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China Credit Spotlight: High Leverage And Slowing Growth Increase Top Corporates' Credit Risks
Primary Credit Analysts: Terry E Chan, CFA, Melbourne (61) 3-9631-2174; terry.chan@standardandpoors.com Christopher Lee, Hong Kong (852) 2533-3562; christopher.k.lee@standardandpoors.com Secondary Contacts: Lillian Chiou, Hong Kong (852) 2533-3530; lillian.chiou@standardandpoors.com Susan Chu, Shanghai (8862) 8722-5813; Susan.Chu@standardandpoors.com Bei Fu, Hong Kong (852) 2533-3512; bei.fu@standardandpoors.com Parvathy Iyer, Melbourne (61) 3-9631-2034; parvathy.iyer@standardandpoors.com Matthew Kong, Hong Kong (852) 2533-3595; matthew.kong@standardandpoors.com Gloria Lu, CFA, FRM, Hong Kong (852) 2533-3596; gloria.lu@standardandpoors.com Lawrence Lu, CFA, Hong Kong (852) 2533-3517; law.lu@standardandpoors.com Huma Shi, Hong Kong 852-2533-3527; huma.shi@standardandpoors.com Suzanne G Smith, Singapore (65) 6239-6380; suzanne.smith@standardandpoors.com
Table Of Contents
Downside Scenario Could Lead To Downgrades For Weaker Entities The Average Financial Risk Profile Remains Significant Slower Growth Will Put Pressure On Profitability And Debt-Servicing Capacity China's Business Environment Softens Sample Selection And Basis Of Assessment Profiling the Industry Sectors Trends For The Industry Sectors' Financial Ratios
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Table Of Contents (cont.)

Comparing Industry Sectors 1. Automobile OEM And Parts Suppliers 2. Building Materials 3. Capital Goods 4. Coal 5. Construction And Engineering 6. Consumer Products 7. Diversified 8. Healthcare And Pharmaceuticals 9. High Technology 10. Infrastructure 11. Metal And Mining 12. Oil And Gas 13. Real Estate 14. Retail 15. Telecommunications 16. Transportation Services 17. Utilities Managing Debt Amid Heightened Economic And Financial Risks
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(Editor's Note: This article is part of our "China Credit Spotlight" series, which discusses the credit conditions for China's sovereign, key sectors, top 150 corporates, and top 50 banks.) China's recent investment boom has left its corporate sector with a large debt hangover. Since the onset of the Global Financial Crisis, China's top corporates have had easy access to credit, which has fuelled their strong investment levels. The country's new administration, however, is attempting to put the economy on a more sustainable footing. To achieve this goal, it aims to steer the economy away from the previous investment-led growth model to a more balanced framework that includes higher levels of consumption. China's top corporates have been struggling with declining profitability amid increasing borrowings since 2008. They now face the challenge of managing their highly leveraged balance sheets amid slower economic growth rates. In this more challenging environment, Standard & Poor's Ratings Services believes the capacity of China's corporates to service their high debt levels has diminished compared with a year ago. However, some companies and sectors are likely to weather the downturn better than others, which is likely to lead to increased differentiation among China's top corporates' credit profiles. Overview China's top 151 corporates accumulated high debt levels during the credit boom of the past five years. Facing lower economic growth and tighter profit margins, we believe they now have a reduced capacity to service their debt. We believe the financial strength of the majority of these corporates will weaken further in the next 12 months. A sizeable minority with highly leveraged balance sheets and continued high investment appetites remain particularly vulnerable in the current slowdown. The impact of the slowdown on China's industry sectors is likely to be uneven. In our view the better-placed sectors are telecommunications, oil and gas, consumer products, and healthcare and pharmaceuticals. On the other hand, sectors struggling with overcapacity--such as building materials, coal, transportation, and metal and mining--are more exposed. The steel subsector is especially stressed by overcapacity and is vulnerable to potential government policy changes.
For this 2013 China Top Corporates survey, we have selected 151 major Chinese companies from a pool of the largest domestic bond issuers and biggest revenue-earners, as well as companies that we believe are representative of their industries. We have chosen a diverse sample to gauge the general credit strength of the significant industries in China. We believe the majority of the 151 corporates that we analyze in this survey are likely to weather the current economic slowdown. However, a sizeable minority of the companies in this survey have "aggressive" to "highly leveraged" financial risk profiles (these are the two lowest categories in our six-point scale for financial risk; see chart 1 for the six-point scales we use to assess companies' financial and business risk profiles). We think these corporates will be
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more vulnerable in this more challenging operating environment. As in our 2012 survey of China's top corporates, the telecommunications and oil and gas sectors are the two strongest performers in this year's survey (see chart 1). Companies in these two sectors benefit from their oligopolistic market positions and strong financial positions. We regard the building materials, coal, construction and engineering, diversified, metal and mining (including steel), transportation, and utilities sectors as those with high financial risks. Some of these sectors are struggling with excess capacity and depressed profitability. To promote consolidation in these industries, we believe the government may intervene to remove excess capacity by asking some state-owned enterprises (SOEs) to acquire weaker entities. For the diversified, construction and engineering, and utilities sectors, financial risks are partially counterbalanced by their "satisfactory" or "strong" business risk profiles. Their business risk profiles reflect their good-to-strong market position, which, however, does not preclude weak or low profitability due to excess capacity. Pricing power for many companies in these sectors remains very limited.
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Chart 1
Downside Scenario Could Lead To Downgrades For Weaker Entities

In our base-case scenario, China's real GDP growth is 7.3% in both 2013 and 2014. In addition to our base-case scenario, we have formulated two downside scenarios--a "medium" downside of 6.8% real GDP growth in 2013 and 2014, and a "hard" downside of 6.5% in 2013 and 5% in 2014 (see "Credit Conditions: Increased China Downside Risk Dampens Asia's Growth," published July 30, 2013). The chances for these scenarios are 20%-25% for the "medium" downside scenario and 5% for the "hard." We summarize the possible ratings impact of both downside scenarios on selected industries in table 1 and chart 2. In this table and chart, "high" impact indicates the potential for downgrades of two or more rating notches, with some defaults among weaker entities; "medium" indicates the potential for downgrades of one-to-two rating notches; and "low" indicates the potential for no downgrades. In chart 2, the size of
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the bubbles illustrates the relative size of each sector's debt level.
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Chart 2
The Average Financial Risk Profile Remains Significant

Our 2013 survey of China's top 151 corporates finds that their average business risk profile is "satisfactory," and their average financial risk profile remains "significant" (see chart 3).
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Three-quarters of this year's sample comprises SOEs. This group also had on average "satisfactory" business and "significant" financial risks. The remaining quarter of the sample consists of private sector companies. This group had a weaker average business risk profile (categorized as "fair"), which is not surprising as SOEs tend to dominate most sectors. However, the private sector companies compensate for this with stronger average financial profiles (categorized as "intermediate").
Chart 3
Scatter Graph Legend

No. 1 2 3 Entity Air China Ltd. Aluminum Corp. of China Ltd. Anhui Conch Group Co., Ltd. Business risk profile 3 3 3 Financial risk profile 6 6 3 No. Entity 77 Great Wall Motor Company Ltd. 78 Guangdong Communication Group 79 Guangdong Hengjian Invesment Holding Co., Ltd Business risk profile 4 3 3 Financial risk profile 2 6 4
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Scatter Graph Legend (cont.)

