Coronavirus weakens demand, disrupts supply chains for China's manufacturing

Moody's Investors Service said in a new report on Wednesday that the coronavirus outbreak has weakened demand and disrupted supply chains in the component, consumer electronics, consumer durables manufacturing and packaged goods sectors.

"Demand in these sectors will be weaker than we expected as consumers stay home and purchase only basic necessities, while production and transport will be hampered by ongoing work stoppages," said Moody's Senior Vice President Lina Choi.

"While these factors will weigh on sales and revenue, the rated companies in these sectors boast strong market positions, flexible cost structures and robust credit metrics that provide them with a buffer against temporary weakness and profitability pressure," added Choi.

For rated packaged goods companies, Moody's estimates earnings before interest, tax, depreciation and amortisation (EBITDA) will fall by 3.5 to 4.5 per cent for every 5 per cent dent in revenue, along with a corresponding increase in leverage.

However, all packaged goods companies had already delivered products to key distributors before the Lunar New Year holiday, and as such should be able to cater to demand once the disruption eases.

For rated component manufacturing companies, Moody's estimated EBITDA will fall by 4.5 to 5 per cent for every 5 per cent drop in revenue, again with a corresponding increase in leverage.

While the first quarter is typically a low season for these companies, mitigating some of the impact, it could take some time for production to ramp up and sales to fully recover.

"With China being an important part of the supply chain for many companies, delays at manufacturing companies will likely also ripple through global supply chains across various sectors," said Choi.

For example, companies in the South Korean auto and tech sectors are exposed to the risk of potential disruptions in their production lines in China and Korea because they rely, to varying degrees, on Chinese parts.