Meet China's Corporates: a Primer

Meet China’s Corporates: A Primer

An At-A-Glance Guide to China’s Non-Financial Sectors

July 9, 2020

S&P Global (China) Ratings www.spgchinaratings.cn July 9, 2020 Meet China’s Corporates: A Primer July 9, 2020

Contents

Beer ...... 3 Car Makers ...... 6 Cement ...... 9 Chemical Manufacturers ...... 11 Coal ...... 13 Commercial Real Estate ...... 16 Engineering and Construction ...... 18 Flat Panel Display Technology ...... 21 Household Appliances ...... 23 Liquor ...... 25 Online and Mobile Gaming...... 28 Power Generation ...... 31 Real Estate Development ...... 34 Semiconductors ...... 37 Steel ...... 40 Subways ...... 42 Toll Roads ...... 44

S&P Global (China) Ratings www.spgchinaratings.cn 2 Meet China’s Corporates: A Primer → Beer July 9, 2020

Beer

ANALYST

Ge, Yu; Beijing; +86 10 6516 6026; [email protected] Li, Dan; Beijing; +86 10 6516 6042; [email protected]

The Market

Growth momentum has slowed after a decade of rapid expansion. In 2019, China's beer output reached 3.765 million kiloliters, maintaining a growth rate which has been flat for several years. With annual per capita beer consumption already at 35 liters, any further significant uptick in growth is unlikely.

Beer Production 6,000

5,000

4,000

3,000

10 Million Liters 2,000

1,000

0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: National Bureau of Statistics, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved. Thanks to low entry barriers, China’s beer industry is an open marketplace with no industry- specific restrictions in place. The market was initially dispersed geographically, due to transport radius and regional governments supporting local producers. This situation is now gradually changing, as market concentration has increased through mergers and acquisitions within the industry.

S&P Global (China) Ratings www.spgchinaratings.cn 3 Meet China’s Corporates: A Primer → Beer July 9, 2020

Total Profit and Revenue of Beer Enterprises

2019.8 2018 2017 2016 2015 2014 2013 2012 2011

0 500 1,000 1,500 2,000 RMB, 100 million

The Companies

By August 2019, there were 415 recognized beer enterprises in China. The five largest companies in the Chinese mainland in 2018 were China Resources Beer (Holding) Co. with 23.2% market share, followed by Tsingtao Brewery Group Co. (16.4%), Budweiser Asia Pacific holdings Ltd. (16.2%), Beijing Yanjing Brewery Co., Ltd (8.5%) and Carlsberg China (6.1%). However, Budweiser Asia Pacific has the largest share in the premium beer market.

Shares In China's High-end Beer Market, 2018

Others 22%

Heineken 2% Budweiser 47% Carlsberg 4% CR Snow 11%

Tsingtao 14%

We expect the average sales price of beer to increase due to the growth of high-end products. This, coupled with increased market share for the beer giants, should further improve major manufacturers’ profitability and operating efficiency. In the absence of any large-scale mergers and acquisitions, the competition dynamics are likely to remain unchanged.

S&P Global (China) Ratings www.spgchinaratings.cn 4 Meet China’s Corporates: A Primer → Beer July 9, 2020

The Products

During the beer industry’s peak growth years, low-price pale lager established itself as the beverage of choice. Cheap foreign lager imports flooded the market as major international brands raced to seize the market, meeting the demand of low-income consumers. Times have now changed, and improved living standards, changing consumer trends and growing beer imports (import volume reached 0.82 million kiloliters in 2018), have seen gradual growth in the high-end beer market. According to Euromonitor International, the share of high-end beer sales in China rose from 3.11% in 2011 to 9.83% in 2017.

S&P Global (China) Ratings www.spgchinaratings.cn 5 Meet China’s Corporates: A Primer → Car Makers July 9, 2020

Car Makers

ANALYSTS

Gao, Yuze; Beijing; +86; [email protected] Li, Dan; Beijing; +86; [email protected]

The Market

Automobiles, more than 80% of which are passenger cars, make up a major component of the consumer products bought in China, and have played a significant role in shaping the country’s growth trajectory. In 2019, nearly 10% of retail sales were cars and car-related products.

