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1、November 23,2012Asia Pacific,Asia Credit Line,Credit Strategy Research,China Credit Series:Part 1 A look at corporate sector leverageAt the end of 2011,corporate leverage as a percentage of GDP has reached 130%in China,increasing from 96%at the end of 2008.Such a rapid rise in leverage raises legiti
2、mate concerns,inparticular whether such debt-fuelled spending will lead to systemic problems.To address theseissues,we are launching a series of reports on“China Credit”,which will examine the factorsaffecting corporate sector leverage in China.In the first report of the series,we refresh our credit
3、analysis on 2,773 listed non-financial Chinese companies.,Corporate sector debts rose faster than EBITDAIn the period between the end of 2006 and the end of June 2012,the totalamount of debt among Chinese non-financial listed companies increasedby 4x,while EBITDA increased only 2.5x.This put gross t
4、otal debt/EBITDAat a decade high of 3.4x for the last 12 months(LTM)to June 2012,thoughnet debt/EBITDA is still at a comfortable 1.8x.,Kenneth Ho+852-2978-7468 Goldman Sachs(Asia)L.L.C.Charles P.Himmelberg(917)343-3218 Goldman,Sachs&Co.,Smaller companies continue to be“crowded out”Top quintile compa
5、nies(by assets)have seen aggregate debt levelsincrease by 319%between Jan 2008 and June 2012,while the smallestquintile has actually seen total debt levels decrease.We think that thesharp contrast between the largest and the smallest companies reflects the“crowding out”of the credit markets for smal
6、ler companies,and that mostof the credit risks reside in large corporates,not in smaller enterprises.For companies with low interest coverage,tail risk is risingWe identified 337 companies with EBITDA interest coverage below 1x forLTM June 2012.This accounted for 9%of the populations total debt ofUS
7、$1.3trn.The 9%number has approached cycle highs,compared withcyclical peaks of 11%in 2002 and 10%in 2008.We see potential tail risk inthe heavy industrial sector if profits growth continues to be under pressure.Further deterioration of credit quality is unlikelyThe credit quality of Chinese listed c
8、orporates has deteriorated over thepast 12 months,but we see signs of stabilization,and possibly recovery.September industrial profits growth rose 7.8%yoy from-6.2%yoy inAugust,in line with improved September macro data.We think that thereare early signs that we are past the worst in terms of credit
9、 deteriorationamong Chinese corporates.This reinforces our positive stance on theChina real estate HY bonds,and the decision in September this year toupgrade our views on China HY industrials to neutral.This research is focused on investment themes across markets,industries and sectors.It does not a
10、ttempt to distinguishbetween the prospects or performance of,or provide analysis of,individual companies within any industry or sector wedescribe.Investors should consider this research as only a single factor in making investment decisions.For Reg ACcertification and other important disclosures,see
11、 the Disclosure Appendix,or go to,The Goldman Sachs Group,Inc.,Goldman Sachs Global Economics,Commodities and Strategy Research,2,November 23,2012,Asia Pacific,China Credit Series Part 1 A look at corporate sector leverageAt the end of 2011,corporate leverage as a percentage of GDP has reached 130%i
12、n China,increasing from 96%at the end of 2008.The rapid increase in corporate sector leverage is adirect result of the stimulus package,as the corporate sector embarked on a period of debt-funded investment spending.Such rapid rise in leverage raises legitimate concerns,inparticular whether such deb
13、t fuelled spending will lead to systemic problems.To try andaddress these issues,we are launching a series of reports on“China Credit”,which willexamine the factor factors affecting corporate sector leverage in China.In this report,the first in our China Credit Series,we refresh our analysis on list
14、ed non-financial Chinese companies,analyzing at the credit profiles of 2,773 companies listed inShenzhen,Shanghai,Hong Kong and Singapore.We found that in the period between theend of 2006 and the end of June 2012,the total amount of debt among Chinese non-financial listed companies increased by 4x,
15、while EBITDA increased only 2.5x.This putgross total debt/EBITDA at a decade high of 3.4x for LTM at June 2012.We also noted thatfor companies with low interest coverage,tail risk is rising.We identified 337 companieswith EBITDA/Interest at below 1x,and their debts accounted for 9%of the populations
16、 totaldebt.This 9%ratio is approaching the cyclical peaks of 11%in 2002 and 10%in 2008.But despite the rising leverage,we do not think that the data shows evidence ofsystemic problems.Firstly,the corporate sector retains a significant amount in cash,andthe net debt/EBITDA for the population is only
17、at 1.8x.Secondly,we are seeing somestabilization in terms of operating cash flows,as the ratio of operating cash flow to EBITDAhas slightly improved to 55%for LTM at June 2012,increasing from the low of 52%in 2011.There are areas that require monitoring,in particular the industrials sectors whichacc
