Tokyo/Hong Kong (Reuters): A quick economic recovery, open access to bond markets and a steady stream of profits has piled up cash at Asia’s top corporates, prompting even the most conservative spenders to put the money to use.
The top five Asia net-cash holders are sitting on $71 billion, according to Thomson Reuters data, with six of the top ten based in Japan.
Following the lead of other Asian companies, Japan’s executives, historically very cautious when it comes to spending, are increasingly opening up corporate coffers.
Should the trend continue, the already heavy flow of outbound acquisitions from Asia will likely increase in future quarters, bringing Japanese companies face to face on cross-border deals with the likes of those in China and India.
“With their earnings now stable, they are becoming more active in investing, reversing the trend of the past two years,” said Moody’s analyst, Shinsuke Tanimoto, on Japan corporations.
Japan’s capital spending in July-September rose from a year ago, posting the first annual gain since 2007. Previously, Japanese companies had been cutting capital spending on concern the strong yen and slowing exports would keep hurting growth.
Backed by the strong yen, outbound M&A doubled with a total value of $31.5 billion in the first nine months of 2010, the second highest volume recorded for the period since 2000.
In terms of number of announced deals, the period marked the highest ever with 367 deals. The US remains the most targeted nation based on number of deals by Japanese companies, with China in second place.
Japanese companies have tended to struggle to find ways to spend on capital investments or hiring. That’s changing.
Moody’s Tanimoto says Canon Inc and Takeda Pharmaceutical Co have made the best use of excess cash. Takeda has $9.2 billion, in net cash, Canon has $8.6 billion and Sony has $6 billion, according to Thomson Reuters.
Takeda in 2008 bought U.S. firm Millennium Pharmaceutical Inc for $8.8 billion in the largest purchase among Japanese drug companies. Last month, the Wall Street Journal reported that Takeda has looked at purchasing Genzyme but is unlikely to bid.
Nidec Corp, a motor maker, is another Japanese corporate that has spent aggressively.
“Japanese companies have been cash-rich for more than 10 years and it’s almost a chronic situation,” said Takuji Aida, an economist at UBS Securities Japan, citing the perpetual fear that the country’s deflation will not end.
Moody’s says that rated Asian corporates, excluding Japan and Australia, have built cash holdings to around $230 billion, which, based on 120 corporates, is highly concentrated among top companies and nearly double the average of a U.S. sampling.
From the end of 2008 to mid-2010, cash holdings of these Asian corporates rose nearly 60 percent, mainly on improved operating performances and debt-raising, according to Moody’s.
Large cash positions, coupled with the desire -- and in some cases the need -- to grow abroad has led to a wave of large, Asia-based corporates spending on overseas acquisitions. China’s state-run energy companies have led that pack, with sector leaders in India also moving abroad.
That activity however does not mean that all in the cash-rich category plan to go on a spending spree.
South Korea’s Samsung Electronics has $6.1 billion in net cash, Thomson Reuters data shows. Samsung has said the cash is for investment and other corporate operations and wants to preserve it for investing in chips, its LCD business or M&A.
Another corporate holding onto its extra money is China Mobile, the world’s biggest mobile operator, which has a net cash position of $33.8 billion, the data shows.
The company has repeatedly frustrated investors with its lack of blockbuster deals and refusal to return more of its money to shareholders in the form of higher dividends.
Its stock currently yields a dividend of about 4 percent, compared with 5-9 percent for comparable slow-growth telecoms carriers, said Daiwa analyst Marvin Lo.
He said China Mobile may be hoarding its cash for any number of reasons, including potential for having to participate in government-led initiatives such as a recent drive to upgrade the country’s fragmented cable TV sector.
“They will do something (with the cash), but not necessarily to please all the investors,” he said.
It’s okay to hold
The research unit of China Construction Bank, CCB International, in a note on China’s software and IT services sector, advises that holding too much cash is not a bad thing.
“Some investors are concerned that the high cash level of Chinese software companies is dampening their ROE, currently in the teens versus global peers with 20 percent plus,” analyst Xin Zhao said in a note.
CCB International’s analysis suggests that the cash level of Chinese software and IT services companies, as measured by net cash to equity and net cash as a percentage of the current year’s revenue, “is roughly in line with that of global peers,” Xin wrote.
The low return on equity is more from lower margins, Xin said, adding it will improve gradually.