Top 10 Investor Questions For 2014: Asia-Pacific Corporates

Primary Credit Analyst: Terry E Chan, CFA, Melbourne (61) 3-9631-2174; terry.chan@standardandpoors.com

Table Of Contents
Frequently Asked Questions Related Research

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Top 10 Investor Questions For 2014: Asia-Pacific Corporates
(Editor's note: Given continuing investor interest in the 2014 credit outlook for Asia-Pacific corporates, this article collates our recent published responses to frequently asked investor questions on Asia-Pacific corporates generally and key sectors specifically.) Asia-Pacific's issuers collectively breathed a sigh of relief in late 2013 as the risks of even slower regional economic growth and continuing financial market volatility seemed to be subsiding (see "Asia-Pacific Credit Outlook 2014: A Sigh Of Relief As Growth And Market Risks Subside," Dec. 10, 2013). The narrowing of the two main risks during 2013 contributed to only a modest pullback in the pace of GDP growth in the region, including China's, in line with Standard & Poor's Ratings Services' base-case scenario (see "Credit Conditions: Asia-Pacific Growth Is Mostly Stable, But Some Lagging Credit Risks Remain For 2014," Dec. 10, 2013). In fact, China's growth has stabilized at about the authorities' target of 7.5%, and the prospect of a hard landing in the near term is increasingly unlikely. Furthermore, capital outflows in the region stemming from speculation about the U.S. Federal Reserve's tapering of asset purchases ("QE", or quantitative easing) have taken a breather for now. The local currencies of India and Indonesia, in particular, endured some turmoil when such speculation was rife in markets. However, the trajectory of lower regional growth will continue to stress issuer credit ratings. Indeed, the Year of the Wood Horse in Asia in 2014 will still be a rough ride for some countries and industry sectors. And so, below, Standard & Poor's answers the top 10 investor questions for the year ahead.

Frequently Asked Questions
What is the credit outlook and macroeconomic risks for Asia-Pacific corporates in 2014?
Our credit outlook for Asia-Pacific corporates is generally stable but with a negative bias (see "Asia-Pacific Credit Outlook 2014: A Sigh Of Relief As Growth And Market Risks Subside," Dec. 10, 2013). We note that this negative bias is slightly worse the global average, partly explained by the lower economic growth trajectory of the region compared to the recovering U.S. and, to a certain extent, Eurozone economies. Consequently while risks have subsided for the time being, softer economic prospects and skittish financial markets make for a difficult environment for Asia-Pacific issuers going into 2014. Corporate sectors that are most affected are grappling with lower economic growth and, in some cases, cyclical downturns include chemicals, building materials, metals and mining, and public finance. Other sectors facing strain include utilities, capital goods, retail, project finance, and transportation–cyclical. Somewhat better placed are the insurance, oil and gas, consumer products, and transportation infrastructure. Best positioned, although some still with some slight negative bias, are issuers in real estate development, diversified, automobile original equipment manufacturers and suppliers, gaming and entertainment, high technology, real estate investment trusts (REIT), and telecommunications. In Asia-Pacific the two main macro risks to the region's economic growth in 2013 have narrowed (see "Credit Conditions: Asia-Pacific Growth Is Mostly Stable, But Some Lagging Credit Risks Remain For 2014," Dec. 10, 2013). First, China's growth appears to have stabilized at around the authorities' 7.5% target, and the risk of a hard landing in

