Hong Kong, October 13, 2016 -- Moody's Investors Service says that Chinese overseas merger and
acquisition (M&A) activity is diversifying in line with the country's
structural reforms towards a consumption-driven model from investment-led
growth.
"Outbound M&A activity by Chinese companies continues to grow
at a rapid pace, but the country's structural reform drive
is shifting the focus of activity away from resource-related sectors
and towards higher-value industries, in the pursuit of technology,
brands and new markets," says Rahul Ghosh, a Moody's
Vice President and Senior Credit Officer.
"Because of rising labor costs in China, companies in the
country are eager to migrate to high-value-added production
and expand their presence, especially to emerging markets,"
says Nino Siu, a Moody's Assistant Vice President and Analyst.
"Chinese companies are therefore looking for opportunities overseas,
in the form of M&As."
Moody's conclusions are contained in its just-released report
titled "China Credit —Overseas M&A Shift Towards Higher-Value
Sectors Set to Continue," and is co-authored by Ghosh and
Siu.
For the nine months between January and September 2016, the volume
of completed and pending outbound M&A deals exceeded the record annual
level reported in 2015, driven by the slowing domestic economy and
supportive government policies.
Moody's report points out that privately owned companies have been
particularly active in the technology industry, and also in consumer
and entertainment-related sectors, such as healthcare products,
media and hotels.
Moody's says that state-owned enterprises (SOEs) will play
a less prominent role in driving overseas M&A. In fact,
the dominance of Chinese SOEs in overseas acquisitions is moderating,
and Moody's expects that this trend will persist. Elevated
leverage in the SOE sector could pose an increasing constraint on companies'
overseas ambitions, because these companies mainly rely on debt
financing.
Furthermore, in line with the broader SOE reform agenda, government
support for the SOEs' outbound M&A activity will diverge between
those motivated by national strategic importance (where support will remain
high) and those more inclined to pursue commercial interests in competitive
sectors (where support could be less forthcoming).
Chinese entities have relatively short experience in managing cross-border
investments, and there are significant execution and financial risks
that could prohibit an M&A deal from generating synergies.
Such risks could also negatively affect the acquirers' credit quality.
In many recent cases of Chinese outbound M&As, the acquired
companies have continued to be operated by their existing management,
due to differences in corporate cultures, market focus, and/or
production platforms. However, it remains to be seen as to
whether or not they can keep existing management structures in place over
the long term, or transition to their own management after the retention
period.
Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1042005
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
• 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.
Nino Siu
Asst Vice President - Analyst
Greater China Credit Research
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
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Ivan Chung
Associate Managing Director
Greater China Credit Research
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