China’s SOEs face poor profit prospects

China’s SOEs face poor profit prospects

English.news.cn   2013-05-24

BEIJING, May 24 (Xinhua) — With China’s state-owned enterprises (SOEs) posting growth of just 5.3 percent from January to April this year, prospects for the SOEs’ profitability in 2013 remain poor, analysts said. The SOEs saw their total profit growth slow to 5.3 percent year on year to reach 689.13 billion yuan (111.32 billion U.S. dollars) in the first four months, according to the Ministry of Finance (MOF). The growth rate was lower than the 7.7-percent increase recorded for the first quarter and average growth of 5.8 percent in 2012, official data showed. The SOEs lost their position as the country’s most profitable sector in 2012, when China COSCO Holdings Co., the country’s largest shipping company, lost 9.56 billion yuan after a deficit of 10.45 billion yuan for 2011.Overcapacity, inefficient cost control and slow industrial upgrading can be blamed for the slowdown, according to Li Jin, a senior researcher with the China Enterprise Research Institute.

From January to April 2013, the total profits of locally-administered SOEs suffered a decline of 14.7 percent to 152.89 billion yuan, according to the MOF.

For centrally-administered SOEs, the situation is also difficult. They generated profits of 536.24 billion yuan in the first four months of 2013, a 12.8 percent increase year on year, but down from 16.5 percent compared with the figure from January to March.

“The SOEs that recorded profit declines are mainly in the traditional industries instead of high-tech or emerging industries. They rely largely on expanding investment to boost growth and are easily affected by changes in the economic cycle,” said Li.

The MOF data showed that SOEs in the power, electronics and housing construction sectors reported relatively fast profit growth, while those in the transportation, non-ferrous metal, coal, chemical and construction material sectors saw profit declines.

Li said steelmakers were too aggressive in increasing their size during better times and still lack the capability to negotiate iron ore prices, leading to worsening overcapacity.

In addition, SOEs have enormous expense budgets and poor management, which means some SOEs are footing the bill for inadequate performance, said Wen Zongyu, director of the State-owned Research Institute for Fiscal Science under the MOF.

Figures from the MOF revealed that the operating costs for central SOEs increased 8.8 percent year on year from January to April, while those of local SOEs rose 13.4 percent.

Exorbitant spending on receptions by some listed companies has been fiercely criticized, with the 10 biggest reception spenders, mostly SOEs, spending a combined total of 2.9 billion yuan on receptions last year.

China Railway Construction Co., Ltd. topped the list with total spending of 837 million yuan, equivalent to about 10 percent of the company’s profits last year.

“High expenses may be a source of corruption among high-level management,” said Sun Lijian, a professor at Fudan University.

A manufacturing contraction that followed the slow growth of Chinese economy in the first quarter and concerns of a possible financial meltdown have all added to the uncertainty surrounding the SOES’ profitability, Wen said.

He said SOEs should move more quickly to eliminate excess production capacity, increase the added value of their products and improve management in order to lower their costs.

“Most importantly, SOEs should find the drive to continue reforms and industrial upgrades to prevent themselves from sailing into stormy waters,” Wen said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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