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the near term appears increasingly unlikely. Second, financial market stress stemming from speculation about the U.S. Federal Reserve's QE tapering have eased for now--although capital outflows from Asia could return once the Fed does start to taper. In terms of global developments, weaker growth in the U.S. on one hand will be partially offset by stable growth in China and slight improvements in Europe, resulting in a largely steady pace of external demand facing Asia economies for this year and next. Nonetheless, structural risks remain in China, particularly in the financial sector. These appear manageable in the near term, but we believe policymakers are serious about gradually shifting out of the investment/credit-led growth model to a more sustainable consumption-led growth path. As such, we believe that China's overall growth rate will continue to ease from this year to next. Japan is still on track to grow at or close to 2% in 2014, but the annual figures mask the easing trend of growth momentum over the next few quarters. Abenomics and the confidence it inspired were able to jump-start the economy, but the consumption tax that is scheduled to increase in April could significantly dampen that momentum. Crucially, the decreased spending power of households would make undoing entrenched deflation expectations much more difficult. The Bank of Japan could try to counter this by increasing the pace of their asset-purchase program. The Tiger economies in Asia might face a significant headwind from any weaker U.S. outlook, although they have the strongest upside should global growth and trade perform better than expected. Nonetheless, offsets from stable growth in China and slightly better economic growth in the E.U. might help to balance this out, resulting in only small changes in our baseline growth forecasts. In contrast, Australia is more exposed to China, and the stable growth outlook there will be one less headwind as the economy struggles to rebalance its economy away from mining investment.

What is the outlook for capital investment in Asia-Pacific corporates, how will it be financed, and what are the key drivers?
We continue to hold a view of weakness in capital expenditure (capex) trends for the Asia-Pacific corporates (see "Global Corporate Capital Expenditure Survey 2013," July 20, 2013). The reversal of capex growth in the energy and material sectors is--as with other regions--part of the story. But there appears to be downward pressure on industrial capex, too, and little sign of the strongly positive contribution from I.T. and telecoms that has been a feature throughout most of the past decade. The fact that the commodity "super cycle" has, at the very least, paused for breath is a major factor explaining negative capex expectations for 2014. This is best illustrated by the capex outlook for Australia, which is central to emerging Asia's energy nexus. Here, the scaling back of mining investment is projected to bring an abrupt reversal of the strong capex growth seen in 2011-2012. Current estimates suggest a decline in capex in real terms of more than 20% in 2014, caused primarily by a sharp reduction in investment intentions by the major mining corporations. Perhaps even more surprising are our current estimates for China. We should stress that China's financial structures are rather different from fully developed markets, so trends for the subset of nonfinancial corporates that provide financial data, and for which consensus forecasts are available, will not tell the whole story. This is especially true given the importance of residential housing investment and local government spending, for example. Even so, our sample includes projections for 91 mainland Chinese companies and 24 from Hong Kong. It includes global behemoths such as PetroChina, China Petroleum & Chemical, CNOOC, and China Mobile. Capex for the mainland Chinese companies in our sample is forecast to fall by 6% in 2014. This follows relatively weak growth in 2012. The inclusion of

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Hong Kong-domiciled companies pushes the 2013 figure back into positive territory. But, even so, this forecast, if realized, would mark a dramatic transition in Chinese corporate trends. Investment growth has been a core part of China's economic rise. In our view, if its leading companies are as uncertain about their capex intentions as their peers in fully developed markets, this could be a sign of a transition to a more mature growth phase, one that will have an important bearing on global credit conditions. In the Asia-Pacific, about nine-tenths of corporate financing is sourced from banks (see "The Credit Cloud: China And Asia-Pacific's Great Wall Of Debt Will Tower Over North America And Europe's," May 14, 2013) although both cross-border and local debt markets continue to develop. The main drivers for corporate capital expenditure continue to be economic growth and for countries, such as China, the availability of credit from banks.

