Sizing Up China's Corporate Elite

By John Bailey and Xiaoming Song China's economic ascendancy is increasingly the focus of corporations and business analysts around the world. While much has been written about the country's overall growth in recent years, much less is known about the companies helping to generate it. To help investors gain a better understanding of China's corporate sector, Standard & Poor's has conducted a statistical survey of the Top 100 listed corporations (view the full list). This is the third year Standard & Poor's has reviewed the leading corporations. The selection criteria are based on the latest available revenue size.

It's important to note that even though these companies are some of the largest in China, they still only account for a relatively small portion of the overall market. Generally, China's industries are highly fragmented. For example, the top five steel companies account for only one-third of the country's production. By contrast, the five biggest West European operators generate about 60% of total supply.

FAMILIAR FACES. For many of the smaller companies outside the Top 100 list, such as the unlisted state-owned enterprises (SOEs), market conditions are much more competitive and challenging. Historically, China's SOE sector has overwhelmingly emphasized job preservation over the efficient use of capital. According to the World Bank, in 2001 China had 89,000 money-losing SOEs -- roughly half of the group.

Of the companies in the Top 100 list, 87% were the same as last year. The companies entering the list for the first time were mostly the result of recent listings, such as China Netcom Group, Air China, and Semiconductor Manufacturing International. Some companies fell off the list because their revenue didn't grow as quickly as the rest of the top corporations -- or even declined, such as Brilliance China Automotive and Shenzhen Kaifa Technology. In all, 13 companies disappeared, reflecting a churn rate like that of previous years. (See BW Online's in-depth coverage of the yuan revaluation and its implications.)

Most companies on the list are in the heavy-industry sector, reflecting the frenzied development of the economy's infrastructure. The largest sectors include steel production, with 22 companies, followed by the petroleum and petrochemical industries, with 14 companies, most of which are related to the Sinopec Group.

BUBBLING CRUDE. From a revenue perspective, the picture looks a bit different. The petroleum and petrochemical sector accounting for 41% of total revenue of the companies surveyed, while telecom and steel production accounted for 17% and 13%, respectively. The top 10 companies accounted for 56% of the Top 100's revenue last year, the same as in 2003.

The largest outfits in this survey are the big SOEs. China Petroleum & Chemical, the biggest petrochemical and refining company in China, ranked first in sales, with its annual revenue reaching 591 billion yuan in 2004. PetroChina, the largest producer of crude oil and natural gas, generated the most profits, with a net income of 102.9 billion yuan in 2004. This was a significant 47.9% increase over the previous year attributable to higher oil prices.

Other large companies in the upper decile of the Top 100 list were China Mobile, the leading cell-phone operator; China Telecom, the largest fixed-line telecom company; CNOOC, in charge of offshore oil and gas exploration and production activities; and Baoshan Iron & Steel, the top steel manufacturer. Here's the list of the 10 largest (you can view the full list here).

Revenue (Mil. Yuan)

Net Profit (Mil. Yuan)





China Petroleum & Chemical





Petroleum and Petrochemical






Petroleum and Petrochemical

China Mobile (Hong Kong)






China Telecom






China United Telecommunications






China Netcom Group






Minmetals Development





Metal and Mining

Baoshan Iron & Steel





Steel Production






Petroleum and Petrochemical

China Resources Enterprises




1,551 Other

Although overall earnings for the Top 100 companies have been rising over recent years, there are many disparities. Some parts of the economy show extremely strong growth, such as the commodity-dependent corporations, which benefit from higher oil and mineral prices. But others are facing significant competitive pressures and cost inflation.

About 78% of the businesses in the survey saw their earnings rise in 2004. Earnings of the Top 100 corporations were up 41% in 2004, vs. a rise of 75% in 2003. However, if we exclude raw-materials-related companies, such as those in the steel, minerals, and petroleum sectors, earnings were up only 14%. The most profitable concerns continue to be the large state-controlled companies, which enjoy relatively protected market positions. The table below details median earnings trends for the Top 100:

Net Income (Mil. Yuan)

% Increase
















A key takeaway from the survey -- the operating margin squeeze affecting Chinese companies that depend on raw materials for manufacturing inputs, known as downstream industries. The median operating margin for the Top 100 was 10.4% in 2004, down slightly on the previous year. However, when the numbers are broken down, it can be seen that the upstream companies -- the producers of manufacturing inputs -- have been enjoying strong growth in their operating margins while the downstream manufacturers have been suffering from margin compression. For many downstream producers, manufacturing input costs are rising while their output prices are constrained, or even falling, because of overcapacity and intense competition.

COAL CRUNCH. A chief culprit has been the higher-than-expected price of coal, which crimped the 2004 performance of high-energy-consuming companies, such as those producing cement, power, and aluminum. The power producers reported that their coal costs rose 14% to 33% last year, resulting in a significant margin squeeze. Industry leader Huaneng Power International posted a 1.3% drop in its bottom line. Apart from coal prices, operating costs have also been hit hard by higher oil and transportation costs.

