Profitability of businesses is expected to deteriorate in the coming 12 months, due to lower demand from China and increased oil and naphtha prices.
- The demand situation for Japanese chemical products is expected to remain stable. However, a sharp slowdown in Chinese economic growth could seriously impact the export performance. Domestic demand for pharmaceuticals is good, as the sector benefits from solid per capita spending for drugs and an ageing population.
- In the basic chemicals segment competition is high with players from overseas, while in the Asian market Japanese pharmaceutical firms increasingly struggle with providers of generic drugs. That said, most Japanese chemical/pharmaceutical manufacturers are focusing on high-end products with higher margins and less market competition.
- Profit margins are generally high. However, chemical businesses profitability is expected to deteriorate in the coming 12 months due to lower demand from China and increased commodity prices (oil and naphtha). Pharmaceutical businesses are also affected by increasing pressure on profit margins, as the Japanese government recently imposed a drug price revision and promotes the sales of generic products.
- Financial gearing among Japanese chemicals/pharmaceutical businesses varies, but is generally below 100%. Especially manufacturers require funds for large investments, and obtaining bank loans is usually no issue. The government is very supportive of bank lending, putting pressure on banks to even lend to weaker businesses in order to achieve inflation targets and to avoid bankruptcies.
- On average, payments in the Japanese chemicals sector take between 45 days and 90 days, with payment duration in the pharmaceuticals sector even longer. Payment experience has been very good over the past couple of years, and the level of protracted payments is low. The number of non-payment and insolvency cases was low in 2018 and H1 of 2019, and this trend should largely remain unchanged over the coming 12 months. This is somehow bucking the trend of Japanese business insolvencies, which we forecast to increase 2% in 2019.
- Due to the stable business performance and good credit risk situation our underwriting approach is open to all major subsectors. While oil price volatility significantly affects the profitability of chemical businesses, Japanese players generally have strong balance sheets, which dampen the impact of higher input prices.