Archives 2014

Among the Fortune 500, size isn’t everything

A record 100 Chinese corporations made the Fortune Global 500 list this year, including 91 companies from the Chinese mainland.

The list shows that Chinese companies are rising in international stature. However, according to a report from the China Business News this week, 16 of the Chinese mainland companies on the list ran in the red in 2013. By comparison, there were only four US companies on the list that ran at a deficit.

These companies won high positions on the list based on their total assets and average revenues, but they lagged behind other companies in terms of profit.

For example, the 95 companies based on the Chinese mainland and in Hong Kong earned an average profit of $3.22 billion over the past fiscal year, below the average of $3.91 billion for all the companies on the list, according to media reports.

Chinese mainland companies also employed more workers to earn their profits. The Chinese mainland companies on the list had 190,000 employees on average, well above the average of 130,000 workers for all the companies on the list.

It is obvious that there are huge gaps in efficiency between mainland companies and their international competitors. To catch up, mainland companies should not only concentrate on expanding their size, but also focus on boosting their competitiveness.

Among the companies on the Fortune Global 500, there were 16 from the mainland that had a total deficit of 37.7 billion yuan ($6.11 billion) in 2013. Most of these companies are in industries suffering from overcapacity, such as coal and steel. They include Ansteel Group, Aluminum Corp of China and Kailuan Group. All 16 companies used to be industrial powerhouses, but overcapacity problems in their industries have taken a toll.

The central government has taken note of the overcapacity problems. It has issued calls for companies in these industries to upgrade to more advanced technology to improve productivity and reduce carbon emissions.

During this period of adjustment, many companies have sought to boost their productivity through mergers and acquisitions, which has left many of them heavily in debt, according to a report in June by China Chengxin?International?Credit?Rating?Co.

The report also mentioned that many State-owned enterprises (SOEs) have trouble controlling costs.

Indeed, most of the Chinese companies made the Fortune Global 500 list simply because of their size, which was the result of the aforementioned mergers and asset restructuring.

For instance, Ansteel Group was born of the merger of Anshan Iron and Steel Group Corp and Panzhihua Iron and Steel Group Corp in 2010. Hebei Iron and Steel Group was the result of the merger of Tangshan Iron and Steel Group Corp and Handan Iron and Steel Group Corp in 2008.

It is easy to build a giant company through mergers and acquisitions, but without long-term planning, the combined company is likely to face a host of problems, particularly in industries rife with spare capacity.

For instance, Hebei Iron and Steel Group has made the Fortune Global 500 list for six straight years. The company produced as much as 42.8 million tons of crude steel in 2013, the most of any company in China. Still, the company reported a net loss of $138 million last year. Scale doesn’t necessarily translate into profit. A company has to hone a competitive edge.

Losses haven’t been limited to companies in industries struggling with overcapacity. Three other mainland firms also reported losses recently, including COSCO Group and China National Chemical Corp.

COSCO reported a deficit of nearly 2.28 billion yuan in the first half of this year due in part to the sluggish international shipping market.

It should also be noted that the Beijing-based oil giant Sinopec Ltd became the first Chinese company to break into the Fortune Global 500’s top three, trailing US retailer Wal-Mart Stores Inc and Royal Dutch Shell.

China National Petroleum Corp and State Grid Corporation of China also made the top 10. But they are SOEs in industries monopolized by the State.

These companies on the list highlight China’s growing economic strength. However, they still need to prove they can be profitable in a competitive market.

Online finance to expand household investment

Internet-based services will make credit more accessible: BCG

The rise of Internet-based finance in the Chinese mainland is set to catapult the average household’s investment readiness and credit accessibility of small businesses in the coming years, management consultancy Boston Consulting Group (BCG) said in a report released on Thursday.

Currently, the demand of the vast majority of households in the Chinese mainland for low-cost, more efficient financial services are unmet, which, coupled with the advancement in technology and the Chinese government’s support for financial innovation, serve to drive growth in online finance in the market, Tang Tjun, Hong Kong-based senior partner and manager director at BCG, told a news conference in Beijing on Thursday while releasing the report.