18、ounted for the bulk of the companies with interest coverage below 1x,and we alsoidentified this sector as having the worst receivables problem.However,we think that thereare early signs that we are past the worst in terms of credit deterioration.Our Chinaeconomics team is forecasting a slight improv
19、ement in Q4 real GDP to 7.5%yoy,comparedwith 7.4%yoy in Q3.And as noted by Helen Zhu,our China equity strategist,Septemberindustrial profits growth rose 7.8%yoy from-6.2%yoy in August,in line with improvedSeptember macro data.This reinforces our view that China real estate HY bonds still offerthe mo
20、st value in the Asia credit space,and also our decision in September this year toupgrade our views on China HY industrials to neutral from negative.Outline of our methodologyTo try and assess the systemic risk among Chinese corporates,we re-ran our analysispublished in Nov-11 by looking at the credi
21、t profiles for all listed Chinese non-financialcompanies,defined as companies with their principal place of business in Mainland China,listed domestically or in Hong Kong or Singapore(see“China credit:No hard landing butstructural issues remain”,Asia Credit Line,November 28,2011).In total we identif
22、ied 2,773companies meeting the above criteria.Of these companies,1,493 were listed on theShenzhen Stock Exchange,862 on the Shanghai Stock Exchange,344 on the Hong KongStock Exchange and 74 on the Singapore Stock Exchange.By looking at listed companies,the quality of information is far superior to b
23、road industrial sector statistics provided by theNational Bureau of Statistics,and enables us to take a more granular look into thecorporate sector.In the following text,we present credit ratios for this population of 2,773 companies(andquintile subsets of this population).To calculate total debt to
24、 EBITDA for the population forinstance,we would first sum up the total debt for each of the 2,773 companies in ourpopulation to arrive at a single total debt numerator.Similarly,we would then sum upGoldman Sachs Global Economics,Commodities and Strategy Research,100,3,November 23,2012,Asia Pacificin
25、dividual EBITDA of each of the companys in our population to arrive at a single EBITDAdenominator.The numerator and denominator would then be used to calculate total debtto EBITDA for our population(as if it were one large company consisting of theconsolidation of 2,773 smaller companies).This metho
26、d effectively“value-weights”thecontribution of each company,with larger companies having a larger effect on financialratios than smaller companies.We also ranked our population of 2,773 companies by 1H2012 assets to create five quintilesof 554-555 companies.The largest one-fifth of companies by asse
27、ts are labeled the“largestquintile”and the next largest one-fifth of companies are labeled the“second quintile”andso on.This allows us to look at the impact on the corporate sector leverage from large andsmall companies,and to better assess whether there are any stress points.Aggregate leverage cont
28、inues to rise,as debt level increased fasterthan EBITDA growthOn an aggregate level,leverage in corporate China continued to rise.This is best illustratedby plotting the increase in aggregate total debt versus the increase in aggregate EBITDA.As shown in Exhibit 1,the total amount of debt has increa
29、sed by 4x by the end of June2012 compared with the aggregate debt amount at the end of 2006,but over the sameperiod,the EBITDA increase was only 2.5x.Notably,we have seen limited EBITDA growthin the past two years,whilst the aggregate debt amounts continued to rise.Exhibit 1:Total debt has increased
30、 by 4x between Dec 2006 and June 2012,but EBITDAincrease was only 2.5x over the same periodEBITDA and Total Debt increase between 2006 and 1H12450Debt Growth(Rebased at 100 in 2006),400,EBITDA Growth(Rebased at 100 in 2006),405,374350,300,292,250200,195,229,231,264,254,15010050,100,139138,134,166,CY
31、 2006,CY 2007,CY 2008,CY 2009,CY 2010,CY 2011,LTM Jun,2012Source:Goldman Sachs Global ECS Research,Capital IQThe rapid increase in total debt compared with EBITDA growth meant that gross leverage,as measured by total debt/EBITDA,is at a decade high.For LTM June 2012,total debt toEBITDA rose to 3.4x,
32、which is a substantial increase compared with the pre-stimulus periodGoldman Sachs Global Economics,Commodities and Strategy Research,7x,4,November 23,2012,Asia Pacificbetween 2001 and 2007,when total/EBITDA ranged between 2.1x to 2.3x(see Exhibit 2).But despite the increase in gross leverage,net le
33、verage and interest coverage remain atcomfortable levels,with net debt/EBITDA at 1.8x for LTM June 2012,and EBITDA/Interest at7.0 x.This means that corporates in general retain a sizeable amount in cash,leading toacceptable levels of net leverage.Together with a 7.0 x interest coverage,we do not thi
