Looking for Clean Balance Sheets

02/10/2009 11:45 am EST


Eoin Treacy

Global Strategist, Fullermoney.com

Eoin Treacy, global strategist at Fullermoney.com, takes a technical look at Asian companies whose balance sheets are in relatively good shape.

The current global economic environment is deterring vast numbers of people from taking on more debt and encouraging them to pay down some of their existing liabilities. This is, of course, only an option for people with sound finances and the cash available to fund such outlays. The same is true of corporations.

Investors are slow to lend to corporations, and credit spreads remain at extremely high levels. This makes issuing new corporate bonds less appealing, even in this low-interest- rate environment, because companies have to pay over the odds for funding. On the other hand, buying back debt that redeems at par for half its nominal value makes sense in this environment.

[Indian auto manufacturer] Mahindra & Mahindra (NSI: M&M_a.NS) peaked in early 2007 and broke down from a lengthy ranging phase in January 2008. It found support in October near R250 (rupee) and continues to show base formation characteristics. A sustained move below R230 would now be needed to question this hypothesis, while a sustained move above R400 would suggest that the bulls have regained the upper hand.

Reliance Communications (NSI: RCOM.NS), [the Indian telecom giant], completed a Type-2 top in January 2008 and remains in an overall down trend. The shares found support near R 150 in late October and are currently retesting that level. An upward dynamic is needed to indicate that demand is returning.

[Korean chemical producer] KCC Corp. (KSC: 002380.KS) accelerated to a high near KRW 700,000 (Korean won) in late 2007 and has since given up the entire advance. It found support nears KRW 150,000 in October and continues to range gradually higher. A sustained break of the short-term progression of higher lows would be needed to question scope for some additional up side.

Noble Group (SES: N21.SI), [a Hong Kong commodities supplier], fell abruptly from its May peak before finding support near SG (Singapore dollars) $0.50 It has since more than doubled and sustained move below SG $0.90 would be needed to question potential for some higher to lateral trading.

[Malaysian palm oil producer] IOI Corp (KLS: 1961.KL) near MYR2 in October and has almost doubled since. A sustained move below MYR (Malaysian Ringgit) 3.6 would be needed to break the short-term progression of higher lows and question scope for further upside.

Most of these shares are not performing as if they have appreciably healthier balance sheets than other companies in their respective countries or sectors. KCC, IOI, and Noble Group have [good] chart patterns but need to continue to perform to suggest that demand is regaining the upper hand beyond the short term.

Buying back debt is a wise choice for these companies in this environment and it may take time for the equity markets to take notice of these moves. Signs that they are outperforming their country indices may suggest that equity investors are beginning to take notice.

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