In 2013, mainland households with investable assets below $100,000 accounted for 94 percent of the mainland’s total number of households, far above the ratios in developed markets which generally stand below 50 percent, data from BCG showed, indicating unaddressed demand for more affordable and accessible investment conduits.

With sustained growth momentum expected in Internet-based financial services, investment readiness of normal households will grow substantially over the next few years, according to the BCG report.

The consulting group estimates that by 2020, the number of mainlanders purchasing fund-based wealth management products as a percentage of the total population will rise to 25-30 percent from a mere 3 percent in 2012.

For small and micro-sized enterprises and individually owned businesses in the country, the emergence of online financing will also help meet their credit demand that has long been marginalized. As a result, the number of small and micro-sized enterprises receiving credit will surge to 30-40 percent of the total by 2020 compared to 11 percent in 2013, the BCG report predicted.

As for emerging areas in online finance, particularly peer-to-peer (P2P) lending which involves tremendous risks, differential business models that target specific financing needs must be sought for survival in the face of uncertain prospects, David He, principal for the consulting firm in Beijing, said at the news conference.

In a sign of prevailing risks for P2P lending in the country, 11.3 percent of more than 1,100 P2P platforms in the country have been shut down or fled with clients’ money by July, said a report released in late August by rong360.com, a Beijing-based online private lending search service provider.

While the country has yet to lay down detailed rules for the regulation of the fast-growing P2P arena, tougher policies are expected to be in the pipeline to rein in the risks of unrecoverable loans, Feng Lin, a senior analyst at Hangzhou-based China E-Commerce Research Center, told the Global Times on Thursday.

Possible rules could include putting a licensing system in place to filter out the unqualified players and setting reserve requirements for P2P platform operators, Feng suggested, noting a coordination between different government bodies such as the People’s Bank of China (PBC), the country’s central bank, and the China Banking Regulatory Commission (CBRC) is also essential in the oversight of the emerging online finance trend.

A registration mechanism with transparent disclosure of investors and intermediary service providers, namely operators of P2P platforms, also needs to be created, He Bo, an analyst at Shanghai-based fund consultancy Howbuy, told the Global Times on Thursday.

Detailed regulations specifically designed for the P2P sector may come out as early as the end of the year, according to recent Chinese media reports which are yet to be officially confirmed by either PBC or CBRC.

Top Chinese companies grow, but face bottlenecks

16 banks made more profits than top 300 manufacturing companies

Despite their growing size, China’s top companies are facing profitability and innovation bottlenecks compared with their global counterparts, according to a recent domestic ranking of China’s top 500 companies released on Tuesday.

In the 2014 edition of the Top 500 Chinese Enterprises, unveiled in Beijing Tuesday, China’s oil giant Sinopec Group snatched the top slot for a 10th consecutive year with revenues of 2.95 trillion yuan ($479 billion).

The list was complied by the China Enterprise Confederation (CEC) and the China Enterprise Directors Association based on Chinese companies’ 2013 revenues.

Although total profits for the 500 companies grew by 10.6 percent from the previous year to 2.4 trillion yuan in 2013, their profit-revenue ratio edged down for a third consecutive year, dropping 0.1 of a percentage point to 4.24 percent.

“Although the growth rate of China’s top companies slowed down from over 20 percent two years ago, they continue to expand. They accounted for 35 percent of the nation’s total tax revenue in 2013,” Li Jianming, deputy director at the China Enterprise Confederation, told the Global Times Tuesday.

A total of 92 of the companies also landed in the US-based Fortune Magazine’s rankings of the world’s 500 largest companies, Li said.

However, some experts point out that bigger does not necessarily means stronger. Weak profitability and ability to innovate mean that many of these companies still have a long way to go before they can be counted among the world’s best companies.

Li Jin, chief researcher with the China Enterprise Development Research Institute (CEDRI), said many of the top 500 companies are State-owned enterprises(SOEs) that lack vitality and efficiency, and lack incentives to reform, although he added that the central government aims to change this.