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Aviation Industry Corporation of China Baidu, Inc. Bailian Group Co., Ltd. Baosteel Group Corp. BBMG Corp. Beijing Automotive Industry Holding Co., Ltd. Beijing Infrastructure Investment Co., Ltd. Beijing State-owned Assets Management Center Beijing Wangfujing Department Store (Group) Co., Ltd. Belle International Holdings Ltd. Bright Food (Group) Co., Ltd. Capital Airports Holding Company China Aerospace Science and Technology Corp. China Coal Energy Co. Ltd. China Communications Construction Co. Ltd. China Communications Services Corp. Ltd. China Co-op Group Co., Ltd. China Cosco Holdings Co. Ltd. China CSSC Holdings Ltd. China Datang Corp. China Electronics Corp. China Everbright International Ltd. China Guodian Corp. China Huadian Corp. China Huaneng Group China Longyuan Power Group Corp. Ltd. China Machinery Engineering Corp. China Mengniu Dairy Co. Ltd. China Merchants Group 2 3 3 3 4 4 4 3 3 3 3 3 2 4 3 3 3 4 4 2 3 4 2 2 2 3 4 3 3 4 2 3 4 5 5 6 5 5 2 5 5 3 3 5 2 6 6 5 6 5 4 6 6 6 4 2 2 3 80 Guangdong Investment Ltd. 81 Guangshen Railway Co. Ltd. 82 Guangzhou Automobile Group Co., Ltd. 83 Guangzhou Pharmaceutical Co. Ltd. 84 Guangzhou R&F Properties Co., Ltd. 85 Hebei Iron & Steel Group Co., Ltd. 86 Henan Coal and Chemical Industry Group Co., Ltd. 87 Hengan International Group Co. Ltd. 88 Huawei Investment & Holding Co., Ltd. 89 HUAYU Automotive Systems Co. Ltd. 90 Intime Retail (Group) Co. Ltd. 91 Jiangsu Communications Holding Co. Ltd. 92 Jiangsu Expressway Co. Ltd. 93 Jiangsu Guoxin Investment Group Ltd. 94 Jiangxi Copper Co. Ltd. 95 Jizhong Energy Group Co., Ltd. 96 Kunlun Energy Co. Ltd. 97 Kweichow Moutai Co., Ltd. 98 Legend Holdings 99 Lianhua Supermarket Holdings Co. Ltd. 100 Maoye International Holdings Ltd. 101 Ningbo Port Co. Ltd. 102 OCT Enterprises Co. 103 Parkson Retail Group Ltd. 104 Poly Real Estate Group Co Ltd. 105 Qingdao Haier Co., Ltd. 106 SAIC Motor Corp. Ltd. 107 Sany Heavy Industry Co., Ltd. 108 Shaanxi Yanchang Petroleum (Group) Co., Ltd 3 4 4 4 4 4 4 4 3 4 4 3 3 3 4 4 3 3 3 3 4 2 3 3 3 3 3 3 3 2 3 4 2 4 6 6 3 2 3 5 5 3 5 3 6 3 2 5 5 4 3 4 4 4 2 3 4 3
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33 34 35 36 37 China Metallurgical Group Corp. China Minmetals Corp. China Mobile Ltd. China National Building Material Co. Ltd. China National Machinery Industry Corp. China National Materials Co. Ltd. China National Offshore Oil Corp. China National Petroleum Corp. China North Industries Group Corp. China Overseas Land & Investment Ltd. China Petrochemical Corp. China Power Investment Corp. China Railway Construction Corp. Ltd. China Railway Group Ltd. China Railway Materials Co. Ltd. China Resources (Holdings) Co., Ltd. China Resources Cement Holdings Ltd. China Resources Enterprise Ltd. China Shenhua Energy Co. Ltd. China Shipbuilding Industry Corp. China Shipping (Group) Co. China Shougang Group Co., Ltd. China South Industries Group Corp. China State Construction Engineering Corp. Ltd. China Telecom Corp. Ltd. China Three Gorges Corp. China United Network Communications Ltd. China Vanke Co. Ltd. China Yongda Automobiles Services Holdings Ltd. 3 3 1 3 4 6 5 1 6 3 109 Shandong Weiqiao Pioneering Group Co., Ltd. 110 Shanghai Chengtou Corp, 111 Shanghai Construction Group Co., Ltd. 112 Shanghai Electric Group Co. Ltd. 113 Shanghai FOSUN Pharmaceutical (Group) Co., Ltd. 114 Shanghai Industrial Holdings Ltd. 115 Shanghai International Port (Group) Co., Ltd. 116 Shanghai Pharmaceuticals Holding Co., Ltd. 117 Shanghai Zhenhua Heavy Industry (Group) Co., Ltd. 118 Shanxi Coal Transportation and Sales Group Co., Ltd. 119 Shenergy (Group) Co., Ltd. 120 Shenzhou International Group Holdings Ltd. 121 Sichuan Expressway Co. Ltd. 122 Sino Biopharmaceutical Ltd. 123 Sinohydro Group Ltd. 124 Sino-Ocean Land Holdings Ltd. 125 Sinopharm Group Co. Ltd. 126 Sinotrans Ltd. 127 Sinotruk (Hong Kong) Ltd 128 State Development and Investment Corp. 129 State Grid Corp. of China 130 Sun Art Retail Group Ltd. 131 Suning Yun Commercial Group 132 Tangshan Jidong Cement Co., Ltd. 133 Tencent Holdings Ltd. 134 The Ministry of Railways of The PRC 135 Tianjin Port Development Holdings Ltd. 136 Tingyi (Cayman Islands) Holding Corp. 137 Tsingtao Brewery Co. Ltd. 3 4 4 3 4 3 6 5 2 5
38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61
3 2 1 2 3 2 2 2 2 3 3 4 2 3 2 4 4 3 3 2 2 2 3 5
5 2 2 4 3 3 6 4 4 5 4 5 4 2 5 6 6 4 4 2 4 3 3 5
3 2 3 4 4 3 4 4 4 3 4 3 4 4 3 2 3 4 4 2 2 3 3 3
5 3 3 6 6 3 3 4 2 5 5 3 4 5 6 2 3 3 6 2 6 3 2 2
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62 63 64 65 66 67 68 69 70 71 72 73 Chongqing Changan Automobile Co. Ltd. Dalian Port (PDA) Co. Ltd. Daqin Railway Co., Ltd. Dashang Group Co., Ltd. Digital China Holdings Ltd. Dongfang Electric Corp. Ltd. Dongfeng Motor Group Co. Ltd. Evergrande Real Estate Group Ltd. Fosun International Ltd. Foxconn International Holdings Ltd. Fuyao Glass Industry Group Co., Ltd. Gansu Provincial Highway Aviation Tourism Investment Group Co., Ltd. Gansu Provincial State-owned Asset Investment Group Co., Ltd. GD Midea Holdings Co., Ltd. Golden Eagle Retail Group Ltd. 4 3 3 3 3 4 4 4 3 5 4 4 4 5 3 5 4 2 3 4 4 3 3 6 138 Uni-President China Holdings Ltd. 139 Want Want China Holdings Limited 140 Weichai Power Co. Ltd. 141 Wuhan Iron and Steel (Group) Corp. 142 Wuliangye Yibin Co., Ltd. 143 Wumart Stores Inc. 144 XCMG Construction Machinery Co., Ltd. 145 Xinyi Glass Holdings Ltd. 146 Yanzhou Coal Mining Co., Ltd. 147 Zhejiang Expressway Co. Ltd. 148 Zhejiang Materials Industry Group Corp. 149 Zhejiang Provincial Energy Group Co. Ltd. 150 Zoomlion Heavy Industry Science and Technology Co. Ltd. 151 ZTE Corp. 3 3 4 4 3 4 4 4 4 3 3 3 3 3 3 5 2 5 4 3 4 2 5 3
74
75 76
3 4
2 3
Business Risk Profile: 1-Excellent, 2-Strong, 3-Satisfactory, 4-Fair, 5-Weak, 6-Vulnerable. Financial Risk Profile: 1-Minimal, 2-Modest, 3-Intermediate, 4-Significant, 5-Aggressive, 6-Highly leveraged. Source: Standard & Poors.
Slower Growth Will Put Pressure On Profitability And Debt-Servicing Capacity

