Hong Kong, October 13, 2016 -- Moody's Investors Service says that Moody's-rated non-property
companies in China (Aa3 negative) will see easing pressure on their revenue
and cash flow in 2H 2016. As for leverage, such levels have
stayed elevated, due to higher overall debt, and any deleveraging
efforts will require time to take effect.
"The recovery of commodity prices from the lows seen in 2015 have
eased revenue and cash flow pressure on Moody's-rated Chinese
non-property companies in the upstream segments of the oil &
gas, steel, chemicals, metals and mining sectors,"
says Lina Choi, a Moody's Vice President and Senior Credit
Officer.
"However, the leverage levels of issuers in mid or downstream
segments in these sectors remain elevated, because the companies'
investment needs precede their deleveraging efforts," adds
Choi.
And, with the exception of a few outliers, revenue streams
have been steady for the food & beverage, auto and construction
sectors. Together with slightly lower debt levels, the credit
profiles of companies in these sectors have also seen incremental improvements.
Moody's conclusions are contained in its just-released report
titled "Chinese Non-Property Companies: Revenue Pressure
Is Easing; Investment Needs Stay Elevated for FY2016".
On the issue of liquidity, most Moody's-rated Chinese
non-property companies show sufficient liquidity, with the
percentage of companies with sufficient or strong liquidity coverage remaining
stable over the six months to 30 June 2016.
In terms of specific industries, players in the internet sector
show solid credit profiles — despite active merger and acquisition
activities — because their revenue and cash flow growth remain robust
to support business expansions.
The food & beverage industry demonstrates stabilizing revenue trends,
and profit margins are supported by product upgrades and low input prices.
As for the retail industry, weak revenue and profitability will
continue to pressure the credit profiles of Chinese companies in this
sector, as department stores struggle against competition from online
retail and shopping malls.
The oil & gas industry will benefit from a recovery in oil prices
and cuts to capital expenditure levels. Such a situation,
together with cost savings, will help the companies generate positive
free cash flow, leading to a stabilization of their credit metrics
during the last quarter of 2016.
For the construction and engineering services sector, Moody's
says players in this industry will show stable credit profiles,
amid continued moderate demand from infrastructure builds in China,
as well as domestic and overseas property construction activities.
With the steel and cement industry, Moody's says demand will
remain muted, because of lackluster manufacturing investment levels
and moderate property investment growth.
As for the bulk chemicals sector, Moody's report says that
worsening oversupply — amid slow demand — will result in depressed
pricing and profits for companies focusing on commodity products.
Moody's also says that merger and acquisition activities in this
sector will accelerate and will likely result in higher debt leverage.
With the metals & mining industry, Moody's says low commodity
prices will pressure the earnings and credit metrics of companies in this
sector.
Automakers will benefit from higher unit sales, and higher service
penetration rates will benefit dealers and rentals. On auto dealers
in particular, Moody's says revenue growth and stable leverage
for such companies will be driven by growth in aftermarket and financial
services.
Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1046048
The report may also be found through Moody's topic page "China's
Trilemma: Growth, Reform and Stability", available
at http://www.moodys.com/chinarebalancing.
This page provides a centralized source for Moody's research related to
key credit issues in China as the country's macroeconomic story continues
to unfold.
Recent Moody's publications relating to China's Trilemma include:
• China Credit Market: Dongbei Special Steel Bankruptcy Highlights
Restructuring Shift for SOEs
• Chinese National Oil Companies: Oil Price Recovery,
Proactive Cost Savings and Capex Cuts Stabilize Credit Profiles
• China Property Focus - September 2016
• Property — China: First-Half 2016 Results Signal
Full-Year Metrics Will Remain Stable
• Insurance — China: 1H 2016 C-ROSS Solvency Ratios
— Life Insurers Show Decreasing Trend, While P&C and Reinsurers
Are Largely Unchanged
• Regional and Local Governments — China: Debt and Finances
Snapshot
• Banks — China: 1H 2016 Results — Negative Trends
Persist Amid Pockets of Improvement
• China's Tighter Life Insurance Product Regulations Are Credit Positive
• Rising Risks for Chinese Regional and Local Government SOEs as
Policy Evolves (Presentation)
• Securitization — China: Sector Update — Q2 2016:
Auto ABS and RMBS Credit Quality Remains Firm, NPL Deals Emerge
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This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
Lina Choi
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
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Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077