Singapore companies to expand overseas for continued growth

As the quarterly earning-season of Singapore-listed companies came to close this week with most of the reported results seen to be weak and uninspiring, analysts here said that escalating labor cost and operating expense at home could force local companies to step up their overseas expansion.

Within the listed-companies covered by DBS Group Research, there were only 18 percent of them reported better-than-expected quarterly results, whereas 22 percent came in below and the balance of 60 percent well within the expectations of the research house.

Analysts cited rising labor cost as the main culprit of the unexciting quarterly output of Singapore corporations.

According to Credit Suisse Research, wages rose by 4 percent on- year in third quarter this year based on the companies that disclose staff costs separately. Wage cost as a percentage of revenues was at 15.1 percent in third quarter, 1 percent higher than in the previous quarter.

HSBC Global Research said that "labor policy change with material reductions in foreign labor dependency ratios is the key near-term pressure point for (Singapore) corporationsmany have expressed concerns that productivity improvements will not accrue swiftly enough to make up for the workforce contraction."

Given such labor constraint, HSBC added "a structurally lower medium-term growth outlook seems inevitable", noting that Singapore used to enjoy an average of about 6 percent economic growth for the past two decades.

With the rise in labor cost and slowing economic growth at home unlikely to abate in near future, Singapore companies have to seek growth overseas or step up oversea expansion drive. As CIMB Research pointed out "the common theme for Singapore corporations is the obvious need to expand overseas. This is partly due to domestic restructuring but more pertinently due to the limited size of the local economy."

Singapore-listed Suntec REIT's first foray into Australia by acquiring a freehold land and an office building in the North central business district area of Sydney, as well as two local banks OCBC' s and UOB's rumored interest in a Hong Kong franchise, are some latest examples of oversea expansion trend gaining momentum among local corporate world.

The latest earning result of some companies also exemplified the merit of business expansion abroad. ComfortDelgro Corporation, the local public transport operator, had reported surprisingly strong third-quarter earnings, largely due to strong overseas business contribution.

But CIMB Research stressed that overseas foray is not without risk. As Singapore dollar has strengthened against major currencies lately, some Singapore corporations such as Singapore Telecommunications witnessed weaker contributions from their overseas markets in their latest earning result due to a bout of currency depreciation against the Singapore dollar.

CIMB said "as overseas earnings stack up for Singapore' s listed companies, issues like foreign exchange movements will come up once in a while when the regions they operate in suffer a bout of foreign exchange weakness."

Hence, the success of oversea expansion is not guaranteed unless there is a good management of foreign exchange risk in place and well executed, CIMB said.