China is the world’s largest market for passenger cars. Despite a drop of 9.56% from the previous year, dealers still sold 214.4 million units in 2019, ranking first worldwide for the ninth consecutive year.

Automobile Sales In China

3,500 20

3,000 15

2,500 10

2,000 5 (%)

(10k) 1,500 0

1,000 -5

500 -10

0 -15 2014 2015 2016 2017 2018 2019 Sales volume: passenger vehicles Sales volume: buses Sales volume: trucks YoY growth: passenger vehicles YoY growth: buses (right scale) YoY growth: trucks (right scale) Source: Wind. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

The Products

Car buyers in China still love sedans and hatchbacks, which as a group see the biggest unit sales. Nonetheless, SUVs have become increasingly popular, doubling their unit share from 20.7% in 2014 to 43.6% in 2019 -- only a few percentage points behind sedans and hatchbacks.

S&P Global (China) Ratings www.spgchinaratings.cn 6 Meet China’s Corporates: A Primer → Car Makers July 9, 2020

Passenger Car Sales by Vehicle Type

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2014 2015 2016 2017 2018 2019

Sedans and hatchbacks MPVs SUVs Crossovers

Domestically produced cars represent more than 40% of sales, and typically compete in the lower end of the market. Most other models sold are produced by joint ventures (JVs) between major global car brands and Chinese companies.

Share of Passenger Car Brands in the China Market, by Country of Origin, 2019

21% 24%

1% 1% 8% 41% 4%

China Japan Germany US Korea France Others

The Companies

China’s automobile companies typically have their own brands produced in their factories alongside JV vehicles. The manufacturers are commonly classified into six giant companies plus eight smaller ones.

S&P Global (China) Ratings www.spgchinaratings.cn 7 Meet China’s Corporates: A Primer → Car Makers July 9, 2020

China's Biggest Auto Makers by Sales, 2019

7,000

6,000

5,000

4,000

3,000 1,000 Units 2,000

1,000

0 SAIC FAW DMG GAG BAG Chang'an

Note: Sales data includes joint venture brands. SAIC=SAIC Motor Corporation, FAW=China FAW Group Corporation, DMG=Dongfeng Motor Group, GAG=Guangzhou Automobile Group, BAG=Beijing Automobile Group, Chang'an=Chongqing Chang'an Automobile Source: Companies' Annual Reports Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

Policy

The government has used tax incentives to boost sales, given the sector’s importance in the country’s total consumption. In the periods 2009-2011 and 2015-2017, the State Council halved the tax paid by buyers when purchasing new cars, apparently boosting sales. But once removed, these incentives were a factor in sluggish growth in later years when buyers had to pay full tax.

Tax Cuts Apparently Boosted Sales of Passenger Cars

3,000 40

2,500 30

2,000 20 (%) 1,500 10 (10K) 1,000 0

500 -10

0 -20 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Sales volume YoY growth

Note: Red bars indicate years in which car buyers enjoyed tax cuts. Source: Wind, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved. Some big cities restrict car ownership to ease road congestion and air pollution. Beijing, for example, implements a quota-based system, with license plates granted to applicants through a lottery. Other cities like Shanghai auction such quotas. In times of lukewarm sales, the central government has looked to boost sales by encouraging a relaxation of such measures.

S&P Global (China) Ratings www.spgchinaratings.cn 8 Meet China’s Corporates: A Primer → Cement July 9, 2020

Cement

ANALYST

Wang, Lei; Beijing; +86 10 6516 6038; [email protected]

The Market

China has been the world's largest cement producer for many years. Widely used in real estate, infrastructure and rural construction projects, cement processing and equipment have developed rapidly to meet the demand brought by China's urbanization in recent years.

While cement output has stabilized since 2014, last year still saw annual output of 2.35 billion tons, equivalent to 56% of global production. Domestically produced new dry kiln technology and low-temperature waste heat power generation equipment are used widely, with the industry respected globally for its prowess in reducing emissions.

