Sector Review:

Asia-Pacific Credit Trends 2014: Tech Firms Focusing On Asia And Smart Devices Will Outperform
Primary Credit Analyst: Susan Chu, Shanghai (86)21-2208-0855; Susan.Chu@standardandpoors.com Secondary Contact: Raymond Hsu, CFA, Taipei (8862) 8722-5827; raymond.hsu@taiwanratings.com.tw

Table Of Contents
Sector Outlook Key Risks And Trends Ask The Analyst Related Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

OCTOBER 28, 2013 1

1207807 | 300510290

Sector Review:

Asia-Pacific Credit Trends 2014: Tech Firms Focusing On Asia And Smart Devices Will Outperform
(Editor's Note: This article is part of a series on the credit trends of Asia-Pacific's corporate sectors for 2014. The series responds to analytical queries received recently on a sector or a specific issuer in that sector.)

Sector Outlook
Standard & Poor's Ratings Services considers the credit outlook for the Asia-Pacific technology sector to be largely stable in 2014. Some companies, however, still face stress because of competition or technological shift in their respective subsectors. The softer economic prospects (including China-driven slowdowns) has resulted in reduced IT spending since the second half of 2012. However, Asia-Pacific technology companies continue to grow and we expect strong demand for smart handheld devices will significantly benefit the industry's supply chain in Asia. In addition, most Asia-Pacific tech companies can maintain relatively stronger or gradually improving financial risk profiles, despite their exposures to the industry's inherent volatility. Measures to withstand expected economic slowdowns include keeping higher cash levels, pacing their capital expenditure or acquisitions carefully, or even discontinuing their nonprofitable business lines. Over the long term, global economic growth and ongoing end-market demand along with technology advancement will continue to boost IT spending. The negative ratings bias for the region's tech sector is relatively low, and is largely comprised of Japanese players. And if we exclude tech companies whose ratings are affected by the negative outlook of their respective sovereign ratings, such as India, the negative bias would be even lower. Japan's tech companies continue to encounter stiff competition from emerging premium providers or mass producers such as Korean or Chinese companies. Still, such pressures may alleviate with Japan's economy expanding faster, the Japanese yen depreciating, and benefits from its business structuring flowing through.
Table 1

Asia-Pacific Technology Sector Outlook For 2014

Business conditions Business outlook Financial trend Sector outlook Satisfactory No change Same Stable

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

OCTOBER 28, 2013 2

1207807 | 300510290

Sector Review: Asia-Pacific Credit Trends 2014: Tech Firms Focusing On Asia And Smart Devices Will Outperform

Key Risks And Trends

Asia-Pacific technology companies are mostly producers of hardware and semiconductors, which are generally transaction-based and sensitive to technological changes. Software and services, on the other hand, have contractual revenue streams, which are often recurring in nature and tend to correlate with overall GDP growth. While we expect softer economic prospects globally, regional economic growth would remain positive, and in turn, support the stable operating performance of most tech companies. This would be especially true for those targeting Asia as their major end markets. On the other hand, as consumers continue to shift to smart handheld devices from personal computers (PCs), we expect sales of PCs, printers, and feature phones to decline further. However, we expect the technology sector to grow around mid-single-digits in 2014, as strong sales in storage devices, tablets, and smartphones should outweigh the decline in PC-related sales. Such a shift in the market could result in the performance of the region's tech companies diverging.

Ask The Analyst

Why were there more upgrades than downgrades for Asia-Pacific tech companies in 2013 despite slower market conditions?
Our upward rating actions for 2013 were mainly because of issuer-specific reasons, and somewhat independent from economic slowdowns. Most of the upgrades reflect sustainable business growth momentum and stronger-than-expected profitability, driven mainly by tech companies' enhanced market positions in growing market segments, such as tablets, smartphones, or social networking services. At the same time, the majority of rated entities kept prudent financial positions without compromising growth aspirations. We also raised the ratings on some companies based on their strengthening ties with stronger parents. The downgrades on two Japanese technology companies mainly reflect their worsening profitability and cash flow protection because of fierce competition despite their business restructuring. We also downgraded a China-based entity mainly because of our view that the issuer's financial policy was more aggressive than we had assumed in the ratings.

Has Standard & Poor's incorporated the potential benefit of Japanese companies' business structuring in ratings assessments?
A few Japanese tech manufacturers of semiconductors, consumer electronics, and selective electronic components have struggled to cope with changing market dynamics. That's because product commoditization, such as flat panel TV and mobile handsets, has spiked competition from Korean and Chinese players. In response, some Japanese companies have restructured their businesses significantly and adjusted their product portfolios, including closing loss-making business lines and streamlining operations to reduce operating costs. Some large groups have shifted their focus to more stable or promising business lines, such as IT software services, capital goods, and automotive-related business fields.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

OCTOBER 28, 2013 3

1207807 | 300510290

Sector Review: Asia-Pacific Credit Trends 2014: Tech Firms Focusing On Asia And Smart Devices Will Outperform

We incorporate benefits expected from such business restructuring into our base-case scenarios if we believe that those plans could realistically improve their operating performance given our assumptions of the industry and macroeconomic conditions. In addition, we will assess these companies' ability and willingness to execute those plans based on their track records. Nonetheless, execution risks remain and market conditions could worsen beyond our assumptions, resulting in the companies' failing to improve their current weak credit metrics to a level consistent with the ratings over the next one to two years. In those cases, we may lower the ratings.

Has the depreciation in the region's currencies, including the Japanese yen and Indian rupee, supported tech companies that rely on exports?
Currency depreciation generally can benefit companies driven by exports or generating a high proportion of their business overseas. For example, we expect the Indian IT sector (mainly composed of services and business process exporters) to benefit from the weakness in the country's rupee. On average, their margins may increase by about 30-60 basis points with every 1% depreciation in the local currency. However, we believe tough business conditions because of a generally weak global economic environment and intense competition could diminish the benefits of a weaker currency. While the yen's recent weakness should support 2013 earnings for quite a few tech companies in Japan, the extent to which the weak yen can prop up earnings is unclear given business conditions remain tough and companies have shifted some production overseas to counter the effect of a strong yen. In our view, the pace of recovery in profits may vary by company, depending on economic trends in the companies' home markets and the contribution generated from overseas operations.

Related Research
Asia Pacific Credit Trends 2014: Telcos Look To The Cloud In Search Of Growth, Oct. 27, 2013 Credit Conditions 3Q 2013: Asian Corporates Face A Rough Ride Going Into 2014, Sept. 18, 2013 Industry Report Card: Global Technology Sector Credit Quality Is Mostly Stable, With Some Downside In Europe, April 25, 2013 Japan Corporate Outlook 2013: Earnings Will Likely Be Mixed, And Tough Conditions May Mute The Benefits Of A Weaker Yen, Feb. 21, 2013

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

OCTOBER 28, 2013 4

1207807 | 300510290

Copyright 2013 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

OCTOBER 28, 2013 5

1207807 | 300510290