Rapid credit expansion, including from the "shadow" (informal) banking sector, drove China's high investment-to-GDP levels and in turn its high economic growth rates in 2009-2012. Chart 4 shows that the top 151 corporates' debt-to-revenue ratios followed a similar trend to China's investment-to-GDP for the five years from 2008 to 2012. We expect debt growth to moderate for the top corporates in 2013, but with weaker revenue growth, their debt-to-revenue ratios may be slightly higher this year.
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Chart 4
To safeguard the stability of the financial sectors and shift the economy away from an overreliance on investment (and towards greater consumption), China's new Xi-Li administration seems determined to curb excessive credit growth (see "Fast Growth Of Shadow Banking May Hasten China's Monetary Reform," published July 19, 2013). If the new government manages to successfully achieve this aim, we believe it is likely to lead to lower and more sustainable economic growth rates. However, it is also likely to put pressure on the profitability and debt-servicing capability of China's corporates. The revenues, profit margins, debt levels, and debt-serviceability of China's top 151 corporates had strong correlations with the country's real GDP growth for the five years from 2008 to 2012 (see charts 5 to 8). Here, profit margin is measured by earnings before interest, tax, depreciation, and amortization (EBITDA) divided by revenue. Debt-serviceability is measured by funds from operations (FFO, defined as net income from continuing operations plus depreciation, amortization, deferred income taxes, and other noncash items) divided by debt. The top 151 corporates' total debt of Chinese renminbi (RMB) 13.6 trillion (US$2.2 trillion) in 2012 represents about one-fifth of total nonfinancial corporate debt in China.
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Chart 5
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Chart 6
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Chart 7
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Chart 8
Our base-case expectation is for real GDP growth to ease to 7.3% in 2013 compared with 7.8% in 2012. If the correlations in charts 5 to 8 hold, China's top corporates may suffer a weakening in revenue growth, profit margins, and debt-serviceability, although their debt growth should moderate. In China's economy, the state still plays a very substantial role. The government implements changes to its macroeconomic policy largely through its state-owned commercial banks (SOCBs), which still dominate the finance sector, and through the SOEs, which remain major players in many industries. However, the relative credit strengths of the central government and the SOCB and corporate sectors differ. We view the sovereign's credit profile as very strong and the major banks' credit profiles as adequate on a stand-alone basis. However, based on this survey of the top 151 companies in China, we assess the stand-alone financial risk profiles for China's largest companies as on average relatively weak. The average financial risk of the companies in this survey is "significant," with company profiles clustered primarily between "intermediate" and "aggressive" inclusive (see chart 3). On the other hand, their business risk profiles are comparatively better, and cluster between "satisfactory" to "fair" inclusive. In our view, the comparative weakness of these companies' financial risks profiles reflects the substantial investments
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they have made in order to keep pace with or outperform China's fast-growing economy. The fact that SOEs represent about three-quarters of our survey partly explains this push. The objectives of these SOEs go well beyond profit maximization--their shareholder base and relative cost of capital both favor the use of debt, which naturally heightens their financial risks.
China's Business Environment Softens

Following the sharp slowdown in China's real GDP growth to 7.8% in 2012 from 9.2% in 2011, our base-case expectation is for growth to decline further to 7.3% in 2013. China's economic performance in 2012 was a shade under our February 2012 real GDP growth forecast of 8% (see "Credit Outlook: Chinese Dragon To Fly In To A Soft Landing In 2012," published Feb. 1, 2012). For the year-to-June 2013, there has been a near-leveling out of economic growth. At the same time, we observe that manufacturing business sentiment has flattened (and is less optimistic than for nonmanufacturing). In addition, industrial entities' profit margins and real estate development investment growth rates have stabilized at 2012 levels. The low point in China's National Bureau of Statistics' (NBS) manufacturing purchasing managers index (PMI) over the past two years was in August 2012 (see chart 9). The PMI has since gone above 50, although not far above it (the index runs from zero to 100, where 50 is neutral, below 50 is negative, and above 50 is positive). Meanwhile, the nonmanufacturing PMI has remained well above 50, signaling more positive business sentiment than in the manufacturing sector. While this perhaps reflects a more resilient retail sector (as the Chinese government encourages more domestic consumption), the nonmanufacturing PMI has been showing a declining trend line since March 2012, which implies lessening optimism.
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Chart 9
The trendline for profit margins (on a year-on-year basis) of industrial entities with annual revenues of more than RMB20 million fell significantly in 2012 compared to 2011. However, there have been some signs of stabilization, with the trendline for the year-to-June 2013 closely mimicking that of 2012 (see chart 10; note that the NBS' survey covers all industrial enterprises with revenue from principal business of more than RMB20 million).
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Chart 10
Similar to the profit margins of industrial entities, the trendline for the growth rate of investments in real estate development (on a year-on-year basis) fell significantly in 2012 compared to 2011 (see chart 11). But here again there are signs of stabilization, with the trendline for the year-to-June 2013 close to, or even showing improvement over, that of 2012.
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Chart 11
Notwithstanding signs of some stability in business conditions, we expect those Chinese corporates that had either overextended or overinvested in the lead-up to last year's economic slowdown will continue to face stress. This expectation is particularly likely, in our view, given the Chinese government's determination to dampen excessive credit growth in the economy.
Sample Selection And Basis Of Assessment

We have selected 151 major Chinese companies from a pool of the largest domestic bond issuers and biggest revenue-earners, as well as companies that we believe are representative of their industries. We have chosen a diverse sample to gauge the general credit strength of the significant industries in China. As in 2012, our study focuses on the stand-alone credit profile (SACP) of the top corporates in China. The SACP is one of the components in our assessment of a corporate credit or issuer credit rating. For companies that do not benefit from or are constrained by the parent group or government, we would assess the issuer credit rating as being equivalent to the SACP. This year we have increased our coverage of private sector entities, which account for one-quarter of the sample, compared with 12% last year. Retail, consumer products, high technology, and real estate have the highest number of
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private companies. Among the 107 companies in our sample in 2012, we have removed 18 because we believed there was duplication of some holding and operating companies within the same group, and also to streamline the number of companies with similar profiles within the coal and metal and mining sectors. We have also expanded the number of sectors in our study to 17 from 15 by adding retail and healthcare and pharmaceuticals (see charts 12 and 13). We believe these sectors have promising growth prospects because of the government's policy to increase consumption, and due to the country's rapidly aging population. We have also increased the minimum sample size of each industry to five (with the exception of telecommunications), compared with one or two companies for sectors such as building materials and real estate in 2012.
Chart 12
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Chart 13
The largest bond issuer in the domestic market, the former Ministry of Railways (MOR), has been succeeded by China Railway Corp. (CRC), a commercial entity now held under the Ministry of Transport. In early 2013, CRC assumed all of the commercial operations and borrowings of the former MOR. Our assessment of CRC is still based on MOR's financials, as CRC has not yet produced its own consolidated financial statements. We only use publicly available information for issuers that we don't rate. The information sources include chinabond.com.cn, Chinamoney.com.cn, and, for listed entities, the official websites of the stock exchanges. For issuers with a Standard & Poor's public rating, we draw upon our existing issuer credit rating analysis. In this survey, we have only assessed companies' SACP, which comprises their business and financial risk profiles. We have not factored into the analysis our expectations of extraordinary government support. In arriving at public issuer credit ratings for state-owned enterprises, we would factor in the likelihood of extraordinary government support for these entities. Specifically, we would assess the potential for timely and sufficient financial government support if a company is in financial distress. Three-quarters of our sample are SOEs from various levels of government (see "Credit FAQ: China Credit Spotlight: Analyzing Government Support For China's State-Owned Enterprises," published Aug. 12, 2013).
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To illustrate our analytical approach, we will be publishing individual credit summaries for 29 of the 151 companies in this survey. The names of these companies are listed in the industry subsections of this article.
Profiling the Industry Sectors

To inform our views in table 1, we examined the standalone business and financial risk profiles of 151 top Chinese companies to assess how well they can weather the risk of a further economic slowdown. This year we added the healthcare and pharmaceuticals and retail sectors to increase our coverage to 17 industry sectors. Our findings continue to show that there is a wide divergence between and within sectors in regard to business and financial risk profiles. The average business and financial risk profiles for the sectors are listed in table 2.
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In this year's top corporates survey, the overall sample's average business risk profile is "satisfactory." The overall average business risk profile for the SOEs remains unchanged, whereas private sector companies have a lower average business risk profile ("fair"). On the other hand, the private sector companies have a slightly stronger average financial risk profile ("intermediate") than the SOEs. But as the private sector companies only contribute one-quarter of the sample, they do not impact the overall average business and financial risk profiles. Although there was some deterioration in 2012 in the debt leverage and profit margins of those corporates which are members of both our 2013 and 2012 samples, our forward-looking analysis last year had already factored most of the deterioration into our 2012 assessment.
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Our rankings for the sectors have somewhat shifted this year due to the addition of two sectors, which brings the total number of sectors to 17. The strongest and weakest sectors in terms of quartile ranking are broadly similar to our survey in 2012. However, some sectors have shifted as we reassessed their business and financial risk profiles. For example, we have lowered our assessment of the business risk profile for shipping companies, which resulted in the transportation sector ranking falling to 16th (from 10th in 2012). Similarly, the downward adjustment of metal and mining companies' business risk profile due to weak profitability led to the sector rank falling to 17th (from 11th in 2012). The building materials sector rank fell to 14th (from 3rd in 2012), because the 2012 sample comprised the stronger cement producers, and the subsequent expansion of the sample to six cement companies and two glass manufacturers diluted the sector's business risk profile. Finally, the infrastructure sector moved up to 9th spot (from 15th in 2012), as the new expressways and ports companies that we have added to the 2013 sample have stronger financial profiles. The strongest sectors in the first quartile are the telecommunications, oil and gas, consumer products, and healthcare and pharmaceuticals sectors. Healthcare and pharmaceuticals is a new sector in our sample, and comprises two large pharmaceutical companies with strong financials. In the fourth quartile, the weakest sectors are diversified, building materials, coal, transportation, and metal and mining companies.
Trends For The Industry Sectors' Financial Ratios

