consumer Medium We expect China's spending on discretionary goods to gain momentum in the second half. products

The outlook for discretionary spending is bleaker elsewhere in region, especially in Southeast Asian countries where COVID persists and restrictions remain in place.

To track diverging credit quality, focus on balance sheets, geographic and distribution channel diversification, brand positioning, and economic value-add.

Financial Medium COVID-19 is hitting lenders hard. We have taken 50 negative rating actions on banks and finance institutions companies in Asia-Pacific in the second quarter.

The extent of banks' credit losses will become clearer when fiscal support from governments unwinds and banks end their loan-repayment moratoriums.

Downside risks would intensify if the U.S.-China strategic confrontation heightens or COVID-19 inflicts greater damage to the region’s economies than we now assume.

Gaming High We expect a slow revival from the second quarter's rock bottom because travel is still curtailed and in some cities, such as Melbourne, many casinos remain shuttered.

For rated operators, next year's EBITDA will likely remain 10%-20% below 2019 levels.

Ongoing initiatives will help control the rise in leverage as cash flows remain weak or negative.

Insurance Medium Negative rating bias as volatile investment markets weaken capitalization.

Prolonged low interest rate environment prompts riskier investments to boost yields.

Slower macroeconomic conditions impedes growth momentum.

Media and Medium New COVID-19 cases in Asia-Pacific have delayed re-opening efforts and economic recovery, hitting Entertainment traditional media companies and entertainment venue operators.

Media streaming, online games, and some e-commerce platforms have performed well, however, prolonged economic recovery could hurt future growth prospects.

Liquidity remains the key concern for many of the smaller media and entertainment companies, especially those exposed to live events.

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Asia-Pacific Sector Roundup

Sector Effect* Comment

Metals Medium The road to the recovery remains a key source of uncertainty and could undermine growth, shifting market and mining sentiment and adding volatility to commodity prices.

Commodity prices remain soft, but fiscal stimulus may help the sector.

Prudent balance-sheet management will provide some buffer for ratings to withstand volatility, while access to funding remains key for highly indebted producers.

Oil and gas High China is leading the demand recovery, though air traffic remains constrained and recent global increases in COVID-19 pose a fresh threat.

Our US$50/bbl assumption in 2021 and 2022 assumes potential oil supply will limit upside.

Soft demand has squeezed Asian refining margins. The pace of demand recovery will be a bigger driver for refining margins than oil prices.

Public finance Medium The slow recovery continues to threaten economic growth and undermine fiscal positions for local and regional governments (LRGs).

China has more room than India to mitigate constraints on LRGs, though LRGs in both countries remain highly dependent on fiscal measures led by central governments.

Australia, including LRGs and universities, and Japan are supported by their higher budgetary flexibility as they await recovery.

Real estate Medium We expect China's national home sales to increase up to 5% in 2020. Sales are still under pressure for Indonesian developers, however.

Domestic funding in China could get tougher, in our view. Policy curbs are already starting to emerge following land-price surges in some mainland cities.

Rating pressure remains for developers grappling with weaker liquidity amid slowing revenue recognition and tighter margins. These are mostly in China and Indonesia.

Real estate Medium The sector's rating trend continues to be negative. We note an uptick in potential "fallen angels" to non- investment investment grade Asia-Pacific REITs'. trusts

Landlords will see rents fall and vacancies pick up, but the intensity will vary greatly among property quality and type.

Valuation decline will mainly be driven by weaker cash flow expectations as the pandemic lingers.

Retail Medium Second COVID-19 waves in many Asia-Pacific markets will keep home consumption high relative to out-of- home discretionary consumption.

The pandemic has accelerated the shift in consumer behavior toward e-commerce and highlighted the importance of operating omni-channel platforms.

While the overall credit quality of our rated regional retailers remain steady compared with that of global peers, some vulnerable credits have been severely hit.

Sovereign Low Geopolitical tensions add another complication to recovery from COVID-19.

Debt is materially higher for most Asia-Pacific sovereigns due to policies to support growth and employment.

Prolonged low interest rates should ease countries’ financing burden in the absence of risk events.

Structured Medium Employment recovery is the key determinant for consumer asset class performance, in our view, and finance prolonged pandemics in Japan and Australia could test resilience.

Pressure looks to have eased in China, judging from stabilized delinquency rates in auto-loan ABS and RMBS.