Jin said that China’s top 500 companies are concentrated in the resource and manufacturing sectors, with fewer companies in high-value added sectors such as IT.

Experts said that relatively few top Chinese companies are technical leaders in their fields.

Two such examples, PC manufacturing giant Lenovo and telecommunications equipment maker Huawei Technologies, ranked 45th and 48th on the list respectively.

“[As a whole, these companies’] ability to innovate is weak. As the economy has slowed down, the rate of increases in R&D investment dropped for a second straight year in 2013, which is alarming,” Li Jianming of CEC said.

In 2013, Chinese companies’ investment in R&D grew by 7.36 percent year-on-year. That figure was 11.37 percent in 2012 and 16.50 percent in 2011, according to news portal 163.com.

According to Li, the manufacturing sector’s profitability is at concerning levels.

“The 16 Chinese banks on the top 500 list made more profits than the top 300 manufacturing companies combined in 2013, and accounted for over half of the total profit of the top 500 companies, raising concerns of a ‘hollowing-out’ of domestic industry,” Li Jianming said.

In comparison, the top 18 US banks only accounted for around 10 percent of total profit for the top 500 US companies.

With SOEs occupying the top 37 spots on the list, home appliance retailer Suning Commerce Group Co took the 38th spot as the largest company from the private sector, with annual revenues of 279.81 billion yuan.

The 2014 version of the list includes 200 companies from the private sector.

A total of 131 companies reported revenues of more than 100 billion yuan in 2013, up from 123 companies a year earlier, while the top 500 Chinese companies had combined revenues of 56.68 trillion yuan in 2013, up 13.31 percent from a year earlier, according to CEC.

Weak sentiment dampens sales of Shanghai new houses

New home sales fell for the second straight month in Shanghai in August amid weak sentiment.

The sales of new homes, excluding government-funded affordable housing, fell 6.7 percent from July to 654,000 square meters, the lowest volume in three months, Shanghai Deovolente Realty Co said in a report released yesterday.

“Despite a cooler-than-expected weather in August, most homeseekers continued to take a ‘wait-and-see’ attitude as they hope for significant price cuts by developers,” said Lu Qilin, a Deovolente researcher.

But few developers have offered attractive discounts — a major reason for the sluggish sales, Lu said.

The average cost of a new home fell 0.3 percent from July to 26,290 yuan (US$4,276) per square meter.

China Eastern Airlines’ profits decline 98 pct

China Eastern Airlines, one of the country’s leading carriers, has posted a net profit drop of 97.76 percent from the same period last year in the first half of 2014.

With a net profit of 14 million yuan (2.28 million U.S. dollars), the company registered a business revenue of 42.59 billion yuan in the first six months, according to a statement it filed to the Shanghai Stock Exchange on Sunday.

The revenue was a 2.68-percent increase from the same period last year, said China Eastern Airlines.

It attributed the lackluster performance to “geopolitical instability, fewer high-end business travelers, and more convenient high-speed railway services.”

The airline foresees both opportunities and challenges in the second half of this year due to a mixed picture consisting of “uncertainties in global economic recovery, continuous growth in China’s airline market, and fierce competition.”

By June 30, the Shanghai-based carrier had 485 planes, including 459 passenger ones, 12 cargo, and 14 corporate jets under its trusteeship.

Jack Ma tops China’s rich list

Jack Ma Yun, the 49-year-old founder of Alibaba Group Holding Ltd, has become China’s richest man with a net worth of $21.8 billion, Bloomberg reported on Thursday citing its Billionaires Index.

Ma’s assets include a 7.3 percent equity in China’s largest e-commerce business, which is preparing for what could be the largest IPO in US history.

Ma is $5.5 billion wealthier than Ma Huateng, founder of Tencent Holdings Ltd, China’s largest Internet company by market value.

Robin Li Yanhong, founder of Internet search engine Baidu Inc, ranks the third on the list of the richest people in the country.