As part of our assessment of the 17 sectors, we focused on some of the key financial ratios that we use in our credit analysis, and compared the trends and medians between the sectors. In particular, we focused on three financial ratios over the five years from 2008 to 2012: Debt-to-EBITDA: Debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA). This ratio helps to indicate leverage. EBITDA margin: EBITDA divided by revenue. This ratio helps to indicate profitability. However, EBITDA margins may not reflect capital costs and financial leverage as some capital-intensive companies have higher margins compared with "asset light" and working capital-intensive corporates. We may use return on capital as a supplementary analysis for profitability. FFO-to-debt: Funds from operations (defined as net income from continuing operations plus depreciation, amortization, deferred income taxes, and other noncash items) divided by debt. This ratio helps to indicate cash flow available to service and repay debt. In table 3, we present the median ratios for each sector for 2010-2012. A red-colored cell indicates that the metric has worsened, yellow indicates no change, and green indicates an improvement. For further explanation of these ratios, see "Criteria/Corporates/General: 2008 Corporate Criteria: Ratios And Adjustments," published April 15, 2008. We should emphasize that the selected ratios are for illustrative purposes. A full set of financial metrics and ratios that we assessed for this exercise will be found in our forthcoming article, "China Credit Spotlight: Credit Statistics Of The Top 151 Corporates."
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Table 3
Generally, the profitability of China's top companies, as indicated by the weighted average EBITDA margin of the sectors, was on a declining trend in 2009-2012, although there was an uptick in 2010. The vast majority of sectors recorded lower profitability in 2012 compared with 2011 as economic growth slowed. Operating cash flow against debt, as indicated by the weighted average FFO-to-debt ratio, showed a similar declining trend to that for the EBITDA margin. Meanwhile, debt coverage, as indicated by the weighted average debt-to-EBITDA ratio, was stable in 2009-2011, although it deteriorated in 2012. In table 4, we show the rank order of sectors based on each financial ratio, and include two additional financial ratios: Debt-to-debt-plus-equity: Debt divided by the sum of debt and equity. This ratio indicates financial leverage. Return on capital: EBIT divided by the average of the beginning-of-year and end-of-year capital. This indicates capital efficiency. However, the rank order should be treated with caution as some sector samples are considered statistically small, and
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the selection has a size bias (that is, we selected the largest corporates). Consequently, any one sample may not adequately represent the sector. We illustrate the financial ratios from table 4 in charts 14 to 18.
Table 4
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Chart 14
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Chart 15
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Chart 16
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Chart 17
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Chart 18
Comparing Industry Sectors

The following sub-sections briefly discuss our views on the relative ranking and business and financial risk profiles of the 17 industry sectors.
1. Automobile OEM And Parts Suppliers
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Chart 19
For the automotive sector, the average business and financial risk profiles are "fair" and "significant" respectively, leaving the sector ranked 10th among the 17 sectors (see table 2 and chart 19). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be medium. The "fair" business risk profile reflects our view of Chinese automakers' good growth prospects, which is partly offset by increasing competition and rising costs as some regional governments tighten automobile ownership and pollution standards. Foreign manufacturers continue to dominate the market, although local original equipment manufacturers are making inroads, especially in niche segments such as sport utility vehicles and trucks, and in less developed regional cities and markets (see "China Credit Spotlight: For Local Car Makers, Adaptability Is The Key To Closing The Gap On Global Giants," published Aug. 6, 2013).
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We assess the financial risk profile for the automotive sector as "significant." Credit ratios are good for this category, but they don't reflect joint ventures with foreign manufacturers, which form the core asset for these companies. We do not have sufficient information on these joint ventures, so we have taken a more cautious assessment on the financial risk profile. Compared to other sectors, the debt-to-debt plus equity, FFO-to-debt, and return on capital ratios for the automotive sector sit comfortably among the top two sectors. Our sample for this sector consists of nine entities (see table 5), which are all SOEs except for Great Wall Motor Co. Ltd. and Weichai Power Co. Ltd. Among the sample group, we will be providing credit summaries on SAIC Motor Corporation Ltd. and Weichai Power Co. Ltd.
Table 5
China's Top Corporates: Automobile OEM And Parts Suppliers Sector Overview
Business risk profile Beijing Automotive Industry Holding Co., Ltd. Chongqing Changan Automobile Co. Ltd. Dongfeng Motor Group Co. Ltd. Great Wall Motor Co. Ltd. Guangzhou Automobile Group Co., Ltd. HUAYU Automotive Systems Co. Ltd. SAIC Motor Corp. Ltd. Sinotruk (Hong Kong) Ltd. Weichai Power Co. Ltd. Sample average Fair Fair Fair Fair Fair Fair Satisfactory Fair Fair Fair Financial risk profile Aggressive Significant Intermediate Modest Significant Intermediate Intermediate Aggressive Intermediate Significant Ownership SOE SOE SOE Private SOE SOE SOE SOE Private -
Private--classified as private sector. SOE--classified as state-owned enterprise. Source: Standard & Poor's.
2. Building Materials
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Chart 20
For the building materials sector, the average business and financial risk profiles are "fair" and "significant-to-aggressive" respectively, leaving the sector ranked 14th among the 17 sectors (see table 2 and chart 20). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be medium-to-high. The "fair" business risk profile for the building materials sector reflects our view of the industry's cyclicality and competitiveness, and cement companies' good market positions in national and regional markets. The cement subsector continues to face sluggish demand and overcapacity, which compress cement companies' profitability. The prospect of a recovery in profitability is mixed, as some regional markets have stabilized in terms of price competition but others continue to see keen price cutting. Demand should benefit from a modest increase in construction and infrastructure spending.
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The "significant-to-aggressive" financial risk profile reflects a deterioration in the profitability profile and increasing leverage due to a steady rise in debt-funded capital expenditure and negative free cash flows. The 2008-2012 median debt-to-EBITDA ratio ranks in the fourth quartile among the sectors, and debt-to-debt plus equity, FFO-to-debt, and return on capital rank in the third quartile. Cement makers' profitability may start to stabilize in 2013, but increasing capital expenditure and working capital due to longer payment periods from contractors could weaken credit ratios. Our sample for this sector consists of eight entities (see table 6). Among the sample group, we will be providing credit summaries on Anhui Conch Group Co., Ltd. and China National Building Material Co. Ltd. All the cement companies in our sample are SOEs, and the two glass producers are private enterprises.
Table 6
China's Top Corporates: Building Materials Sector Overview

Business risk profile Financial risk profile Anhui Conch Group Co., Ltd. BBMG Corp. China National Building Material Co. Ltd. China National Materials Co. Ltd. China Resources Cement Holdings Ltd. Fuyao Glass Industry Group Co., Ltd. Tangshan Jidong Cement Co.,Ltd. Xinyi Glass Holdings Ltd. Sample average Satisfactory Fair Satisfactory Satisfactory Fair Fair Fair Fair Fair Intermediate Aggressive Highly leveraged Aggressive Aggressive Intermediate Highly leveraged Intermediate Ownership SOE SOE SOE SOE SOE Private SOE Private
Significant-to-aggressive -
3. Capital Goods
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Chart 21
For the capital goods sector, the average business and financial risk profiles are "satisfactory" and "significant" respectively, leaving the sector ranked 6th among the 17 sectors (see table 2 and chart 21). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be medium-to-high. This sector sample comprises large defense contractors, shipbuilders, and construction machinery makers. Demand for capital goods is sensitive to economic cycles, and demand for ships, heavy equipment, and construction machinery has softened due to a weak shipping market and sluggish demand from construction and manufacturing. This is reflected in relatively low margins and moderate revenue growth over the past three years. Nevertheless, defense contractors should benefit from a steady increase in China's defense spending and regulatory barriers to entry in industries considered strategic. We assess defense contractors as having "strong" business risk profiles, compared with
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'satisfactory" or "fair" for shipbuilders, heavy equipment, and construction machinery makers, which operate in competitive and volatile industries. The sector's "significant" financial risk profile is reflected by the fact that four of the five representative ratios are in the second quartile, while the EBITDA margin ratio is in the third quartile. We view the financial health of the companies in the sample as relatively good, and we believe these companies have controlled their balance sheet leverage fairly well as they have expanded over the past three years. These companies have also maintained large surplus cash, which should provide good financial flexibility. Our sample for this sector consists of 14 entities (see table 7), of which two are privately-owned companies. Among the sample group, we will be providing credit summaries for Aviation Industry Corp. of China, Sany Heavy Industry Co., Ltd., and Shanghai Electric Group Co. Ltd. We rate Zoomlion Heavy Industry Science and Technology Co. Ltd.
Table 7
China's Top Corporates: Capital Goods Sector Overview