Cement and Clinker Output, Cement YoY Growth

30 25%

25 20% 15% 20 10% 15 5% 10 0% Tons, 100 million

5 -5%

0 -10% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Cement Output Clinker Output Cement Output YoY Growth (R Axis)

The Companies

Domestic cement companies compete over regional distribution, mine resources and production costs. Due to limited demand in regional markets, storage difficulties and low value per unit, long- distance transportation of cement is usually not economical. With a usual transport radius of around 300 kilometers, cement companies develop better in regions with strong local demand.

Once a regional market is saturated, it is difficult for new firms to enter. Firms pursuing long-term development need to secure a supply of limestone, but increased emphasis on environmental protection and a ban on illegal mining mean high-quality resources have become scarce.

S&P Global (China) Ratings www.spgchinaratings.cn 9 Meet China’s Corporates: A Primer → Cement July 9, 2020

Companies compete on prices, with cement producers focusing on technology and processing, energy consumption, limestone supplies, transportation and management procedures to reduce costs.

Cement Prices in Beijing, Shanghai and Guangzhou

700

600

500

400

300 RMB/Ton 200

100

0 2010-01 2011-01 2012-01 2013-01 2014-01 2015-01 2016-01 2017-01 2018-01 2019-01 2020-01

Policy

Supply-side reforms came in after years of expansion that saw cement production capacity increase to 400 million tons per year by 2016. Prices fell as supply became excessive, reaching their lowest point in the first half of 2016.

The reforms introduced that year saw policies introduced that prohibited new production capacity and removed outdated capacity. These policies have controlled output, reducing energy consumption and pollution. Cement prices have since recovered, remaining high for the past few years. The reforms have seen the industry’s top companies expand their grip on the market, with industry concentration rising. While supply-side reforms are gradually eased, strict controls on production capacity remain in place and the chances of substantial expansion are low.

S&P Global (China) Ratings www.spgchinaratings.cn 10 Meet China’s Corporates: A Primer → Chemical Manufacturers July 9, 2020

Chemical Manufacturers

ANALYST

Wang, Lei; Beijing; +86 10 6516 6038; [email protected]

The Market

China’s chemical manufacturing industry serves a wide range of applications, with very limited concentration in any specific product or customer type.

A significant volume of chemicals is exported. According to the latest data available from China Customs, China exported chemical products worth $271.6 billion in 2018, accounting for about 11% of the country’s total exports. This means that the ebbs and flows of overseas demand can cause volatility in prices even in the domestic market.

Prices for petrochemicals, a major sub-sector, fluctuate with crude oil because they rely on it as a key input. Manufacturers make their profits from a margin over the cost of oil they buy from overseas or China’s state-owned oil companies. Coal-based chemicals substitute petrochemicals, so oil prices influence their pricing as well.

Spreads of Petrochemicals Over Crude Oil

7,000 6,000 5,000 4,000 3,000 2,000 (RMB per MT)(RMB per 1,000 0 (1,000) 4/1/2013 4/1/2014 4/1/2015 4/1/2016 4/1/2017 4/1/2018 4/1/2019 4/1/2020

ethylene-naphtha glycol-ethylene PX-naphtha

The Products

Chemicals generally fall under the categories of commodity chemicals and specialty chemicals. The former has large output and wide applications, while the latter has a smaller output and more specialized applications.

Petrochemicals are the mainstream of China’s commodity chemicals. Leveraging on its vast coal reserves, however, China also features a unique industry of coal-based chemicals. Large amounts of benzene, methanol, urea, polyvinyl chloride (PVC) and other chemicals are being produced from

S&P Global (China) Ratings www.spgchinaratings.cn 11 Meet China’s Corporates: A Primer → Chemical Manufacturers July 9, 2020

coal, with some of them enjoying significant cost advantages compared with competitors in the global market. The producers have also advanced into new coal-based products such as coal-to- olefins, coal-to-ethylene glycol and coal-to-oil.