Government support measures will remain in place over the coming months, which could delay the full impact on borrower performance.

Technology Medium COVID-19, high inventories, and tech trade tensions could cause revenue and EBITDA losses for Asia- Pacific tech companies over the next three to four quarters.

Faster digitalization will likely accelerate investments in cloud computing and 5G infrastructure and partly offset weaker corporate and consumer spending, facilitating a gradual recovery beginning in 2021.

An extended pandemic or escalating tech disputes could lead to downgrade triggers for companies with low rating headroom.

Telecom Low The telecom sector's low cyclicality and utility-like demand characteristics should limit its correlation to weak macroeconomic conditions amid COVID-19.

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Asia-Pacific Sector Roundup

Sector Effect* Comment

However, we see ongoing downward pressure for some operators due to stiff competition and large capital investments.

Data traffic should expand on rising connectivity demand, but telecom operators face risk of disruptions in roaming services and business-to-business (B2B) operations.

Transportation High Disruptions to people flows and supply chains have severely hit transport demand in the region. Recovery cyclical could be gradual and vulnerable to shocks until risks of a second COVID-19 wave subside.

Airlines are the most exposed and volumes will remain grounded. Aircraft lessors can handle temporary disruptions, but a prolonged drop in air travel and the possible failures of some airlines may expose them to a significant second-order effect.

Package express, postal services, and logistics companies are less exposed given their focus on domestic markets.

Transportation High Cash flows are only slightly improving amid a gradual resumption of economic activities. infrastructure

Airports won't likely normalize until 2024. Road traffic may recover by 2021 in Asia-Pacific; it has already largely recovered in China.

Selective access to domestic banking systems add extra layers of strain for speculative grade credits.

Utilities Low We see near-term strains on cash flows and working capital, in part due to continuing hardship support for customers.

China capex growth will stay on track, mostly to meet renewables targets, while India's will likely slow.

Mixed rating headroom and liquidity will enable companies to withstand indirect effects of COVID-19.

*The impact descriptor above (high, medium, low) is our qualitative view of the risk. It does not directly translate to risk of rating actions, which depend on a number of factors including initial headroom under a rating coupled with the expected length and severity of the pandemic.

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Asia-Pacific Sector Roundup

Appendix 3: List Of Analytical Contacts

List of contacts in table 2

Sector Analyst name and contact

Auto Katsuyuki Nakai + 81 3 4550 8748 [email protected]

Building materials Danny Huang + 852 2532 8078 [email protected]

Capital goods Makiko Yoshimura + 81 3 4550 8368 [email protected]

Chemicals Shawn Park + 65 6216 1047 [email protected]

Consumer products Flora Chang + 852 2533 3545 [email protected]

Financial institutions Sharad Jain + 61 3 9631 2077 [email protected]

Gaming Aras Poon + 852 2532 8069 [email protected]

Joel Yap + 61 3 9631 2196 [email protected]

Insurance Eunice Tan + 852 2533 3553 [email protected]

Media and entertainment Clifford Kurz + 852 2533 3534 [email protected]

Metals and mining Minh Hoang + 61 2 9255 9899 [email protected]

Oil and gas Danny Huang + 852 2532 8078 [email protected]

Public finance Susan Chu + 852 29123055 [email protected]

Real estate Matthew Chow + 852 2532 8046 [email protected]

Real estate investment trusts Esther Liu + 852 2533 3556 [email protected]

Retail Sam Playfair + 61 3 9631 2112 [email protected]

Ryohei Yoshida + 81 3 4550 8660 [email protected]

Sovereign KimEng Tan + 65 6239 6350 [email protected]

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Asia-Pacific Sector Roundup

Sector Analyst name and contact

Structured Finance Narelle Coneybeare + 61 2 9255 9838 [email protected]

Technology Raymond Hsu + 886 2 8722 5827 [email protected]

Telecom JunHong Park + 852 2533 3538 [email protected]

Transportation Cyclical Xin Hui Zu, CFA + 852 2533 3589 [email protected]

Andy Liu, CFA +852 2533 3554 [email protected]

Transportation Infrastructure Abhishek Dangra + 65 6216 1121 [email protected]

Utilities Parvathy Iyer + 61 3 9631 2034 [email protected]

This report does not constitute a rating action.

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Asia-Pacific Sector Roundup

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