Business risk profile Financial risk profile Ownership Aviation Industry Corporation of China China Aerospace Science and Technology Corp. China CSSC Holdings Ltd. China Machinery Engineering Corp. China National Machinery Industry Corp. China North Industries Group Corp. China Shipbuilding Industry Corp. China South Industries Group Corp. Dongfang Electric Corp. Ltd. Sany Heavy Industry Co., Ltd. Shanghai Electric Group Co. Ltd. Shanghai Zhenhua Heavy Industry (Group) Co., Ltd. XCMG Construction Machinery Co., Ltd. Zoomlion Heavy Industry Science and Technology Co. Ltd. Sample average Strong Strong Fair Fair Fair Strong Strong Satisfactory Fair Satisfactory Satisfactory Fair Fair Satisfactory Satisfactory Significant Intermediate Aggressive Modest Intermediate Significant Aggressive Significant Modest Significant Modest Highly leveraged Significant Significant Significant SOE SOE SOE SOE SOE SOE SOE SOE SOE Private SOE SOE SOE Private -
4. Coal
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Chart 22
For the coal sector, the average business and financial risk profiles are "fair" and "significant-to-aggressive" respectively, leaving the sector ranked 15th among the 17 sectors (see table 2 and chart 22). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be high. The sample study of the coal sector comprises three large coal miners--China Shenhua Energy Co. Ltd., China Coal Energy Co. Ltd., and Yanzhou Coal Mining Co., Ltd--along with three coal chemical and transportation companies. The "fair" business risk profile for coal companies reflects the fragmented and competitive market in which they operate, volatile demand and prices, and rising costs due to an increased focus on safety and environmental standards. Coal companies' profitability weakened in 2012 due to lower prices, following a period of sustained high prices. In addition, imports of low-quality thermal coal at significantly lower prices provided a substitute for domestic supply, particularly for power plants. The prospect of a sector recovery is slim in the next 12 months, in our view, as the sector
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grapples with increased supply and sluggish demand amid slower economic growth. The "significant-to-aggressive" financial risk profile reflects the more solid financial standing of the large coal miners in the sector. Even so, coal miners' financial ratios have deteriorated somewhat due to weaker cash flows and increased capital expenditure. Coal miners have large cash balances, and we believe they have the flexibility to cut capital expenditure and thereby preserve cash flow to weather the industry downturn. Although margins have declined as commodity prices fell in 2012, most of the thermal coal companies have been consistently profitable. As a result, their earnings-related metrics are in the second quartile (see table 4). However, the debt-to-debt plus equity and FFO-to-debt ratios, which are in the third quartile, indicate leverage is high, and weigh down the financial risk profile. Our sample for this sector consists of six entities (see table 8), all of which are SOEs. Among the sample group, we will be providing a credit summary on China Shenhua Energy Co. Ltd. We rate Yanzhou Coal Mining Co. Ltd.
Table 8
China's Top Corporates: Coal Sector Overview

Business risk profile Financial risk profile China Coal Energy Co. Ltd. China Shenhua Energy Co. Ltd. Henan Coal and Chemical Industry Group Co., Ltd. Jizhong Energy Group Co., Ltd. Fair Satisfactory Fair Fair Intermediate Modest Highly leveraged Highly leveraged Highly leveraged Significant Ownership SOE SOE SOE SOE SOE SOE
Shanxi Coal Transportation and Sales Group Co., Ltd. Fair Yanzhou Coal Mining Co., Ltd Sample average Fair Fair
Significant-to-aggressive -
5. Construction And Engineering
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Chart 23
For the engineering sector, the average business and financial risk profiles are "satisfactory" and "aggressive" respectively, leaving the sector ranked 11th among the 17 sectors (see table 2 and chart 23). Should the Chinese economy experience a "hard" downside, we expect the impact on the sector's credit profile to be medium-to-high. The "satisfactory" business risk profile reflects the sample companies' large operating scale, leading market positions, and thin profitability. We expect a modest recovery in construction and infrastructure spending in 2013-2014, from a low point in 2011 (see "China Credit Spotlight: The Top Construction Machinery Makers Have Deep Enough Pockets For A Lengthy Downturn," published Aug. 15, 2013). We believe profitability in the sector is stabilizing, but this is mitigated by somewhat weakening customer credit quality. Working capital requirements are rising, as some local governments are facing tighter funding and weaker revenue receipts, which have led to slower payments.
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The sector's "aggressive" financial risk profile is reflected in the fact that the five representative ratios are in the third and fourth quartiles. This highlights these companies' increasing leverage and significant negative free cash flows, which are offset by their large surplus cash balances. Contractors' leverage is unlikely to decrease given their aggressive expansion appetite to diversify their revenue streams, especially into capital-intensive businesses in property and infrastructure development. Our sample for this sector consists of seven entities (see table 9), all of which are SOEs. Among the sample group, we will be providing a credit summary on China State Construction Engineering Corp. Ltd. We rate China Railway Construction Corp. Ltd. and China Railway Group Ltd.
Table 9
China's Top Corporates: Construction And Engineering Sector Overview

Business risk profile Financial risk profile Ownership China Communications Construction Co. Ltd. China Metallurgical Group Corp. China Railway Construction Corp. Ltd. China Railway Group Ltd. Satisfactory Satisfactory Strong Strong Aggressive Highly leveraged Significant Significant Significant Aggressive Aggressive Aggressive SOE SOE SOE SOE SOE SOE SOE -
China State Construction Engineering Corp. Ltd. Satisfactory Shanghai Construction Group Co., Ltd. Sinohydro Group Ltd. Sample average Fair Satisfactory Satisfactory
6. Consumer Products
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Chart 24
For the consumer products sector, the average business and financial risk profiles are "satisfactory" and "intermediate" respectively, leaving the sector ranked 3rd among the 17 sectors (see table 2 and chart 24). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be low. The companies in our sample comprise mostly privately-owned businesses in food and beverages, apparel and textiles, and home appliances. The sector's "satisfactory" business risk profile is supported by our view that the companies in the sample have leading market positions, strong brands, and good profitability. We expect the sector to continue to benefit from the government's policy to encourage greater domestic consumption. Tempering these strengths are the sector's increased competition and overcapacity, which have led to slower sales and increased cost pressures. Among the sample companies, the state-owned food conglomerates have large scales and revenue bases, but their profitability and
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returns are comparatively thin. Their leverage is also significantly higher compared with smaller privately-owned competitors (see "China Credit Spotlight: Financial Risks Are Rising As Retail And Consumer Product Companies Step Up Their Spending Spree," published Aug. 13, 2013). The sector's "intermediate" financial risk profile reflects the sample companies' solid financial ratios, due to their good profitability and strong cash flows. Four of the five representative ratios are in the first quartile. While we expect sales in the sector to continue to grow, profitability will remain under pressure because of higher costs and intensifying competition at home and abroad. The beverage companies in the sector enjoy strong financial positions with good cash flows and low leverage. Our sample for this sector consists of 15 entities (see table 10). Among the sample group, we will be providing a credit summary on Qingdao Haier Co. Ltd. We rate Bright Food (Group) Co. Ltd. and Tingyi (Cayman Islands) Holding Corp.
Table 10
China's Top Corporates: Consumer Products Sector Overview

