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Airline giants post strong annual profits

Carriers face competition from booming railway industry, fuel costs

China’s major airlines recently released their annual profits for 2017, with all reporting a jump in profit due to soaring travel demand.

Air China said on Tuesday that its net profit in 2017 rose 6.3 percent to 7.24 billion yuan ($1.15 billion), its strongest profit increase since 2011. Meanwhile, China Southern Airlines Co posted a 17 percent jump in profit and Hainan Airlines reported a net profit of 3.3 billion yuan, up 6 percent compared to its net income of 3.1 billion yuan in 2016.

China Eastern Airlines had not released its financial report as of press time.

Those numbers mean that the three airline giants contributed substantially to the overall robust growth of the domestic aviation market witnessed in 2017.

Air China said that the level of outbound travel in the industry is continuously increasing, causing the demand for international flights to soar. At the same time, its cargo sector has witnessed a recovery due to an increase in global demand, with the airline noting that its cargo revenue jumped 23.5 percent in 2017 alone.

China Southern, which is based in Guangzhou, South China’s Guangdong Province, said that the number of transfer passengers traveling through its main hub at Guangzhou Baiyun International Airport grew by 24.2 percent year-on-year while its transfer revenue grew 22.6 percent year-on-year.

According to the Civil Aviation Administration of China (CAAC), in 2017, China remained the world’s second-largest aviation market, with a total annual freight transport turnover of 108.31 billion ton-kilometers, representing a year-on-year growth rate of 12.5 percent.

In detail, the number of domestic and regional passengers reached 500 million, representing a year-on-year growth rate of 13.7 percent. The number of international passengers reached 55.442 million, representing a year-on-year growth rate of 7.4 percent. Meanwhile, the total domestic aviation freight volume reached 7.058 million tons, representing a year-on-year growth rate of 5.7 percent.

CAAC has predicted that 2018 could see the high demand trend continue, forecasting a passenger growth rate of more than 10 percent for the year.

Looming challenges

However, despite the strong forecasts and 2017’s climb in growth, numerous factors, including a pickup in fuel prices, a boom in high-speed rail travel, the prospect of interest rate hikes and fluctuations in exchange rates, are posing challenges and bringing uncertainties to the industry.

The three airlines said that each of their fuel costs are now at more than 28 percent, with Air China in particular noting that its fuel costs now stand at 29.2 percent, or 6.42 billion yuan, the highest fuel cost rate among the three giants.

Air China also said that currency fluctuations remain a risk as a 1 percent change in the yuan against the dollar could lead to a 279 million yuan shift in net profit.

All three companies have pointed out that the rapid development of China’s high-speed railway system could pose a big threat to their performances in the future, as the train network has almost completed the construction of four horizontal and four vertical transportation arteries spanning the entire country.

The National Development and Reform Commission said earlier that the country’s entire railway system could extend by as much as 150,000 kilometers by 2020, with that number including a 30,000 kilometer high-speed railway line increase. However, since Air China does not operate as many domestic short- and medium-haul routes as its peers, which are challenged by train journeys of a similar length, the impact of railway expansion on the airline’s overall performance will be limited.

Future strategy

As for future development, competition over slots at major domestic airports is becoming increasingly tense and it is getting ever more difficult for carriers to tap airports in first- and second-tier cities.

Because more carriers have been placing an increasing number of planes at domestic airports, competition has even been spreading as far as third- and fourth-tier cities.

Air China noted that since domestic airlines operating with wide-body aircraft are actively involved in the development of remote, second-tier markets, it has brought about a kind of diversion effect from its hub operations in first-tier cities.

In 2009, there were only three second-tier airports operating long-haul international routes longer than 5,000 kilometers. By December 2017, however, such flights were being operated in 21 second-tier airports across the nation, Air China said, adding that those airports have developed so much in recent years that they now have destinations across Europe, the Americas, Australia and Africa. This demonstrates the recent exponential growth of second-tier markets.

Despite the fierce competition, the three airline giants are nevertheless still holding on to the strategy of accelerating intercontinental routes as their main form of expansion.

Hainan Airlines, for example, said it will amplify its intercontinental route network in second-tier cities while China Southern said it is expecting a more prominent position in its Guangzhou hub, attempting to expand in Beijing and establishing more routes connecting China with overseas destinations. face competition from booming railway industry, fuel costs

International investors setting their eyes on China’s future global cities

China’s top tier cities may elevate themselves from regional centers to future global metropolises, with advantages in sectors such as smart cities and artificial intelligence.

