Fitch: China Corporate Profits and Cash Flow to Remain Positive

Fitch Ratings says in a new report that profit growth based on both earnings before interest and tax (EBIT) and cash flow from operations for its portfolio of 40 Chinese non-financial corporates will remain positive in 2012 and 2013 and likely outperform China on an overall basis.

In the report, titled ’40 Chinese Corporates: YE12 Status and 2013 Preview’, the credit ratings agency (CRA) compares this with China’s overall industrial profits falling by 1.8% over January to September 2012 against the same period in 2011, underlining the possibility of negative growth for the full-year 2012. However, Fitch adds that its portfolio does not fully represent China on a macro basis, as it focuses more on the larger and stronger corporates, whereas the economic slowdown in China is likely to be taking a greater toll on companies in the middle and lower tiers.

Fitch expects the average credit profile of its portfolio of 40 Chinese corporates to improve by end-2012, and that this positive trend is likely to continue during 2013.

In particular Fitch expects 23 Chinese corporates in its portfolio to show an improvement in funds from operations-adjusted net leverage during 2012. This is largely from rising funds from operations, due to ongoing revenue growth and stable margins. For the remaining 17 corporates – including some major state-owned entities – the CRA expects a slight deterioration in leverage due to high capital expenditures (capex).

Fitch forecasts cash flow from operations growth in its Chinese portfolio to remain positive but slow to, on average, 10% and 7% in 2012 and 2013, respectively, after 19% in 2011. However, high capex levels are likely to restrict the average corporate from generating positive free cash flow in 2012 and 2013.

The publicly rated issuers in Fitch’s portfolio of 40 Chinese corporates are:

  • State-owned entities: Aluminum Corporation of China (BBB+/Stable); Baosteel Group (A-/Stable); Bright Food (Group) Co (BBB-/Stable); China Mobile (A+/Stable); China Oilfield Services (A/Stable); China Petroleum & Chemical Corp (Sinopec) (A+/Stable); China Resources Gas Group (BBB+/Stable); China Telecom (A/Stable); China Yangtze Power (A-/Stable); CNOOC (A+/Stable); PetroChina (A+/Stable); Sinochem Hong Kong (Group) (BBB+/Stable); Yanzhou Coal Mining (BBB-/Stable).
  • Non state-owned entities: China Hanking Holdings (BB-/Stable); China Hongqiao Group (BB/Positive); China Liansu Group (BB/Stable); China Oriental Group (BB+/Negative); China Shanshui Cement Limited (BB-/Positive); Delong Holdings (B/Negative); ENN Energy Holdings (BBB/Positive); Evergrande Real Estate (BB/Stable); Fufeng Group (BB/Negative); Intime Department Store (Group) (BB/Stable); MIE Holdings (B/Stable); Parkson Retail (BBB-/Stable); Road King Infrastructure (BB-/Stable); Shanghai Zendai Property (B/Stable); Shimao Property Holdings (BB/Stable); Sunac China Holdings (BB-/Stable); West China Cement (BB-/Stable); Winsway Coking Coal Holdings (BB-/Negative); Zoomlion Heavy Industry Science and Technology (BBB-/Stable); ZTE Corporation (BB-/RWN)


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