Business risk profile Financial risk profile Ownership Belle International Holdings Ltd. Bright Food (Group) Co., Ltd. China Mengniu Dairy Co. Ltd. China Resources Enterprise Ltd. GD Midea Holdings Co., Ltd. Hengan International Group Co. Ltd. Kweichow Moutai Co., Ltd. Qingdao Haier Co., Ltd. Shandong Weiqiao Pioneering Group Co., Ltd. Shenzhou International Group Holdings Ltd. Tingyi (Cayman Islands) Holding Corp. Tsingtao Brewery Co. Ltd. Uni-President China Holdings Ltd. Want Want China Holdings Ltd. Wuliangye Yibin Co., Ltd. Sample average Satisfactory Satisfactory Satisfactory Strong Satisfactory Fair Satisfactory Satisfactory Satisfactory Fair Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Modest Aggressive Modest Significant Modest Intermediate Modest Modest Intermediate Intermediate Modest Modest Significant Intermediate Modest Intermediate Private SOE Private SOE Private Private SOE Private Private Private Private Private Private Private SOE -
7. Diversified
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Chart 25
For the diversified sector, the average business and financial risk profiles are "satisfactory" and "aggressive" respectively, leaving the sector ranked 13th among the 17 sectors (see table 2 and chart 25). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be medium. This sector comprises companies with diverse businesses. We view this diversity as a positive factor for the sector's "satisfactory" business risk profile. However, we believe the majority of the companies in this sector suffer from a lack of business focus, while high investment and capital expenditure levels have resulted in low profitability and returns. These companies' weak profitability may reflect the fact that our sample includes SOEs that undertake non-commercial activities such as public utility functions, purchasing for the national railway, or development of new towns.
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The sector's financial risk profile has steadily weakened over the past three years. This is reflected in diversified companies' increasing leverage, particularly among infrastructure or utilities-base conglomerates. The sector as a whole has negative discretionary cash flow due to large capital expenditure and increased dividends. Other credit measures have also weakened, such as FFO-to-debt and EBITDA interest coverage. Consequently, the median ratios for the sector are in the third or fourth quartiles. Our sample for this sector consists of 12 entities (see table 11). Among the sample group, we will be providing a credit summary on Beijing State-owned Assets Management Center. We rate Fosun International Ltd.
Table 11
China's Top Corporates: Diversified Sector Overview

Business risk profile Financial risk profile Ownership Beijing State-owned Assets Management Center China Co-op Group Co., Ltd. China Merchants Group China Railway Materials Co. Ltd. China Resources (Holdings) Co., Ltd. Fosun International Limited Gansu Provincial State-owned Asset Investment Group Co., Ltd. Guangdong Hengjian Invesment Holding Co., Ltd. Jiangsu Guoxin Investment Group Ltd. Shanghai Industrial Holdings Ltd. State Development and Investment Corp. Zhejiang Materials Industry Group Corp. Sample average Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Aggressive Highly leveraged Intermediate Aggressive Significant Significant Aggressive Significant Aggressive Aggressive Highly leveraged Aggressive Aggressive SOE SOE SOE SOE SOE Private SOE SOE SOE SOE SOE SOE -
8. Healthcare And Pharmaceuticals
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Chart 26
For the healthcare and pharmaceuticals sector, the average business and financial risk profiles are "fair" and "intermediate" respectively, leaving the sector ranked 4th among the 17 sectors (see table 2 and chart 26). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be low. The sector comprises manufacturers and distributors of pharmaceutical products. The distributors include the two biggest drug distributors in China. The "fair" business risk profiles in the sector reflect distributors' leading market positions, strong relationships with government agencies and regulators, and wide geographic coverage. These strengths are tempered by increasing regulatory scrutiny over drug distribution and pricing, increasing capital expenditure to expand distribution networks, and rising acquisition appetites. Given tightening regulations, we expect consolidation in the industry to accelerate.
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Four of the five representative ratios fall in the first or second quartiles, leaving the sector with an "intermediate" financial risk profile. This reflects companies' strong cash flows, large cash balances, and relatively low borrowings. Operating cash flows have fully covered capital expenditure and dividends, leaving companies with increasing surplus cash balances. The expansion appetite for most companies in the sector has been somewhat disciplined. Our sample for this sector consists of five entities (see table 12). Among the sample group, we will be providing a credit summary on Sinopharm Group Co. Ltd.
Table 12
China's Top Corporates: Health Care And Pharmaceuticals Sector Overview

Business risk profile Guangzhou Pharmaceutical Co. Ltd. Fair Financial risk profile Modest Aggressive Intermediate Modest Intermediate Intermediate Ownership SOE Private SOE Private SOE -
Shanghai FOSUN Pharmaceutical (Group) Co., Ltd. Fair Shanghai Pharmaceuticals Holding Co., Ltd. Sino Biopharmaceutical Ltd. Sinopharm Group Co. Ltd. Sample average Satisfactory Fair Satisfactory Fair
9. High Technology
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Chart 27
For the high technology sector, the average business and financial risk profiles are "satisfactory" and "intermediate" respectively, leaving the sector ranked 5th among the 17 sectors (see table 2 and chart 27). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be low-to-medium. The sector is dominated by privately-owned companies, comprising equipment manufacturers, telecommunications and technology service and solution providers, and internet services providers. The business risk profile is quite widely dispersed, with a handful of companies in the "strong" and "weak" categories. However, the average business risk profile is "satisfactory," which reflects the stronger business risk profile of the internet services providers (Tencent Holdings Ltd. and Baidu, Inc.) and the global telecommunications equipment maker (Huawei Investment & Holdings Ltd.). On the other hand, contract manufacturer Foxconn International Holdings Ltd. and ZTE Corp. both have "weak"
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business risk profiles, as reflected by their losses in 2012. Internet service providers benefit from their large user base, increasing economies of scale, and asset light strategy. Their high profitability and minimum capital expenditure have led to strong cash generation and minimal borrowings. Large acquisition appetites could somewhat reduce these companies' financial strength. Huawei has a strong market position in router and new generation telecommunications gear, while low leverage and strong cash flows support its strong financial position. We believe the sector has a healthy financial position overall. The weaker players have somewhat high leverage and weak cash flows, but the stronger financial profiles for other companies in the sector offset this. The sector's debt-related ratios rank in the first or second quartiles. Manufacturers' profit margins are quite thin, which meant the sector ranked in the fourth quartile. Our sample for this sector consists of nine entities (see table 13). Among the sample group, we will be providing credit summaries on Huawei Investment & Holding Co., Ltd. and rated Tencent Holdings Ltd.
Table 13
China's Top Corporates: High Technology Sector Overview

Business risk profile Financial risk profile Ownership Baidu, Inc. Satisfactory Modest Modest Aggressive Significant Intermediate Modest Aggressive Modest Aggressive Intermediate Private SOE SOE Private Private Private Private Private Private -
China Communications Services Corp. Ltd. Satisfactory China Electronics Corp. Digital China Holdings Ltd. Foxconn International Holdings Ltd. Huawei Investment & Holding Co., Ltd. Legend Holdings Tencent Holdings Ltd. ZTE Corp. Sample average Satisfactory Satisfactory Weak Satisfactory Satisfactory Strong Weak Satisfactory
10. Infrastructure
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Chart 28
For the infrastructure sector, the average business and financial risk profiles are "satisfactory" and "significant" respectively, leaving the sector ranked 9th among the 17 sectors (see table 2 and chart 28). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be low-to-medium. The "satisfactory" business risk profile reflects our view of the major players' good positions in the transport infrastructure and logistics sector, in which a high level of capital investment acts as a barrier to entry. Some companies in the sample are local monopolies or have very strong market positions (for example regional ports, provincial trunk highways, water supply operators, airports, and railways). In our sample, we have replaced the former Ministry of Railways by its successor, China Railway Corp., which has assumed the former ministry's commercial operations.
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Under the government's 12th Five-Year Plan (2011-2015), the overall cost for railway and airport projects is about RMB4,300 billion. High capital expenditure has pushed most of the sector's debt-related ratios into the third quartile. This is particularly so for the national railway company and provincial and municipal infrastructure platforms. In contrast, port and highway operators are in an enviable financial position, with low leverage and strong cash flows. While this sector's EBITDA margin is the best among the sectors, this ratio excludes depreciation, which can be substantial for such a capital expenditure-heavy industry. Our sample for this sector consists of 16 entities (see table 14), all of which are SOEs. Among the sample group, we will be providing credit summaries on Shanghai International Port (Group) Co. Ltd. and China Railway Corp.
Table 14
China's Top Corporates: Infrastructure Sector Overview