Consumer products: How is the rise of Asia-Pacific's consumer class influencing the credit outlook for the consumer products sector?
Contact: Machiko Amano, Tokyo (81) 3-4550-8659; mailto:machiko.amano@standardandpoors.com In a diverse region like Asia-Pacific, the key concerns for the consumer products sector differ by market. Across the region, volatile raw material prices, fuel costs, and foreign exchange rates could cause overall margins to fluctuate, depending on rated companies' ability to pass through costs. Overall, the outlook for consumer products companies in the Asia-Pacific region is fairly stable in the next 12 months, based on our expectation of fast-rising consumption by the region's middle class. In China, most of the rated consumer products companies have strong regional brands, good market reputations, and competitive products. However, the economy is slowing down, major players are struggling to gain market share, and margins are narrowing as competition intensifies. More Chinese companies are likely to venture overseas to broaden their offerings, or establish joint ventures with foreign brands interested in gaining a foothold in China. Food and beverage companies, in particular, are likely to acquire reputable foreign brands or form alliances with raw material providers to alleviate consumer concerns over food safety. The easing of the one-child policy in China would not have an immediate impact on the consumer product companies we rate in the Asia-Pacific region. We expect the implementation of the policy to boost infant formula and diaper sales in the next three-to-five years. The baby formula market in China is dominated by foreign brands, given Chinese consumers' lack of confidence in domestic brands, many of which have been involved in food safety scandals. We currently do not rate any diaper companies in the region, but expect domestic brands' comprehensive distribution networks in China, especially in lower tier cities, will underpin their better growth prospects. In general, Japan's major consumer products companies should perform solidly in 2014, thanks to an improving consumption environment, a resilient domestic market, profit from overseas operations, and higher selling prices. However, in Japan too, margins are thinning, mainly for second-tier players, as major retailers focus on private-label products and consumers turn to value products. As with China, we believe Japanese companies will continue to look abroad for growth opportunities. Although a weaker yen has slowed the pursuit of outbound mergers and acquisitions (M&A) compared with last year, in September 2013 Japan-based Suntory Beverage & Food Ltd. announced it acquired well-established beverage brands from U.K.-based GlaxoSmithKline PLC for approximately ¥210 billion. The deal will give Suntory sales bases in Africa and Malaysia.

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(Also see "Top 10 Global Investor Questions For 2014: Consumer Products Sector," Jan. 9, 2014.)

High technology: How is the shift towards portable devices affecting the credit outlook for the Asia-Pacific technology sector going into 2014?
Contact: Susan Chu, Shanghai (86)21-2208-0855; Susan.Chu@standardandpoors.com Standard & Poor's considers the credit outlook for the Asia-Pacific region's technology sector, which is comprised of mostly producers of hardware and semiconductors, to be largely stable, with growth around the mid-single-digit area expected in 2014. On a global basis, we expect growth rates to remain strongest in Asia, followed by the U.S. and then Europe. We expect that strong demand for storage devices, tablets, and smartphones will significantly benefit the industry's supply chain in Asia, outweighing the decline in PC-related sales. To minimize exposure to the industry's inherent volatility, most Asia-Pacific technology companies maintain stronger financial risk profiles, as demonstrated by the high percentage of investment grade-rated companies in the region, at over 70%, compared to about 30% globally in the technology sector. Over the long term, we expect global economic growth, ongoing end-market demand, and technology advancement will continue to boost I.T. spending in the region. The rating trends in 2013 have reversed for Asia-Pacific technology issuers, with a current slightly positive bias from a 5.5:1 ratio of downgrades to upgrades in 2012. The negative rating trend in 2012 reflected the downward trend of Japanese consumer electronics companies. These companies experienced massive losses in flat-panel TVs and other digital consumer products, which faced rapid commoditization and significant pricing competition. 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 restructuring flowing through. (Also see "Top 10 Global Investor Questions For 2014: Technology Sector," Jan. 9, 2014)