Property price to rise for another 3 to 5 years

China’s housing price is likely to rise for another 3 to 5 years, said a senior executive with Shanghai’s leading property developer Greenland.

The ratio between the total price and the annual rent income of a property in the Chinese market is around 50 to 1, while that of the Japanese and Hong Kong markets were as high as 80 to 1 before they collapsed, said Geng Jing, vice-president of Greenland Holding Group.

So the Chinese property market is still hasn’t reached its upper limit, Geng said to an audience including a delegation of 30 students from the University of Cambridge at an event held by the Chinese Students & Scholars Association of Cambridge.

The delegation took a tour of Shanghai for the 30 anniversary of the CSSA Cambridge. The tour included visits to the top 25 companies in the city.

Foreign firms in China release CSR reports

Fifty-three foreign enterprises in Shanghai collectively released for the first time their corporate social responsibility reports on Aug 12.

An enterprise’s commitment and performance to fulfill its CSR is a new benchmark included in the evaluation system for Shanghai authorities to examine a foreign enterprise’s comprehensive performance and contribution to the development of the city, according to Shanghai Municipal Commission of Commerce.

The collective release of the CSR reports shows foreign enterprises have been attaching more importance to the China market, said Liu Jinping, head of Shanghai Association of Enterprises with Foreign Investment.

“Releasing a global CSR report has been a conventional measure for an enterprise to show its commitment to market, community and society. However, releasing a CSR report that is devoted to the China market shows an enterprise’s increasing awareness of being part of the China market,” said Liu.

The CSR reports cover the foreign enterprises’ involvement and investment in various aspects of the community, including environmental protection, product quality, charity contributions and social education.

On average, each of the foreign enterprises has already released three CSR reports. Some have released reports consecutively for seven years.

Experts and market insiders said an enterprise’s commitment and performance to shoulder its CSR reflects the enterprise’s capacity and competence in various ways.

“The fact that an enterprise can contribute a lot to the environment, employees, communities and society means that the enterprise is well-run, profit-making and has good credit to realize all these contributions. A poorly run enterprise may not have enough resources to secure employee safety and product quality, not to mention shouldering other responsibilities,” said a social science professor at Fudan University.

Johnny Kwan, senior vice-president of country plat-form and functions, BASF Greater China, said that in China the chemical industry has been making efforts for sustainable development.

One measure is to leverage more resources through building up a supply chain with social responsibility awareness, involving more partners to contribute to environmental protection, charity, employee welfare and other fields.

Some other enterprises have been improving their internal mechanism to improve operational flows to realize better compliance to their CSRs.

Shanghai has been improving conditions for foreign investment, and the city has also been raising the quality of investment, said Liu.

Departments and authorities have been appealing to high-caliber enterprises in terms of social output and financial output with higher administration efficiency and fair, open, transparent conditions, according to Shang Yuying, director of Shanghai Municipal Commission of Commerce.

Encouraging enterprises with foreign investment to release their CSR reports is also a step that pushes forward enterprises’ disclosure system and builds up Shanghai’s credit management, said Liu.

“As an enterprise’s commitment to and performance of CRS is included as a benchmark for evaluating the enterprise’s performance and contribution to the city, Shanghai may have a better insight into the role of foreign enterprises in the city’s economic and social development,” said Liu.

More than 2,000 foreign investment projects started in the first half of 2014 in Shanghai, of which 1,016 were focused in the China (Shanghai) Pilot Free Trade Zone, about 46.7 percent of the total number, according to Shang.

Alipay starts online financing for SMEs

Zhaocai Bao was designed to connect the investment activities of 300 million individual investors in China with the financing needs of 1 million small and medium-sized enterprises. Its annual sales volume is expected to reach 1 trillion yuan in the next two to three years.

China’s largest online payment provider Alipay announced the official launch on Monday of Zhaocai Bao, an Internet finance platform that aims to reshape financing for small businesses to the tune of 1 trillion yuan ($162 billion) within three years.