International investors from global giants like Boeing, Merck and Siemens shared this view at the Annual Investment Conference in south China’s Guangzhou on Wednesday.

The conference is a major event aimed at promoting the city to potential investors and listening to their comments on its business environment. Over 1,800 enterprises from around the world attended the conference.

Many investors stated that China is now more than just a large market for them.

This year China is celebrating the 40th anniversary of its reform and opening-up.

Merck, a world leading company in health care, life science and performance materials, has been operating in China for over 80 years. As well as its existing research and development centers and labs in Beijing and Shanghai, the company established a new China Innovation Center in Shanghai in February.

“The opening-up of China has made a great difference to our business and it allowed us to advance business sectors liquid crystal and pigments,” said Allan Gabor, managing director of Merck China.

“When Merck looks at China, we see China as much more than a large business market, we see it actually as an enabler of our global strategy,” Gabor added.

Similarly, John Bruns, vice president of Boeing International, said China is now “a source of innovation” from the company’s perspective.

The American aviation giant will soon open its first finishing and delivering center for 737 planes outside the United States in east China near Shanghai, and recently signed an agreement with China Southern Airlines to initiate a 737 converted freight project in Guangzhou, and to include a local maintenance company in its 787 global care program.

Cities like Beijing, Shanghai, Guangzhou and Shenzhen, and the Greater Bay Area of Guangdong, Hong Kong and Macao, are becoming the key players in investors’ global strategies.

These cities have mature urban infrastructure, advanced industries and are renewing their focus on development to be in line with the information revolution and an international lifestyle.

Guangzhou, for example, is focusing on the new generation of information technology, artificial intelligence, bio-pharmaceuticals, as well as new energy and new materials.

The output of its new generation internet technology and panel display industries have both exceeded 100 billion yuan. It is also ambitious in becoming a smart city, by teaming up with global giants like Cisco and Siemens.

New York and London are indisputably global cities now, but what will global cities of the future look like?

“A future global city should be leading in smart mobility and smart energy distribution and future technology like A.I. I think Guangzhou is on a very good way to that,” said Jens Hildebrandt, chief representative of Delegation of German Industry and Commerce Guangzhou.

But investors also pointed out that Chinese cities still need to tackle a series of challenges before they become global cities, including IPR protection, environmental protection, further opening-up and continuous innovation, as well as self promotion.

These are also the areas where huge opportunities lie.

Three months ago, SHV Energy, the world’s largest distributor of LPG energy solutions, signed an memorandum of understanding with Guangdong Province, to build a LPG terminal in the city’s Nansha District.

“With the strong focus of the Chinese government to improve air quality and reduce emissions, you see a higher need for clean energy solutions.” said Maarten Bijl, global vice president of the company.

He added that SHV is also innovating its business model and looking for cleaner energy solutions in which it can cooperate with the Chinese cities. “We’re in discussion to see how we can work with the city of Guangzhou, and we can get hydrogen mobility solutions here, which is the next step.”

Aside from the top tier cities, China as a whole is putting every effort to further open up. Earlier this month, the government pledged to continue to streamline administration and delegate power to improve the business environment and further stimulate market vitality.

Industrial profits rise 16.1% in first 2 months

Policy support to reduce costs, higher sales help boost growth

The nation’s industrial profits grew significantly in the first two months of the year, thanks to policy support to lower costs and higher sales offsetting weaker price rises.

Industrial profits increased by 16.1 percent to 968.9 billion yuan ($154.6 billion) in the January-February period compared to the same period last year, up from the 10.8 percent growth in December, data from the National Bureau of Statistics showed on Tuesday.

Profit growth in sectors such as oil and natural gas extraction and pharmaceutical manufacturing helped drive up the overall profit growth, according to the NBS.

Better than expected demand in the first two months led to stronger growth of industrial product sales, which helped offset the downward pressure from slower price rises, according to Liang Jing, an analyst with the research institute of Bank of China.

In the first two months, the industrial added value increased by 7.2 percent year-on-year, up 1 percentage point compared to December.

Revenue from companies’ major businesses increased by 10 percent year-on-year in the first two months, which is 1.2 percentage points higher than that in December.