Mining: With China's lower growth, what is the credit outlook for the Asia-Pacific's metals and mining sector?
Contact: May Zhong, Melbourne (61) 3-9631-2164; may.zhong@standardandpoors.com We believe China's GDP growth has stabilized, although the slower growth is likely to keep commodity prices low globally. The health of China's economy is a key factor in the supply-and-demand balance for the global metals and mining sector. China's GDP appears to have stabilized at about the authorities' 7.5% target, and a sudden drop in near-term growth is increasingly unlikely. Nonetheless, risks remain, particularly in the financial sector. These appear manageable in the near term, but we believe policymakers are serious about gradually shifting away from the investment/credit-led growth model to a more sustainable consumption-led growth path. We expect our negative credit outlook for the Asia-Pacific metals and mining sector to moderate in 2014. Our forecasts for the sector show that most companies' profitability and credit metrics should bottom out in 2013. Supporting this view are three key factors: 1) a ramp-up in volumes across the sector; 2) a levelling of operating margins in 2013 because of companies' initiatives to cut operating costs and improve productivity in response to low commodity prices; 3) deferral of growth capital expenditure to preserve cash. Nonetheless, we expect the improvement in credit metrics will be slow and modest. Commodity prices are unlikely to

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bounce back strongly in the next 12-18 months because of pockets of oversupply for certain minerals, such as coking and thermal coal and nickel, and metals such as steel and aluminium. The weak commodity prices would hamper a strong recovery in earnings and cash flows. In monitoring the sector's credit quality, we also focus on the liquidity levels of weaker companies, including their operating cost and working capital management, control over stripping costs, and refinancing activity. Globally, we believe capital expenditures in metals and mining will decline in 2014 and again in 2015 from the record levels of 2012 and 2013. That said, we note that two Chinese government-owned steelmakers, Baoshan Iron & Steel Co. Ltd. and Wuhan Iron and Steel Co. Ltd., are constructing two new, large steelmaking bases in southern China. In our view, this reflects the Chinese government's policy to improve steel industry efficiency by replacing old, small manufacturing plants with new, larger capacity. As a result, we expect these steelmakers to receive ongoing government support, including construction approval and financing. Even so, the major risk for the sector is slower demand growth for steel and raw materials from China. We expect China's demand growth for metals and minerals will be lower than its overall macroeconomic expansion, as the country gradually transitions to a consumption-led economic model. In India, in addition to moderate demand growth, internal factors such as a mining ban, delay in environmental clearances, and challenges with land acquisition are key risks for this country's metals and mining sector. Overcapacity will continue to plague the sector at least until the first half of 2014. Segments experiencing a severe glut are the aluminium, nickel, thermal coal, and coking coal industries. Meanwhile, merger and acquisition activities seem to be slowing on the back of a soft sector outlook. (Also see "Top 10 Global Investor Questions For 2014: Metals And Mining," Jan. 9, 2014)

Oil & Gas: Your baseline forecast is for robust oil prices, how does this translate into the prospects for Asia-Pacific oil and gas?
Contact: Andrew M Wong, Singapore (65) 6239-6306; andrew.wong@standardandpoors.com In Asia-Pacific, our generally stable outlook on refiners reflects increasing demand for refined products, which should help mitigate increasing supply (both regionally and globally) and the influence of government-controlled price regulations. Nevertheless, refiners in Asia-Pacific may face challenges in 2014 because we believe refining margins could come under pressure from increased refining capacity from China. In addition, capital investments for refining companies will remain elevated as companies seek to enhance operating efficiency and profitability and comply with government regulations related to the environment and the quality of refined products. Such investments will be critical for Asian refiners to maintain their competitive advantage against rising U.S. refined product exports, particularly given the strength of international oil prices relative to the U.S. benchmark. Demand for oilfield well services should remain strong in Asia, as those economies continue to expand and their domestic fields begin to mature, requiring greater hydrocarbon supplies. For contract drilling, we expect high jack-up activity in Southeast Asia. In respect of liquefied natural gas (LNG), the currently high cost of long-term LNG sales contracts and the export potential of vast North American gas reserves in the form of LNG are influencing the behavior of gas buyers in Asia who are concerned about the high cost of LNG.