How Manufacturers Turn Oil and Coal into Chemicals

Crude oil

Heavy oil, Naphtha Petrol, diesel Coal residual oil

Acrylic, Ethylene butene Carbon Xylene monoxide, C3, C4 C2 oxygen syngas PX Rubber, plastic

Oxalate MEG PTA

PET

Note: black boxes – reﬁning and cracking phase; darker blue boxes – chain of petrochemical production; lighter blue boxes – chain from coal to MEG; red boxes – chain of ﬁber manufacturing. Source: S&P Global (China) Ratings. Polyester yarn Bottle tablets Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

The Companies

A few petrochemical conglomerates have emerged recently in China. They used to be producers of downstream products like polyethylene terephthalate (PTA), but had to rely heavily on imported source materials including purified terephthalic acid (PTA) and paraxylene (PX). With China opening up refining and petrochemical manufacturing to privately-owned enterprises beginning from 2015, the companies expanded upward along the value chain with heavy investment in integrated petrochemical complexes in the eastern provinces of Jiangsu and Zhejiang. They are:

― Hengli Group Co Ltd.

― Zhejiang Rongsheng Holding Group Co., Ltd.

― Tongkun Group Co., Ltd.

― Xin Feng Ming Group Co., Ltd.

― Zhejiang Hengyi Group Co., Ltd.

For specialty chemicals, however, expanding capacity is not easy. The barriers to entry are higher than commodity chemicals, with expensive equipment and high-level expertise in technology and processing methods required. Chinese companies have resorted to a strategy of acquiring established overseas companies. They include China National Chemical Corporation Limited and its subsidiary China National BlueStar (Group) Corporation Limited.

S&P Global (China) Ratings www.spgchinaratings.cn 12 Meet China’s Corporates: A Primer → Coal July 9, 2020

Coal

ANALYST

Wang, Lei; Beijing; +86 10 6516 6038; [email protected]

The Market

Coal mining companies in China defended the country’s title as the largest producer in the world by churning out 3.85 billion metric tons of thermal coal, coking coal and anthracite in 2019, 4.2% more than in the previous year. They benefit from a treasure of 250 billion tons in basic reserves as of 2018.

Raw Coal Produced and Imported

45 35 40 30 35 25 30 20 15 25 (%) 10 20 5 15 0 (100 million tons) 10 -5 5 -10 0 -15

Quantity produced Quantity imported Growth of quantity produced(right scale)

They supply nearly 60% of energy consumed in China. Oil and gas reserves are relatively limited in the country, leading to a dominant role of coal in its mix of primary energy sources.

Overseen by the National Development and Reform Commission (NDRC), China’s economic planning body, large coal producers strike annual contracts with mega power generators, fixing prices and amounts for the 12 months. This arrangement reduces volatility in prices and revenues.

S&P Global (China) Ratings www.spgchinaratings.cn 13 Meet China’s Corporates: A Primer → Coal July 9, 2020

Output Comparison: Seven Giants And The Industry

40 40% 35 38% 30

25 36% 20 15 34% 10 32% 5 Value of output Value of output RMB)(100 mil. 0 30% 2015 2016 2017 2018

Top 7 Combined Total National Output Proportion of top 7 (right scale)

China’s vast coal reserves are mainly located in central and western provinces such as Shanxi and Inner Mongolia. The major consumers, however, are mostly based in eastern provinces. Coal mining companies have to transport coal across large distances, mostly by railroads.

The Products

They practically only serve the domestic market, with just a few million tons exported a year. Thermal power generators eat up 50% of total coal produced per annum. Other consumers include steel mills, chemical plants and building material manufacturers.

Coal Prices In And Out Of China

900 150 800 130 700 110 600 90 500 70 400 50 (USD per ton)

(RMB per ton) 300 200 30 100 10 0 -10

S&P Global (China) Ratings www.spgchinaratings.cn 14 Meet China’s Corporates: A Primer → Coal July 9, 2020

The Companies

State-owned enterprises (SOEs) control this sector with sizable reserves and output. In 2018, companies with annual output of over 100 million tons were China Energy Investment Corporation, China National Coal Group Corporation, Shaanxi Coal and Chemical Industry Group, Yankuang Group, Shandong Energy Group, Datong Coal Mine Group and Shanxi Coking Coal Group, all SOEs. They accounted for 38% of China’s raw coal output.