For investors, the Zhaocai Bao (Money-drawing Treasure) platform offers products with average annualized returns of between 5.4 percent and 6.9 percent. In comparison, the annualized return rate for Yu’ebao, China’s largest money market fund, has fallen to about 4.1 percent since its launch in June 2013, while China’s one-year fixed-term deposit rate is 3 percent.

Zhaocai Bao is different from Yu’ebao as its major product consists of loans to small businesses, while the latter is a money market fund managed by Tianhong Asset Management.

“We aim to connect the investment activities of 300 million individual investors in China with the financing needs of 1 million small and medium-sized enterprises,” said Yuan Leiming, CEO of Zhaocai Bao.

In addition to the higher return rate, Zhaocai Bao has set the threshold for investors at a mere 100 yuan. And risk of bad loans is underwritten by insurance companies.

Although products on Zhaocai Bao are bound by a fixed maturity ranging from three months to three years, investors are allowed to “liquidate” the product before its due date by transferring it via the platform to other investors, after paying a 0.2 percent transaction fee, so they can still enjoy the original annualized return rate.

At the borrowers’ end, Yuan said the financing cost for SMEs on Zhaocai Bao is about 7 percent, much lower than the average 18 percent financing cost for small and medium-sized companies, and the time it takes to borrow money can be as short as 10 seconds.

“The traditional approach for banks is to collect small pieces of capital, put them into a pool and then go search for borrowers, which pushes up the overall cost,” Yuan said.

“Our capability of cloud computing and big data processing enables direct integration of every piece of capital with the borrowers, which significantly reduces the cost,” he said, adding that the average Zhaocai Bao deal totals around 200,000 yuan and that Zhaocai Bao takes a 0.1 percent transaction fee on every deal.

Since a test run in April, Zhaocai Bao has already sold 11.4 billion yuan in financial products to a half-million customers, according to its official Web page, which is linked to Taobao.com. Forty financial institutions are currently working with the platform, while another 100 are waiting in the line.

By comparison, Yu’ebao currently has about 100 million users with transactions totaling 600 billion yuan.

“The aim for Zhaocai Bao is to reach 1 trillion yuan annual sales volume over the next two to three years,” Yuan said.

According to independent statistics, China is home to 800 online lending websites, with close to 100 billion yuan worth of transactions in 2013.

Chen Jin, CEO of China’s first online insurance vendor, Zhong’an Insurance – which is also one of Zhaocai Bao’s partners – said the transition from Yu’ebao to Zhaocai Bao reminds him of Taobao.com and Tmall.com, and marks a strategic transformation for China’s largest e-commerce conglomerate, Alibaba Group Holding Ltd.

Wu Zhigang, chief information officer for China National Investment and Guaranty Co, said that as most of China’s individual investors are vulnerable to risks, a platform like Zhaocao Bao could effectively lower those by offering a high degree of information and comparisons.

“It’s a good example of inclusive finance,” he said.

Gome H1 profit up 115%

Chinese electronics retailer Gome Electrical Appliances Holding Ltd said on Monday that net profit for the first half of the year climbed 115.2 percent as a successful move toward e-commerce helped the firm stretch its net profit margin.

The firm posted a net profit of 693 million yuan ($112.7 million), up from 322 million yuan in the same period a year earlier, it said in a filing to the Hong Kong Exchanges and Clearing Ltd. Its net profit margin doubled to 2.38 percent from 1.19 percent.

Like its main rivals, Gome has been pushing increasingly online to help turn around flagging offline sales that dragged the firm into the red in 2012. Gome ompetes in China with firms like Suning Commerce Group Co Ltd, but online rivals such as JD.com Inc are becoming a challenge.

Gome, backed by private equity firm Bain Capital, saw first-half revenue climb 7.4 percent to 29.1 billion yuan.

The firm’s shares were closed at HK$ 1.36 on Monday with 3.03 percent growth, outflanking the benchmark Hang Seng Index, which was up 0.22 percent.