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A potential game changer for energy markets is the development of shale oil and natural gas reserves in the U.S. Natural gas is primarily a localized commodity because of the difficulty and cost of transporting it across long distances. Thus, the rise of U.S. natural gas shale production resulted in the collapse of prices for both natural gas and associated NGLs as U.S. supply growth exceeded U.S. demand. Internationally, we are just beginning to see the effect of the growth in U.S. shale production. LNG exporters such as Qatar are redirecting LNG cargos originally intended for the U.S. to Asia, European natural gas buyers are structuring contracts based on local natural gas prices rather than high-priced Brent crude oil, and Asian buyers are beginning to negotiate contracts that price LNG off a Henry Hub gas price rather than Brent. (Also see "Top 10 Global Investor Questions For 2014: Oil & Gas, Midstream Energy, And Refining," Jan. 9, 2014)

Real estate: You described the credit prospects for real estate in the U.S. and Europe as steady and satisfactory, is it the same for the Asia-Pacific?
Contact: Craig W Parker, Melbourne (61) 3-9631-2073; craig.parker@standardandpoors.com; Bei Fu, Hong Kong (852) 2533-3512; bei.fu@standardandpoors.com Credit prospects within the Asia-Pacific region are mixed, in our opinion. In Hong Kong, despite the weakening property market, our rated large property developers that earn recurring rental income and have low leverage should be able to support their existing credit profiles. China's property developers, meanwhile, may not grow as strongly as in 2013 because we believe prices and sales volumes are unlikely to repeat the sharp spike of that year. However, if sales and prices were to rise further, it might prompt regulatory tightening. We believe Chinese developers can continue to manage their refinancing risk, thanks to strong sales, good cash earnings, and developers' ready access to funding. The sector, including many first-time issuers--big and small--borrowed heavily from offshore bond and loan markets in 2013. New issuers alone issued bonds totalling more than US$4 billion-equivalent during the year. Looking ahead, we believe Chinese developers are likely to enjoy continued access to funding in 2014, although it will be hard to match the activity levels of 2013. The credit prospects for real estate owners are largely stable. In 2013, purchasers across the region bid up asset values. This was not because of improving rentals, but because they believed that asset values represented good buying opportunities. And the relatively low level of interest rates compared to property income yields spurred buyers to take on more debt. However, we believe asset prices do not justify current rent levels. Therefore, if economic conditions worsen, rents may slip downward and cause asset values to fall, leaving participants overleveraged. In Japan, the property market appears to have bottomed out, with office vacancy rates in central Tokyo improving. Although rent levels from existing properties are likely to be constrained for a year or so, we anticipate that rated J-REITs and diversified real estate companies will benefit from stable cash flow generated by high-quality properties. J-REITs are actively issuing equity, and the number of new J-REIT listings is increasing. Although we believe that the market recovery will help J-REITs strike a balance between financial management and external growth, we expect a complete recovery in their profitability and improvement in their financial standing to take at least 1-2 years amid heightened competition for prime assets. We believe the profitability of condominium sales should improve moderately among the diversified real estate companies amid brisk sales of condominiums, as Japan's new Abenomics economic policy boosts consumer confidence.

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Similarly in Singapore, the effect of regulatory tightening has filtered into the broader real estate market. Sales in 2013 were lower year on year, and with more completed units coming on stream and a tightening of immigration policy, the leasing market is similarly subdued. The S-REITs are faring better, with occupancies in retail, commercial, and industrial units remaining stable, and rental reversions remaining positive. (Also see "Top 10 Global Investor Questions For 2014: Real Estate Sector," Jan. 9, 2014)

