Coface Sa · EURONEXT:COFA
Coface Sa — Coface Country Risk Conference 2018
28 slides from Coface Sa's conference presentation, October 2018
Slide 1: Coface Conference Country Risk: Major Trends in the World Economy
COFACE CONFERENCE COUNTRY RISK MAJOR TRENDS IN THE WORLD ECONOMY
Slide 2: Trade War and Higher US Rates - Key Risks for China's Corporate Health
TRADE WAR AND HIGHER US RATES - KEY RISKS FOR CHINA’S CORPORATE HEALTH Alicia GARCIA-HERRERO Chief Asia Pacific Economist, NATIXIS
Slide 3: Trade war and higher US rates key risks for China's corporate health
Trade war and higher US rates key risks for China’s corporate health Alicia Garcia Herrero – Chief Economist, Asia Pacific +852 3900-8680 – alicia.garciaherrero@natixis.com OCTOBER 2018
Slide 4: Deleverage? Not for Chinese corporate sector
1 Deleverage? Not for Chinese corporate sector 2 No expectation of deleveraging in 2018 thanks to fiscal and monetary policy 3 But risks increase due to trade war and higher US rates 2
Slide 5: 1. Deleverage? Not for Chinese corporate sector
1. Deleverage? Not for Chinese corporate sector
Slide 6: Deleverage? Not for Chinese corporate sector
Deleverage? Not for Chinese corporate sector • Deleverage was the buzzword until the PBoC started cutting RRR • However, the deleverage was more financial than real: • Crackdown on shadow banking but limited progress in corporates • Continuous leveraging in Chinese firms especially private ones (mos
Slide 7: Natixis China Corporate Monitor
Natixis China Corporate Monitor Natixis China Corporate Monitor offers a bottom-up analysis of the health of the 3,000 largest listed corporates in China in 2017. Beyond evolution over time, the report also looks into the relative financial health of Chinese corporates compared to their global peers
Slide 8: Chinese corporates continued to leverage, especially private sector
In contrast with the global peers whose leverage ratio has declined in 2017, Chinese corporates continued to leverage, especially for the private sector Leverage Total Liabilities/Common Equity (%) By Country By Ownership China Global Central SOE Local SOE POE 195 195 190 190 190 185 182 185 179 180
Slide 9: Chinese corporates improved repayment ability but still lower than global peers
Therefore, Chinese corporates improved their repayment ability but still lower than their global peers Repayment EBITDA/Interest Expense By Country By Ownership China Global Central SOE Local SOE POE 10 10 9 8.6 9 8.1 8 7.6 8 7.3 7 7 6.2 6.3 5.9 5.6 6 5.1 6 4.8 4.8 5 5 4.0 4.1 4.4 4 4 3.1 3 3 2 2 1
Slide 10: New economy performing better; health care and utilities best
When compared to global peers, the new economy is clearly performing better. Health care and utilities are the very rare sectors with better corporate health than global average China versus global in 2017 Corporate Debt Revenue Capital EBITDA/ Management Liabilities/ % of Short Operating Interest P
Slide 11: 2. No expectation of deleveraging in 2018 thanks to fiscal and monetary policy
2. No expectation of deleveraging in 2018 thanks to fiscal and monetary policy
Slide 12: In 2018, stimulus should help but there are looming uncertainties
In 2018, stimulus should help but there are looming uncertainties Monetary and Fiscal Stimulus Key uncertainties US-China Trade war The FED (Supply chain and (Higher rates) access to technologies) 10
Slide 13: Tax cuts and additional local government bond financing
Tax cuts and additional local government bond financing to fight against the economic impact of US-led trade war Reduction in tax and non tax burden in 2018 Local Government Debt Limit (RMB tr) (RMB bn) 2017 2018 %YoY 25 25 1,400 1,200 1,100 18.6 1,000 20 20 1,000 300 15 15 800 11.6 600 420 10 7.2 1
Slide 14: Monetary policy through 250 basis points reduction in RRR cuts
Same with monetary policy through 250 basis points reduction in RRR cuts in 2018, pushing down cost of funding at the short end Required Reserve Ratio (%) China’s Rates (%) Big Banks SHIBOR 3M SHIBOR 1Y China 10 Year Small Banks Rural Credit Cooper and Other SM Fin 5.0 5.0 25 25 4.5 4.5 20 20 4.0 4.