Looking ahead, analysts expect slower profit growth in the near future due to the high base effect in the past several months, but they expect relative strong growth in the medium-to-long run as the growth momentum persists.

Gao Ming, an analyst with China Merchants Securities, said government support implemented since last year, such as efforts to lower production costs and tax cuts, will continue to help increase the efficiency of industrial production.

He expected industrial profit growth will increase by around 13.2 percent in 2018.

While many manufacturing sectors failed to see major improvement in profit growth in the first two months due to cyclical factors, government support to lower enterprises’ debt levels will encourage enterprises to restructure to achieve more sustainable profit growth in the long run, according to Gao.

The overall debt level of State-owned enterprises has been declining steadily as the government implements measures to help enterprises to improve asset quality.

Some promising signs can be found in enterprises’ financial performance, reflected by improved cash flows, higher investment returns and improved performances of inventories, according to a research note by China International Capital Corporation.

The profitability of consumer-related manufacturing enterprises is expected to see continued improvement, including food and consumption upgrade related industries, according to CICC.

Tencent listed as China’s most valuable brand

New analysis from market observation firms Kantar Millward Brown and Wire & Plastic Products Group now lists Tencent as China’s most valuable brand.

The analysis is part of the group’s “2018 BrandZ Top 100 Most Valuable Chinese Brands” ranking and report.

The report says the total value of the Top 100 Chinese brands has come in at $683.9 billion to start this year. This would represent 23% growth compared with the start of last year.

With a brand value of $132.2 billion, Tencent tops the list for the 4th year in a row.

E-commerce giant Alibaba now has an estimated brand value of $88.6 billion, a 53% year-on-year rise.

Other noteworthy sectors performing well are education, logistics and technology.

“Chinese customers pay increasing attention to brands, and top brands affect purchasing to a great extent,” said Wang Xing with Kantar Millward Brown.

The 2018 BrandZ China Top 100 is based on interviews with over 400,000 Chinese customers, as well as analysis of financial data, market evaluation and risk prediction.

Pony Ma: Tencent mulling A-share listing

Pony Ma Huateng, chairman and CEO of Chinese internet giant Tencent, indicated his support for the company’s listing both in Hong Kong and the Chinese mainland, and said he has discussed Tencent’s A-share flotation during the two sessions, which concluded last week.

Ma made the remarks at the China (Shenzhen) IT Summit on Sunday, according to a transcript from financial news outlet wallstreetcn, which broke the Hong Kong-listed company’s silence on returning to the mainland stock market.

Chinese business magazine Caixin earlier reported Tencent has been singled out as one of eight companies in the first batch to issue Chinese Depository Receipts — similar instruments to American depositary receipts, which are certificates that allow investors to hold shares listed across borders.

The other seven are Baidu, Alibaba, JD, Ctrip, Weibo, NetEase and Sunny Optical, which will go back to the A-share market via the CDR.

In Tencent’s 2017 Fourth Quarter and Annual Results announcement Wednesday, Ma also said the company will consider issuing CDRs if conditions permit, the Paper reported.

To woo tech giants home, China’s regulators have been working hard. Yan Qingmin, the deputy head of the China Securities Regulatory Commission confirmed to Securities Times on the sidelines of the two sessions that CDRs will be released very soon, and the instrument is an effective measure for enabling Chinese enterprises listed elsewhere to return to the mainland’s A-share market.

China’s investment bank China International Capital Corporation Limited predicted China will release a draft on CDR rules after the two sessions.

For years, China’s capital market was dominated by traditional industries such as property development, finance and industrial materials.

Innovative firms, tech startups in particular, face legal and technical barriers to list on the A-share market, including restrictions on weighted voting rights, or dual-class shares, and mandatory requirements on IPO applicants’ profitability.

Tech firms have declared support for the China-based listings. China’s search engine giant Baidu Inc, Chinese game developer NetEase Inc, Chinese search engine Sogou Inc and major online marketplace operator 58.com are among a host of firms interested in a secondary listing at home.

If CDR rules are released soon, China’s high-tech titans Alibaba and JD will probably issue CDRs in June, Caixin reported, citing a person familiar with the matter.

Report: Top Chinese real estate companies hold half of market in 2017

Market share of the Chinese top 100 real estate companies reached about 50 percent in 2017, up 7.9 percentage points year-on-year, suggesting a trend for concentration in the domestic property industry, report said.