Telecommunications: Given the structural decline of fixed-line voice services, what's the credit outlook for Asia-Pacific telecom companies?
Contact: Paul R Draffin, Melbourne (61) 3-9631-2122; paul.draffin@standardandpoors.com Our credit outlook for the sector remains stable. Despite significant technological, regulatory, and competitive change across the region, we expect strong growth in data services and generally supportive economic conditions to continue to underpin a satisfactory operating environment for most players. Although regional economic growth remains slightly below trend, the risks associated with a significant slowdown in the key Chinese economy have abated in recent months, in our view, which should support near-term growth. On the competitive front, we have observed some moderation in competition in certain markets in the past six to nine months, such as India, which should support near-term profitability. Although regulatory risks remain, we consider these regulations as supportive of a more transparent and rational market, and believe they should allow further consolidation among industry players. For example, recent regulatory pronouncements in India have, in our view, reduced the level of regulatory uncertainty that has overhung the market in the past few years. In Asia-Pacific, auctions for 4G (and in some cases 3G) spectrum are largely complete. In most markets, spectrum allocations have generally been in line with the existing market structure and funded within the bounds of existing ratings. In China, we expect the recent allocation of 4G spectrum to the three major market players to support the market position of market leader China Mobile Ltd., although growing 4G competition from the No. 2 and 3 players is expected to heighten competitive pressures over the medium to long term. Investment will be driven by mobile network upgrades for new 4G (and in some cases 3G) services, copper-to-fiber fixed-line network services, and investment in new revenue channels. We expect capex-to-revenues trends for most of the developed market operators in Asia-Pacific to be in the 12%-15% range in the next few years, and slightly higher in many of the emerging markets, including up to 30%-35% in some cases. We expect capex to be funded primarily from internally generated cash flow, which should limit any pressure on credit quality. Regional M&A activity has remained relatively muted since Softbank Corp.'s major acquisition of U.S.-based wireless company Sprint Nextel in mid-2013. The structural decline in traditional voice services continues to pressure the profitability of traditional copper fixed-line networks across the region. However, in most Asia-Pacific markets, network owners, often supported by government funding, are replacing traditional copper networks with high-speed fiber optic networks, which we view as critical to supporting future demand. As data usage continues to grow exponentially across the region, driven in particular by growing use of video services (such as Internet protocol television), we expect telecom providers to increasingly utilize fixed-line networks (through wireless access points) to help reduce traffic congestion on mobile networks.

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Consequently, over the longer term, we see these trends resulting in a move toward fully interchangeable telecommunications networks, where data carriage moves seamlessly between mobile and fixed-line networks in a manner that maximizes data carriage speed and quality. (Also see "Top 10 Global Investor Questions For 2014: Telecommunications And Cable," Jan. 9, 2014)

Transportation Infrastructure: Given the continued need for infrastructure in Asia-Pacific, so what are the credit outlook, growth prospects and risks for this sector in 2014?
Contact: Thomas Jacquot, Sydney (61) 2-9255-9872; thomas.jacquot@standardandpoors.com The credit outlook for the Asia-Pacific transportation infrastructure sector is largely stable in 2014, although growth will vary between countries in the region. For Australia and New Zealand, we expect moderate economic expansion will continue to support higher earnings and relatively stable financial performance of rated companies. A potential area of growth in the region is the Japanese government's intention, under its Revitalization Strategy, to develop infrastructure (such as airports and ports) to stimulate economic growth. We believe that certain key drivers for this sector in Japan (such as passenger growth for airports or trade volumes for ports) are generally very steady, given the typically significant barriers to entry that temper competition. However, too much regulation and fierce competition between airport and land transportation are key hurdles to encouraging private investors in Japan. The key risks for the Asia-Pacific sector are likely to be related to issues and circumstances concerning each entity, rather than stemming from macro-economic trends. In particular, merger and acquisition (M&A) activity over recent times or large capital expenditure--in both cases funded through more debt--have worsened some companies' financial performance. Given our outlook of gradual economic growth in 2014, we estimate that the recovery for these companies might be slower than originally anticipated. Any economic slowdown, even marginal, could delay that recovery and lead to negative rating actions. An additional risk arises from the fact that a number of rated transportation infrastructure companies in the region are Government-Related Entities (GREs). We typically factor uplift from our assessments of their stand-alone credit profiles (SACPs) into our ratings to reflect the likelihood of extraordinary financial support from the government in case of need. Such transportation infrastructure GREs can be found in the Asia-Pacific. Consequently, under our GRE criteria we could lower their ratings if we were to downgrade the relevant sovereign. Toll road operators in China also face heightened policy risk since over the past two years, when the government responded to the perceived high toll rates and started to clear out the irregularities in this sector. The green passage policy for waiving toll fees of fresh farm products and the toll-free policy for passenger cars during four national holidays have adversely affected the operators. In our view, policy uncertainty could continue in China until there is a transparent regulatory framework on toll rates and concessions. That said, materially adverse policies are less likely, in our opinion. We expect capital investment for the Asia-Pacific transportation infrastructure sector will remain broadly in line with historical trends, characterized primarily by a strategy of gradual investment supported by underlying growth. This generally enables companies to temper spending if operating conditions deteriorate. Funding is mainly through debt issuance, a trend we expect to continue. We expect a few certain large projects with long lead times to start during

