TheTreasurer

Moody’s foresees stable 2018 for Chinese corporates

Prospects for China’s leading corporates in 2018 looking good, according to rating agency’s analysis of firms in its rated portfolio

Revenues and profitability among China’s corporates are likely to remain stable throughout 2018, according to Moody’s.

The rating agency has drawn its conclusion from a review of Chinese firms in its rated portfolio. In its assessment, its near-term refinancing needs will be manageable in the course of next year.

Moody’s predicts that the aggregate revenue and EBITDA of its rated Chinese firms will rise between 5% and 7% in 2018.

Overall corporate liquidity will be sufficient, it says, as onshore bank loans will remain a solid financing route.

Meanwhile, commodity companies will continue to make progress with deleveraging – thanks to a combination of price recovery, more prudent capital spending and enhanced cost structures.

Downside risks that Chinese corporates may face include:

  • GDP growth slowing materially;
  • the US strengthening its protectionist policies; and
  • the government further reining in credit avenues, leading to a squeeze on liquidity.

However, they may benefit from some upside factors, such as:

  • stronger-than-expected GDP growth from effective economic rebalancing;
  • faster-than-expected deleveraging progress, among corporates generating greater revenue and cash flow; and
  • allocation of capital to sectors that will foster robust and sustainable medium-term growth.

In addition to those overall forecasts, Moody’s also provided its tips for how individual sectors would fare. Taking each in turn, it predicted:

  • Automotive Most rated automakers’ unit sales growth will slow, while higher service penetration will benefit rated dealers and rental providers.
  • Chemicals Rising prices and sales of non-core assets will support producers’ credit quality.
  • Construction and engineering services Moderate demand growth will boost earnings, while leverage will be stable.
  • Food and beverages Revenue will stabilise.
  • Internet Revenue growth will slow from a high, current base.
  • Manufacturing EBITDA growth will drive leverage decreases.
  • Metals and mining Commodity-price recovery and low capital spending will support modest deleveraging.
  • Oil and gas Credit quality will remain stable, based upon current oil-price assumptions.
  • Oilfield services Improved demand growth will lead to higher earnings, and leverage will improve.
  • Property Tight government policies will continue to slow sales growth.
  • Retail Credit quality will stabilise and there will be a focus on refinancing.
  • Steel and cement Improved pricing and enhanced cost controls will stabilise credit quality.
  • Utilities Thermal generation companies will face rising fuel costs and overcapacity – but most rated utilities will have financial buffers to compensate.

Moody’s vice president and senior credit officer Lina Choi said: “Domestic GDP growth of 6.6% in 2018, operating-efficiency gains and stable commodity prices will drive moderate corporate revenue and cash-flow growth. While deleveraging has started in most industries, the pace varies widely.”

She added: “We also believe that our rated portfolio’s near-term refinancing needs are manageable. We note that bond maturities are evenly distributed [throughout the run-up to] 2021.”

Moody’s subscribers can access its full report on what lies ahead for Chinese corporates next year here.

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