Business risk profile Financial risk profile Ownership Beijing Infrastructure Investment Co., Ltd. Capital Airports Holding Company China Everbright International Ltd. Fair Satisfactory Fair Highly leveraged Aggressive Significant Highly leveraged Aggressive Highly leveraged Highly leveraged Modest Aggressive Intermediate Intermediate Highly leveraged Intermediate Significant Intermediate Modest Significant SOE SOE SOE SOE SOE SOE SOE SOE SOE SOE SOE SOE SOE SOE SOE SOE -
China Railway Corporation (formerly The Ministry of Railways of The PRC) Strong Dalian Port (PDA) Co. Ltd. Gansu Provincial Highway Aviation Tourism Investment Group Co., Ltd. Guangdong Communication Group Guangdong Investment Ltd. Jiangsu Communications Holding Co. Ltd. Jiangsu Expressway Co. Ltd. Ningbo Port Co. Ltd. Shanghai Chengtou Corp. Shanghai International Port (Group) Co., Ltd. Sichuan Expressway Co. Ltd. Tianjin Port Development Holdings Limited Zhejiang Expressway Co. Ltd. Sample average Satisfactory Fair Satisfactory Satisfactory Satisfactory Satisfactory Strong Fair Strong Fair Satisfactory Satisfactory Satisfactory
11. Metal And Mining
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Chart 29
For the metal and mining sector, the average business and financial risk profiles are "fair" and "aggressive" respectively, leaving the sector ranked 17th among the 17 sectors (see table 2 and chart 29). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be high. In particular, the impact on the steel subsector will be very high. While the major players in China's metal and mining industry have a "satisfactory-to-fair" average business risk profile, other subsectors such as steel and aluminum are doing less well. The sector's "aggressive" financial risk profile is reflected in the fact that the five representative ratios are in the fourth quartile. In the steel and aluminum sectors, overcapacity, lack of product differentiation, market fragmentation, and sluggish demand will likely keep prices depressed. Profitability in these sectors remains weak and we do not expect a turnaround in the next 12 months. In our view, the key factor for the sector's profitability is the government's policy to consolidate the industry and eliminate
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excess capacity. Our sample for this sector consists of seven entities (see table 15), all of which are SOEs. Among the sample group, we will be providing credit summaries on Aluminum Corp. of China Ltd. and Baosteel Group Corp., both of which are rated.
Table 15
China's Top Corporates: Metal and Mining Sector Overview

Business risk profile Financial risk profile Ownership Aluminum Corp. of China Ltd. Baosteel Group Corp. China Minmetals Corp. China Shougang Group Co., Ltd. Hebei Iron & Steel Group Co., Ltd. Jiangxi Copper Company Ltd. Wuhan Iron and Steel (Group) Corp. Sample average Satisfactory Satisfactory Satisfactory Fair Fair Fair Fair Fair Highly leveraged Significant Aggressive Highly leveraged Highly leveraged Intermediate Aggressive Aggressive SOE SOE SOE SOE SOE SOE SOE -
12. Oil And Gas
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Chart 30
For the oil and gas sector, the average business and financial risk profiles are "strong" and "intermediate" respectively, leaving the sector ranked 2nd among the 17 sectors (see table 2 and chart 30). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be low. The sector's "strong" business risk profiles reflect our view of the good growth prospects for energy, as China continues its industrialization and continues to be a (net) importer of energy. It also reflects the three major oil companies' strong market positions and their growing presence overseas. These strengths are tempered by still-evolving regulations over energy prices, which have caused oil companies to suffer losses in certain segments of their business from time to time. Nevertheless, we believe pricing reform is moving towards a more transparent framework, which should close the gap between domestic prices and market prices over time.
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The sector's "intermediate" financial risk profile is underpinned by the fact that the five representative ratios are in the first and second quartiles. The oil companies' leading market positions and large operating scale support their strong financial positions. We expect the oil companies to maintain their sound profitability profile. However, large capital spending and a continued strong appetite for acquisitions will likely increase their leverage in the medium term, albeit from a low level. The industry has excellent access to capital, which is critical given the high level of capital expenditure and acquisitions. Our sample for this sector consists of five entities (see table 16). Among the sample group, we will be providing credit summaries on China National Petroleum Corp. and China Petrochemical Corp., both of which are rated. In addition, we rate China National Offshore Oil Corp.
Table 16
China's Top Corporates: Oil And Gas Sector Overview

Business risk profile Financial risk profile Ownership China National Offshore Oil Corp. China National Petroleum Corp. China Petrochemical Corp. Kunlun Energy Company Ltd. Shaanxi Yanchang Petroleum (Group) Co., Ltd. Sample average Strong Excellent Strong Satisfactory Satisfactory Strong Modest Modest Intermediate Intermediate Intermediate Intermediate SOE SOE SOE SOE SOE -
13. Real Estate
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Chart 31
For the real estate sector, the average business and financial risk profiles are "satisfactory" and "significant" respectively, leaving the sector ranked 8th among the 17 sectors (see table 2 and chart 31). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be medium. The sector sample comprises the largest residential property developers in China and some notable mid-sized regional developers. The "satisfactory" business risk profile mainly reflects the large developers' leading market positions, large operating scale, and good access to funding. These strengths are tempered by evolving policy risks related to the housing sector, volatile and cyclical industry drivers, and increasing competition as the industry consolidates. In the first six months of 2012, property developers realized strong sales and refinanced short-term maturities while credit conditions were favorable. However, more aggressive land purchase activity could drain cash levels (see "China
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Credit Spotlight: The Lending Landscape Is Shifting For Property Developers," published July 31, 2013). Despite the industry's improved liquidity position compared with early 2012, our financial risk profile for the sector remains "significant" as three of the five representative ratios are in the third or fourth quartiles. This reflects developers' need to maintain a healthy sales inventory to expand and increase earnings. Developers fund this growth with borrowings, particularly for construction. As a result, we expect leverage to remain relatively high, even among the strongest players in the industry. We believe growth prospects for real estate remain strong as China continues to industrialize and witnesses higher urbanization rates. Our sample for this sector consists of seven entities (see table 17). Among the sample group, we will be providing a credit summary on rated China Vanke Co. Ltd. We also rate China Overseas Land & Investment Ltd., Evergrande Real Estate Group Ltd., Guangzhou R&F Properties Co. Ltd., and Poly Real Estate Group Co. Ltd.
Table 17.
China's Top Corporates: Real Estate Sector Overview

Business risk profile Financial risk profile Ownership China Overseas Land & Investment Ltd. Satisfactory China Vanke Co. Ltd. Evergrande Real Estate Group Ltd. Guangzhou R&F Properties Co., Ltd. OCT Enterprises Co. Poly Real Estate Group Co Ltd. Sino-Ocean Land Holdings Ltd. Sample average Satisfactory Fair Fair Satisfactory Satisfactory Fair Satisfactory Intermediate Intermediate Significant Significant Significant Significant Aggressive Significant SOE Private Private Private SOE SOE Private -
14. Retail
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Chart 32
For the retail sector, the average business and financial risk profiles are "fair" and "significant" respectively, leaving the sector ranked 12th among the 17 sectors (see table 2 and chart 32). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be medium-to-high. The sector comprises leading department stores, supermarkets, hypermarkets, and auto distributors. The "fair" business risk profile reflects the competitive and fragmented market in which companies operate, increasing competition from online shopping, and a cash-generative business model. We expect retail sales growth to be steady, although the government's curb on lavish spending is likely to continue to affect sales of luxury products(see "China Credit Spotlight: Financial Risks Are Rising As Retail And Consumer Product Companies Step Up Their Spending Spree," published Aug. 13, 2013). Overcapacity and increasing competition will likely lead weaker retailers to seek strong partners or sell out, and we believe industry consolidation will likely accelerate over the next 12-18 months.
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The sector's "significant" financial risk profile is reflected in the fact that the five representative ratios are in the third and fourth quartiles. Retailers' rental leases are capitalized and added to total debt for the calculation of leverage. As a result, retailers' leverage is somewhat higher compared, for example, with consumer companies. In our view, retailers that have a strong acquisition appetite may need to strike a balance between growth and financial stability, as potential acquisitions could raises integration risks and increase their leverage. Our sample for this sector consists of 12 entities (see table 18), the majority of which are privately-owned companies. Among the sample group, we will be providing credit summaries on Bailian Group Co., Ltd. and Sun Art Retail Group Ltd. We rate Golden Eagle Retail Group Ltd., Intime Retail (Group) Co. Ltd., Maoye International Holdings Ltd., and Parkson Retail Group Ltd.
Table 18
China's Top Corporates: Retail Sector Overview