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2014, but these are generally supported by favorable regulatory regimes that allow an economic return even before the projects are completed. (Also see "Top 10 Global Investor Questions For 2014: Transportation Infrastructure Sector," Jan. 9, 2014)

Utilities: Your credit outlook for the global utilities sector is 'stable' what about for the Asia-Pacific?
Contact: Richard P Creed, Melbourne (61) 3-9631-2045; richard.creed@standardandpoors.com The sector outlook for the Asia-Pacific utilities sector is "stable to negative". We expect some divergent trends between the developing markets of Asia and the mature markets of Australia and New Zealand. In Asia, economic conditions are still reasonably good, which will boost industrial output and hence generate strong demand for energy. Moreover, tariffs have increased in many markets in 2013. If governments do not maintain the planned tariff increases in 2014 or seek to reduce tariffs for socio-economic reasons, it will erode financial headroom. Idle nuclear capacity in Japanese and Korean utilities and higher cost of alternate forms of generation remain a risk to the cost and profitability of the rated utilities in these countries. In contrast, moderating economic growth, strong competition, and high retail energy prices in Australia and New Zealand are likely to dampen energy consumption. In terms of investment in this sector across the Asia-Pacific, we estimate in excess of US$200 billion will be spent in 2014, with China and India dominating as they continue their massive investments in energy and its associated infrastructure over the next few years. We think the spending will have a neutral effect on credit quality for regulated utilities, but will present a challenge for unregulated companies. In China, we estimate total capital spending for the country's power industry over the last two years of the 12th 5-Year Plan (i.e., 2014-2015) to be about RMB2.5 trillion to RMB2.8 trillion (about one-half on network infrastructure). This generation build-out will stretch Chinese generators, with most funding coming from Chinese banks. We expect the network investments to be fully recoverable under the regulatory framework, so the credit outlook on those companies is stable. India is endeavouring to add as much as 90 gigawatts of electric capacity from 2012 to 2017, with projected spending of about US$300 billion, of which 15% could be on renewables. We expect an additional US$100 billion to go toward electricity, gas, and water and sewage networks. Such a sizable investment task is likely to present challenges for credit stability given the difficulty utilities have in achieving timely cost recovery in India due to an evolving tariff framework and weak creditworthiness of many of the market participants. Even so, we expect the large regulated utilities to have ready access to funding because of their government linkage. We expect the more developed markets of Japan and Australia to spend far less than the populous and rapidly growing emerging markets of Asia. In Japan over 2014 and 2015, we expect about ¥2.1 to ¥2.5 trillion, with just over one-half spent on power generation and the balance on networks. Increased fuel costs stemming from displacement of nuclear plants in the country will continue to weigh on Japanese electric utility ratings. In Australia, we expect spending of about US$7 billion on networks in 2014, with limited spending on generation due to excess supply and policy uncertainty constraining outlays on new power stations. In the network sector the robust regulatory regime means the Australian regulated credit outlook overall is stable. (Also see "Top 10 Global Investor Questions For 2014: Regulated Utilities And Unregulated Power And Gas Sectors," Jan. 9, 2014)

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