Another key trend gleaned from the survey: Overall, the biggest Chinese manufacturers appear to be easing up on debt leverage. Total debt to capital for China's Top 100 declined steadily to 27.4% in 2004, from 28.6% in 2000. Most companies relied heavily on bank debt, although some larger ones have used offshore capital markets.

A characteristic of many of the large listed corporations in China is a high level of cash and liquid investments. Of the 100 companies on S&P's list, 41% ended 2004 in a net cash position. However, a lot of the hoard will be used to pursue asset acquisitions and other growth opportunities. Transportation, principally airlines, was among the most heavily leveraged sectors, at 55% total debt to capital at the end of 2004 (this ratio has not been adjusted for operating leases).

Reflecting continued growth in passenger and cargo volume, all the major airlines in China have been aggressively expanding and updating their fleets. Boeing predicts that China will become the second-largest commercial aviation market, after the U.S., within 20 years, with that growth spurring demand for roughly 2,300 new planes over the same period. The major airlines have also been spending money on industry consolidation.

POWER HUNGRY. The energy sector has shown the largest jump in debt leverage in recent years. Power companies have been aggressively building up their capacity to satisfy China's insatiable thirst for energy. Huaneng Power, the largest listed independent power concern, for example, has nearly doubled its generation capacity in the last five years.

What can investors expect for China's upper-tier companies? The rapid economic growth seen in 2004 will slow in 2005 but will still remain strong. Structural constraints, tighter bank-lending policies, and a downturn in business sentiment in some sectors will limit growth -- but not to a damaging degree. Accelerating industrialization and urbanization will lead to further expansion in private investment and domestic consumption over the long term.

Despite Standard & Poor's expectation that China will continue to sustain strong growth rates, there are still important credit issues to watch out for:

Shrinking margins: High input costs and increased price competition because of overcapacity will cause more margin compression for some sectors -- in particular, autos, power, building materials, petrochemicals, and electronics. For example, the domestic auto industry has posted a 59% year-over-year decline in total profit in the first quarter of this year. This was the third quarterly decline in a row.

Austerity measures: Aiming to keep growth in certain economic segments from overheating, Beijing will impose new controls on the property-related sectors. Standard & Poor's remains cautious about some of the smaller property developers, especially those concentrated in Shanghai, and producers of cement and structural steel products, because of increased uncertainty over their demand and price outlook on the back of mortgage-tightening measures.

Quickening consolidation: Given the emergence of overcapacity and input-cost inflation, a pickup in consolidation is expected. New licensing requirements by the government are also helping to squeeze out some of the smaller unlicensed manufacturers. Consolidation is most likely to happen within carmaking, property development, low-end steel manufacture, and mobile-phone production.

The process could be drawn out, however, and may at times be highly political. Unemployment in China's rust-belt towns is high, and closures of state-owned factories only exacerbate it.

Yuan revaluation: The big beneficiaries of a stronger Chinese currency would be the airlines, because of the significant translation gains from their foreign currency debt exposure, and refineries, which would benefit from lower import costs for raw materials. On the other hand, a stronger yuan would increase the margin pressure on export-oriented companies, especially those with weak competitiveness that lack the pricing power to pass on costs to customers, and downstream chemical companies, which have a high percentage of dollar-based revenue.

Uncertainties in foreign expansion: Capital-spending levels are expected to grow strongly for some of the larger companies as they seek to restructure and expand their businesses. This could entail overseas investments and merger and acquisition activity (see BW Online, 7/27/05, "China's Global Urge to Merge"), which would raise significant operating risks and compound financial risk brought about through higher debt leverage. Chinese companies are starting to make outward investments, such as Lenovo's acquisition of IBM's PC business and the state-owned oil companies' investment in offshore energy projects. Of particular note has been CNOOC's announcement that it made a competing bid to Chevron's $16.4 billion offer for Unocal.

Potential global slowdown: Another important risk factor to consider will be how global demand evolves over the next two to three years. China's economy is highly open to exports and imports. The large current-account deficit in the U.S., which can be blamed on budget deficits and a low savings rate, could slow the pace of economic growth. A U.S. slowdown would lead to a decline in consumer confidence, exacerbate competition, and further depress profit margins in China.

Overall, there are many reasons to be cautiously optimistic about China's long-term outlook. However, it remains a classic emerging market, with all the hidden dangers and opportunities.

In the coming years, some companies will not survive the race, but others will change their management mentality, upgrade their technology, and emerge as internationally competitive enterprises. It will be interesting over the next decade to see which outfits emerge out of the current Top 100 list as the big winners. You can be sure rest of the world will be watching closely. Bailey and Song are analysts for Standard & Poor's Greater China corporate ratings group, based in Hong Kong

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