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    China: 10 things we learnt from the FY15/1Q16 results – Goldman Sachs Sandeep Kanihama

    Research Team at Goldman Sachs, suggests that with Chinese companies recently finishing reporting of their 1Q16 results, GS aggregate over 3,800 companies’ financial statements in 1Q16 (FY15 for those that don’t report quarterly) and observe the following key trends.Key QuotesA weak recovery: Aggregate earnings grew 0% in 1Q16, 4% yoy ex financials, 16% ex financials/energy, but 1Q aggregate earnings to full-year consensus ratio is only 22%, tracking below the historical avg.Profitability pressures remain: ROEs have dropped to decade lows, dragged by falling asset turnover and sticky SG&A, despite slightly better margins on lower input costs (COGS).‘New’ vs. ‘Old’ China divide continues: New China grew top/bottomline by 29%/26% in 1Q16 vs. 3%/-1% for Old China. We stay OW Tech post the 2nd tranche of ADR inclusion in the MSCI benchmark indexes.More dividends, lower capex: A record Rmb780bn of dividends were paid in 2015 but growth has slowed; capex growth and capex/rev. have fallen to all-time lows; we continue to like DY growth as a theme.Mixed evidence on earnings quality: Cash conversion cycle (CCC) has worsened to 70 days from 68 days in 2014 but op. CFs grew faster ( 12%) than accrual earnings (-11%) in 2015 due to high depreciation.Credit risk looks contained in the public market: Default cases are rising in China but leverage, interest coverage ratios, and interest expense growth have all stabilized, at least in the listed universe.Supply-side responses are happening, but slowly: Steel, Cement, and Coal in total cut 4% of employees and reduced capex ~10% in 2015. Revenue concentration has improved for Coal, but industry fragmentation remains an overhang for Steel and Cement.Macro ‘green shoots’ aren’t enough: Select cyclicals’ earnings have stabilized in 1Q16, but EPS downgrades continue for the broader market. Our EPSg forecasts for offshore equities are below consensus.Rmb depreciation–big concerns, modest earnings impact so far: Chinese corporates incurred Rmb50bn of FX losses in 2015, 1.4% of total profits. We estimate that every /-10% USDCNY move could change aggregate earnings by around /-1.5%.Concerns about earnings quality for banks remain: Listed Chinese banks managed to grow earnings by 3% in 1Q partly by lowering provisioning coverage ratios (to ~170% from 300% in 2013. We think NPL risks will continue to drive banks’ share prices. Stay Underweight.”


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