Business risk profile Financial risk profile Ownership Bailian Group Co., Ltd. Beijing Wangfujing Department Store (Group) Co., Ltd. China Yongda Automobiles Services Holdings Ltd. Dashang Group Co., Ltd. Golden Eagle Retail Group Ltd. Intime Retail (Group) Company Ltd. Lianhua Supermarket Holdings Co. Ltd. Maoye International Holdings Ltd. Parkson Retail Group Ltd. Sun Art Retail Group Ltd. Suning Yun Commercial Group Wumart Stores Inc. Sample average Satisfactory Satisfactory Weak Satisfactory Fair Fair Satisfactory Fair Satisfactory Satisfactory Fair Fair Fair Intermediate Aggressive Aggressive Aggressive Intermediate Aggressive Aggressive Significant Significant Intermediate Intermediate Aggressive Significant SOE SOE Private SOE Private Private SOE Private Private Private Private Private -
15. Telecommunications
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Chart 33
For the telecommunications sector, the average business and financial risk profiles are "strong" and "modest" respectively, leaving the sector ranked 1st among the 17 sectors (see table 2 and chart 33). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be low. The "strong" business risk profiles reflect the major players' oligopolistic positions in a sector catering to the expanding communication needs of China's business and consumer sectors. We believe China's wireless subscriber base could grow further because the mobile penetration rate is still relatively low. Moreover, smartphone subscription in China is increasing from a small base. We expect rapid take-up in 3G wireless services to continue for at least the next several years, which should drive further wireless data revenue growth. The "modest" financial risk profile reflects telecommunications operators' light indebtedness, which is a result of their
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strong cash flows that are more than sufficient to fund capital expenditure. This has resulted in the debt and EBITDA ratios being in the top two quartiles, although the return on capital remains in the fourth quartile. Nevertheless, increasing capital investment for advanced wireless networks and higher handset subsidy costs will likely moderate some operators' strong cash flows and profitability. Our sample for this sector consists of three entities (see table 19). Among the sample group, we will be providing a credit summary on rated China Mobile Ltd.
Table 19
China's Top Corporates: Telecommunications Sector Overview

Business risk profile Financial risk profile Ownership China Mobile Ltd. China Telecom Corporation Ltd. Excellent Strong Minimal Modest Intermediate Modest SOE SOE SOE -
China United Network Communications Ltd. Strong Sample average Strong
16. Transportation Services
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Chart 34
For the transportation services sector, the average business and financial risk profiles are "fair" and "aggressive" respectively, leaving the sector ranked 16th among the 17 sectors (see table 2 and chart 34). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be high. The sector's credit health varies by sub-segment. Airline and shipping line companies have generally weak credit profiles, while railroad and logistics companies have better credit health profiles. The "fair" business risk profiles reflect the major players' leading market positions in the airlines, freight rail, and shipping sub-sectors. These strengths are tempered by the competitive and cyclical industry in which these companies operate, and their exposure to volatile energy prices. The industry downturn in shipping has resulted in losses for Chinese shipping liners, while large capacity additions to their fleets have further weakened their credit profiles. The airlines fare slightly better, and stabilizing oil prices should ease the pressure on profitability. Nevertheless, we expect a weak cargo business and the
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substitution of short-haul travel with the high-speed rail network to crimp the demand for domestic air travel. The "aggressive" financial risk profile reflects airline and shipping line companies' highly leveraged balance sheets. These companies have accumulated high leverage due to their weak profitability and large capital expenditure, and we don't expect leverage to fall in the near term. The stronger credit ratios of freight railroad and logistic companies have helped to mitigate to some extent the high leverage of airline and shipping line companies, leading to the sector's overall financial risk profile of "aggressive." Our sample for this sector consists of six entities (see table 20), all of which are SOEs. Among the sample group, we will be providing a credit summary on Air China Ltd.
Table 20
China's Top Corporates: Transportation Services Sector Overview

Business risk profile Air China Ltd. China Cosco Holdings Co. Ltd. China Shipping (Group) Co. Daqin Railway Co., Ltd. Guangshen Railway Co. Ltd. Sinotrans Ltd. Sample average Satisfactory Fair Fair Satisfactory Fair Fair Fair Financial risk profile Highly leveraged Highly leveraged Highly leveraged Intermediate Intermediate Significant Aggressive Ownership SOE SOE SOE SOE SOE SOE -
17. Utilities
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Chart 35
For the utilities sector, the average business and financial risk profiles are "strong" and "aggressive" respectively, leaving the sector ranked 7th among the 17 sectors (see table 2 and chart 35). Should the Chinese economy experience a "hard" downside scenario, we expect the impact on the sector's credit profile to be low-to-medium. The major utilities' strong market positions, good growth potential for energy demand, and the government's policy to support renewable energy support their "strong" business positions. This is offset by evolving regulations and the lack of a transparent pricing framework (see "China Credit Spotlight: Price Reforms Could Put Utilities On A Firmer Footing," published Aug. 7, 2013). The financial risk profile is "aggressive," which reflects independent power producers' (IPPs) high leverage, which is offset by the stronger financials of grid companies, gas distributors, and provincial energy groups. After a period of low profitability, the situation turned around for IPPs in 2012, and we expect the improvement will be sustained in 2013 given our expectation that coal prices will remain low. The sector
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continues to expand capacity, which will require substantial funding. Median leverage and capital efficiency are both in the fourth quartiles. However, the utilities' profitability levels are in the second quartile. Our sample for this sector consists of 10 entities (see table 21). Among the sample group, we will be providing a credit summary on China Guodian Corp., China Huaneng Group, rated State Grid Corp. of China, and China Three Gorges Corp. We also rate China Longyuan Power Group Corp. Ltd.
Table 21
China's Top Corporates: Utilities Sector Overview

Business risk profile Financial risk profile Ownership China Datang Corp. China Guodian Corp. China Huadian Corp. China Huaneng Group China Longyuan Power Group Corp. Ltd. China Power Investment Corp. China Three Gorges Corp. Shenergy (Group) Co., Ltd. State Grid Corp. of China Zhejiang Provincial Energy Group Co. Ltd. Sample average Strong Strong Strong Strong Satisfactory Strong Strong Satisfactory Strong Satisfactory Strong Highly leveraged Highly leveraged Highly leveraged Highly leveraged Significant Highly leveraged Significant Intermediate Modest Intermediate Aggressive SOE SOE SOE SOE SOE SOE SOE SOE SOE SOE -
Managing Debt Amid Heightened Economic And Financial Risks

Following the rapid increase in corporate leverage since 2008, we believe the Chinese government is now willing to tolerate slower economic growth to contain excessive debt. In addition to slower GDP growth, potentially higher interest rates and a tighter credit environment have added to worries over financial sector stability. Interest rates in the interbank market unexpectedly spiked in June 2013, rising well into the double-digits from their usual 3%-4% range. Although we believe the rate spike in June was a short-term liquidity issue, the market was surprised that the central bank allowed this to happen, and this led to temporary dislocation (see "Credit FAQ: Top-10 Investor Questions On The Chinese Interbank Market And Financial Stability," published July 4, 2013). Consequently, the challenge for China's top corporates is to manage the impact of slower economic growth, thinner profits, and potential financial market volatility. This survey highlights our opinion that the major Chinese corporates' business risk profiles are generally satisfactory but their financial profiles pose significant risk. In our view, the telecommunications, oil and gas, consumer products, and healthcare and pharmaceuticals sectors are better-placed to face these challenges. On the other hand, subsectors struggling with overcapacity--such as airlines, aluminum, shipping, coal and cement, and steel--may be more stressed. Given the pressures in these sectors, we expect there may be some industry consolidation as the government intervenes to promote mergers between larger corporates and weaker players. In the more challenging operating environment ahead, we expect increased differentiation among
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China top corporates' credit profiles.
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Additional Contacts: Josie Li, Shanghai (86) 21-2208-0853; josie.li@standardandpoors.com Han Yan, Hong Kong (852) 25333505; han.yan@standardandpoors.com
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China Credit Spotlight: High Leverage And Slowing Growth Increase Top Corporates' Credit Risks

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Table Of Contents (cont.)

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Downside Scenario Could Lead To Downgrades For Weaker Entities

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The Average Financial Risk Profile Remains Significant

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Scatter Graph Legend

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Scatter Graph Legend (cont.)

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Scatter Graph Legend (cont.)

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Scatter Graph Legend (cont.)

Slower Growth Will Put Pressure On Profitability And Debt-Servicing Capacity

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China's Business Environment Softens

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Sample Selection And Basis Of Assessment

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Profiling the Industry Sectors

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Trends For The Industry Sectors' Financial Ratios

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Comparing Industry Sectors

1. Automobile OEM And Parts Suppliers

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China's Top Corporates: Building Materials Sector Overview

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China's Top Corporates: Capital Goods Sector Overview

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China's Top Corporates: Coal Sector Overview

5. Construction And Engineering

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China's Top Corporates: Construction And Engineering Sector Overview

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