Total sales of those companies grew 32.8 percent to surpass 6.37 trillion yuan ($1 trillion) last year, with a 23.7 percent increase in sales area, showing an overall positive performance, according to a report released Thursday by the China Index Academy, the Development Research Center of the State Council and Tsinghua University.

“Since 2003, the Chinese property industry has undergone a 15-year golden era as one of the pillar industries in the Chinese economy and an engine of urbanization,” the report said.

Gross assets and sales of the top 100 real estate operators have seen fiftyfold growth amid the period, showing a steady and quick development, the report showed.

In 2017, those companies strengthened cost controls to improve the quality of operations, whose average revenue and net profit increased 28.5 percent and 30 percent respectively, it said.

They also helped to provide houses for low-income families and construct eco-friendly and energy-saving buildings, as part of the effort to realize corporate social responsibility, according to the report.

However, the average asset-liability ratio of the top 100 property developers reached 78.9 percent, up 2.2 percentage points over 2016, suggesting greater pressure from debt.

In the future, the report suggested those companies should not buy too many parcels of expensive land in hot cities to prevent the risk of overstock.

Besides, they need to attach more importance to the safety of cash flow to avoid capital risk, it said.

Minimum salaries on the rise in China

China’s Ministry of Human Resources and Social Security announced the country’s 2017 monthly minimum salary standard and hourly minimum salary standard among 32 provinces and cities.

According to the data, Shanghai’s monthly minimum salary was top in the country last year, with its full-time workers at least earning 2,300 yuan ($364), and Beijing’s part-time workers earned the highest hourly minimum salary at 22 yuan.

Monthly minimum salaries in Shanghai, Shenzhen, Zhejiang, Tianjin and Beijing have broken 2,000 yuan, and Beijing, Tianjin and Shanghai’s hourly minimum salary has also reached more than 20 yuan.

Last year, 20 provinces and cities increased minimum salary standards, with an average increase of 11 percent from 2016.

This year, many other regions in China, including Jiangxi, Liaoning, Tibet and Guangxi, have all enhanced their minimum salary. Guangxi increased its minimum by 20 percent.

Shanghai announced it will increase its monthly minimum salary standard by 5 percent to 2,420 yuan per month starting April 1.

China’s R&D spending up 11.6 pct in 2017

China’s spending on research and development (R&D) grew faster in 2017 as the country continued to push for innovation-driven development.

Preliminary calculations showed that R&D spending rose 11.6 percent year-on-year to 1.75 trillion yuan (about 280 billion U.S. dollars) in 2017, 1 percentage point higher than in 2016, the National Bureau of Statistics (NBS) said Tuesday.

The spending accounted for 2.12 percent of China’s gross domestic product, 0.01 percentage points higher than the previous year.

Chinese enterprises spent more than 1.37 trillion yuan on R&D last year, up 13.1 percent from 2016, while R&D spending at government institutions and colleges increased 7 percent and 5.2 percent, respectively.

Some 92 billion yuan, or 5.3 percent of the total spending, was put into fundamental research in 2017, up 11.8 percent from a year earlier, the NBS said.

According to the 13th five-year plan for national science and technology talent development (2016-2020), China will increase its annual per capita spending on R&D to 500,000 yuan by 2020, up from 370,000 yuan in 2014.

China had 5.35 million people working in R&D at the end of 2015, the world’s largest pool of R&D personnel.

Sales of FMCG surge 4.3%

China’s sales of fast moving consumer goods, such as packaged food, beverage and cosmetics, recorded the highest annual growth in three years in 2017 at 4.3 percent, with online sales volume rising 29 percent, according to Kantar Worldpanel.

Retailers are adopting new methods to catch up with the digital transformation, with the combined sales volume of hypermarket, supermarket and convenience stores rising 2.6 percent, from 1.6 percent growth a year ago.

Most multinational and local retailers have strengthened their foothold with new store openings or business formats through tie-ins with Internet companies.

Sun Art Retail Group, which runs Auchan and RT Mart malls, remains the biggest player by sales, lifting its market share to 8.4 percent from 8.1 percent a year ago.

Yonghui recorded the fastest growth with new formats such as Super Species and community stores. It overtook Carrefour as the fourth largest retailer, with a market share of 3.3 percent.

About 60 percent of Chinese families have purchased fast moving consumer goods online, and in Beijing, Shanghai, Guangzhou and Chengdu, that figure is nearly 70 percent.