Slide 15: 3. But risks increase due to trade war and higher US rates
3. But risks increase due to trade war and higher US rates
Slide 16: China's reliance on trade for growth seems reduced
In front of a trade war, the good news is that China’s reliance on trade for growth seems reduced China's exports as a share of GDP is falling Exports (USD bn) %GDP (rhs) 2,500 35 30 2,000 25 1,500 20 1,000 15 10 500 5 0 0 08 09 10 11 12 13 14 15 16 17 Source: Natixis, Bloomberg 14
Slide 17: Chinese corporates more dependent on overseas revenue
..but Chinese corporates are more and more dependent on overseas revenue Proportion of overseas revenue (%) 12 12 9.8 10 10 8.8 8.2 8 7.3 8 6.6 6.7 6 6 4 4 2 2 0 0 2012 2013 2014 2015 2016 2017 Source: Natixis, WIND N.B. Estimated from A shares Related Research Which Chinese sectors are more exposed
Slide 18: Some sectors are more exposed than others (ICT, consumer goods)
Some sectors are more exposed than the others (ICT, consumer goods) Proportion of overseas revenue by sector (%) 2012 2013 2014 2015 2016 2017 35 35 30 30 26 26 25 25 20 20 16 15 15 11 10 10 7 7 10 6 5 5 0 0 Information Consumer Industrials Automobiles Materials Health Care Retail Consumer Technolog
Slide 19: Semiconductor overtook oil as China's top imports
Semiconductor overtook oil as China's top imports Semiconductor overtook oil as China's top imports Crude Oil (USD bn) Integrated Circuit (USD bn) Crude Oil (% of Total Imports, rhs) Integrated Circuit (% of Total Imports, rhs) 300 16 14 250 12 200 10 150 8 6 100 4 50 2 0 0 12 13 14 15 16 17 Source:
Slide 20: Achilles heel as the biggest market but the smallest supplier
Achilles heel as the biggest market but the smallest supplier Demand of Semiconductor (2017, %) Supply of Semiconductor (2017, %) China, 3 Israel, 1 America, Europe, 4 21 Japan, 12 US, 37 Singapore, 8 Asia (ex Europe, 9 Japan, mostly Taiwan, 18 China), 60 Japan, 9 Korea, 19 N.B. Calculated by revenu
Slide 21: Chinese manufacturers secure larger market share only in the lower end
Chinese manufacturers only manage to secure larger market share in the lower end Supply of Semiconductor by Subsector (2017, %) China US Europe Korea Taiwan Singapore Japan Israel Others (Low) OSAT 22 17 44 3 14 (High) Fabless 7 52 2 15 16 8 (High) Foundry 7 9 9 68 2 5 (High) Wafer Supplier* 8 14 13
Slide 22: Ballooned corporate leverage means risks from higher funding cost
Ballooned corporate leverage in China means risks from higher funding cost Total debt to GDP (%) China’s Corporate Leverage (% GDP) Government Household Corporate 400 180 170 350 160 300 150 250 140 200 130 120 150 110 100 100 50 90 0 80 China US EU Japan 06 07 08 09 10 11 12 13 14 15 16 17 18* *201
Slide 23: Real estate sector: the big elephant in the room
Real estate sector: the big elephant in the room with massive leverage Chinese developers are more leveraged than global peers China Global 500 466 500 433 400 355 400 300 300 200 200 111 113 113 100 100 0 0 2015 2016 2017 N.B. Data extracted from Natixis China Corporate Monitor 2018. Real estate co
Slide 24: Property developers increasing reliance on USD bond funding
Chinese property developers are increasing their reliance on USD bond funding, which is becoming more expensive Outstanding Bond of Chinese Natixis China Offshore USD Corporate Bond Developers by Currency (USD bn) Index (By Sector, Yield-to-maturity) Others USD+HKD Aggregrate Real Estate CNY % of US
Slide 25: 13% of Chinese developers face severe debt repayment difficulties
According to our calculations, 13% of Chinese developers are subjected to severe debt repayment difficulties Repayment Ability of Chinese Number of real estate developers with high Developers repayment risk ordered by asset size At risk 6 Central SOE Local SOE POE 6 13% Good 30% 4 2 4 1 2 2 1 3 3 2
Slide 26: Conclusion
Conclusion • Chinese corporate balance sheets have not improved in 2017 especially when compared with those of global corporations. • Some sectors have been better than others, namely health care and utilities • As for 2018 prospects, fiscal and monetary stimuli should help increase the stream of in
Slide 27: Disclaimer
DISCLAIMER The information contained in this publication and any attachment thereto is exclusively intended for a client base consisting of professionals and qualified investors. This document and any attachment thereto are strictly confidential and cannot be divulgated to a third party without the
Slide 28: Coface Conference Country Risk: Major Trends in the World Economy
COFACE CONFERENCE COUNTRY RISK MAJOR TRENDS IN THE WORLD ECONOMY