34、nkthat,on an aggregate level,we are seeing evidence of a credit problem.,Exhibit 2:Releveraging in 1H2012 as EBITDA growth didnot match with debt growth,Exhibit 3:Interest coverage has dropped,though still at,3.50,Total Debt/EBITDA,3.40,23,EBITDA/Interest Expense,3.00,Net Debt/EBITDA,3.12,2.95,3.04,
35、2119,2.71,2.50,2.32,17,2.00,2.24,2.18,2.07,2.14,2.14,2.17,15,1.75,1.78,13,1.501.00,1.06,1.24,1.26,1.22,1.31,1.22,1.08,1.37,1.14,1.46,119,11.14 10.73,9.76,10.88,8.58,0.50,75,7.02,7.02,CY,CY,CY,CY,CY,CY,CY,CY,CY,CY,CY,LTM,CY,CY,CY,CY,CY,CY,CY,CY,CY,CY,CY,LTM,2001 2002 2003 2004 2005 2006 2007 2008 200
36、9 2010,2011,Jun,2001 2002 2003 2004 2005 2006 2007 2008 2009,2010,2011,Jun,Source:Goldman Sachs Global ECS Research,Capital IQ.,2012,Source:Goldman Sachs Global ECS Research,Capital IQ.,2012,Most of the debt increases came from the largest companies,assmaller companies continue to be“crowded out”To
37、take a closer look at the increase in leverage,we compared the total debt and EBITDAgrowth between large and small companies.We ranked our population by total asset size,and split the companies into quintiles.We found that the top quintile has seen the largestincrease in total debt,with aggregate de
38、bt level increasing by 319%between Jan 2008 andJune 2012,whilst the smallest quintile has actually seen total debt levels decrease by 9%over the same period.We also found that EBITDA growth was also the slowest for the topquintile,increasing by only 179%over the same period,lower than each of the ot
39、herquintiles(see Exhibit 4).Goldman Sachs Global Economics,Commodities and Strategy Research,208%,5,November 23,2012,Asia PacificExhibit 4:Since the beginning of 2008,largest companies have seen the biggest debtincrease,but the slowest EBITDA risePercentage increase in total debt and EBITDA by quint
40、iles ranked by asset size,350%,319%,Aggregate Debt Growth since Jan-08,300%250%,Aggregate EBITDA Growth since Jan-08235%215%,300%,200%150%100%,179%,168%,193%137%,91%,50%0%,Largestquintile,Secondquintile,Third quintile Fourth quintile,Smallestquintile,Source:Goldman Sachs Global ECS Research,Capital
41、IQ.Looking at the net leverage between the five quintiles,we see significant dispersion inleverage patterns between each.As we highlighted in November 2011,in the years prior tothe 2008/2009 stimulus package,the largest quintile of companies had consistently thelowest net leverage,and the smallest q
42、uintile companies had the highest net leverage.Thisrelationship reversed post 2008,with the largest quintile of companies becoming the mostlevered,and at the same time the smallest companies have mostly delevered.By the endof June 2012,the top quintile had a net debt/EBITDA of 2.1x,and the smallest
43、threequintiles are,on aggregate,in net cash positions(see Exhibit 5).We think that the sharp contrast between the largest and the smallest companies reflectsthe“crowding out”of the credit markets for the smaller companies.As China embarked onits stimulus package in 2008/09,funded by the significant
44、increase in bank lending,webelieve that the banks felt more comfortable lending to larger,often state-owned,companies.This led to smaller companies being frozen out of the credit markets,despitethe overall increase in system-wide lending.Therefore we think that most of the creditrisks reside in larg
45、e corporates,not in smaller enterprises.We also found that debt servicing ability is relatively comfortable for all quintiles.In theyears prior to the 2008-09 stimulus,the smallest three quintiles had interest coverageranging between 1.5x to 5x,indicated that some of the smaller companies had very w
46、eakdebt servicing ability.However,interest coverage has improved for the smaller companiesover the past few years,as leverage for the smaller companies has in general declined.Asof June 2012,none of the quintiles had an interest coverage of below 5.8x.Given the datadoes not indicate any quintiles as
47、 having particularly low interest coverage,we do not seeany systemic risk based on the leverage and interest coverage ratios.Goldman Sachs Global Economics,Commodities and Strategy Research,2x,6,November 23,2012Exhibit 5:Smaller companies have de-levered,whilst thelargest companies have increased le
48、verage over timeNet debt to EBITDA(x)by size quintile8x,Exhibit 6:Interest coverage is comfortable for allquintilesEBITDA to Interest(x)by size quintile14x,Asia Pacific,12x6x,10 x,Smallest quintile,10.1x,4x,8x,Fourth quintile,8.3xThird quintile,7.4xLargest quintile,7.1x,2x,Largest quintile,2.1xAvera
49、ge,1.8x,6x,Average,7.0 xSecond quintile,5.8x,Second quintile,0.9x4x0 xCY CY CY CY CY CY CY CY CY CY CY LTM Third quintile,-0.8x2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jun,-2x,2012Fourth quintile,-1.9x,0 x,Smallest quintile,-2.9x,CY 2005 CY 2006CY 2007CY 2008CY 2009 CY 2010 CY 2011,LTM
50、,-4xSource:Goldman Sachs Global ECS Research,Capital IQ.,Source:Goldman Sachs Global ECS Research,Capital IQ.,Jun2012,For companies with low interest coverage,tail risk is risingTo identify any tail risk,we screened for companies with total debt to EBITDA of greaterthan 6x for the LTM ending June 20
