Moody's: China corporate revenue is stabilizing, leverage to remain elevated

Moody's Investors Service says that continued robust GDP growth in China in 2017 and stabilizing commodity prices will drive modest revenue growth and improve profitability for the Chinese non-financial corporates that it rates, although the impact will vary by sector.

"Revenue will grow modestly in 2017 from a low base in 2016, but we expect deleveraging will remain slow, especially for overcapacity sectors due to still elevated investment needs," says Clement Wong, an Associate Managing Director in Moody's Corporate Finance Group.

"At the same time, refinancing risk is manageable for the sector as a whole for the rated portfolio, because onshore bonds account for the majority of bonds maturing through 2017 and onshore issuance remains a supportive funding channel for Chinese corporates," adds Wong.

Moody's conclusions are contained in its just-released 2017 outlook presentation titled: Non-Financial Corporates -- China: 2017 Outlook - Revenue Is Stabilizing; Leverage to Remain Elevated.

By sector, Moody's expects companies in the oil & gas sector will benefit from the sustained oil price recovery, proactive cost savings and capital expenditure cuts, which will help stabilize EBITDA and allow them to generate free cash flow in 2017.

Metals & mining companies, too, should see earnings rise from low levels, supported by cost cuts and rising commodity prices. Debt will however stay high, thereby keeping leverage at elevated levels, although capital expenditure cuts should limit debt growth.

Steel & cement companies on the other hand will see their earnings decline in 2017 because of low production volumes and rising raw material costs, despite the recent rebound in cement and steel product prices.

Construction and engineering services companies will benefit from moderate demand growth, driven by domestic and overseas infrastructure projects and domestic residential projects.

Internet companies meanwhile will see a continued rise in revenue and EBITDA streams as monetization efforts increase. Operational investments in growing online to offline businesses will also remain high, which will in turn lower EBITDA margins.

Automakers will see unit sales growth and deleveraging moderate due to slower China unit sales growth. However, auto dealers should still see revenue growth and stable leverage, driven by growth in aftermarket and financial services.

And utilities benefit from financial headroom against modest demand and overcapacity, although coal-fired generation companies will face more challenges from declining utilization hours.

In addition to the above sectors, Moody's presentation also covers the outlook for companies in the property, chemicals, food & beverage and retail sectors.