Top 10 coal producers in China, 2018

600

500

400

300

Million tons 200

100

0 Shandong Datong Chemical Investment Coal Group Chemical Coal Group China Energy China Energy Group Shanxi Coking Shanxi Lu'an China National China Industry Group Industry Shaanxi Coal & Coal Shaanxi Mining (Group) Industry Group Industry Yangquan Coal Yangquan Henan Energy & Industry (Group)Industry Yankuang Group Coal Mine Group Source: Public Infomation Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

S&P Global (China) Ratings www.spgchinaratings.cn 15 Meet China’s Corporates: A Primer → Commercial Real Estate July 9, 2020

Commercial Real Estate

ANALYST

Liu, Xiaoliang; Beijing; +86 10 6516 6040; [email protected]

The Market

Commercial real estate has grown rapidly in recent decades, with investment in the sector peaking at 2.24 trillion RMB in 2017. Growth in investment has since slowed and gradually turned negative, as the growth rates of GDP and consumer spending gradually slow down.

Real Estate Investment and GDP Growth

80 70 60 50 40 30 20

growth rate (%) 10 0 (10) (20)

Investment in office buildings Investment in outlet buildings Total retail sales GDP growth

Regionally fragmented, the development of commercial real estate differs from city to city. Vacancy rates are lower and rents higher in first-tier cities, with supply and demand for commercial property generally in balance. In second-tier cities, eastern cities like Nanjing and Hangzhou have seen commercial real estate perform strongly, in contrast to comparable cities in central, western and northeast provinces.

Office vacancy rates vary greatly between first- and second-tier cities. The average vacancy rate in Guangzhou is only 6.2%, while in comparison that of Tianjin is 39.8%.

For hotels, the occupancy rate and room price of five-star hotels are relatively high, while fierce competition among hotels with three stars and below leads to relatively low occupancy rates and room prices. First-tier and Yangtze River Delta cities generally see higher occupancy and room prices than other cities. The average occupancy rate of first-tier cities in the past three years was 69%, with the average room rate at 589 RMB/room/day. In comparison, Dalian’s average occupancy rate over the same period was 51%, and Shenyang room rates were only 306 yuan/room/day.

S&P Global (China) Ratings www.spgchinaratings.cn 16 Meet China’s Corporates: A Primer → Commercial Real Estate July 9, 2020

Table 1 Summary of Key Indicators in Core Cities Retail Office Hotel

Cities Vacancy Rent Vacancy Rent Occupancy Room Rate (%) Level Rate (%) Level Rate (%) Price

Beijing 6.5 37.7 13.8 427.6 73.74 525.93

Shanghai 7.2 35.1 19.4 318.81 67.28 711.57

Guangzhou 6.4 31 5.4 168.2 64.03 451.5

Shenzhen 4.2 21.6 20 201.2 64.95 532.63

Tianjin 10.1 17.4 42.6 113.7 57.53 371.13

Shenyang 9.7 14 29.1 76 67.77 345

Dalian 4.6 14.5 18.2 93.6 64.35 447.6

Nanjing 3.2 19.91 13 124.4 71.39 441.66

Hangzhou 2 22.2 17.9 119.3 66.03 417.8

Ningbo 2 22.6 16.2 69.8 56.72 403.51

Qingdao 6.5 15.6 28.2 89.8 72.04 487.33

Chongqing 9.7 12.85 29.4 79.2 53.32 332.92

Chengdu 4.1 12.35 20.5 83.8 65.71 415.08

Notes: 1. Retail, office building data for whole 2019, hotel data is from first three quarters of 2019. Retail rent level=RMB/sq. meter/day. Office rent level=RMB/sq. meter/month. Hotel room price=RMB/room/day. 2. The darker the red the better, the darker the green the worse. Source: Wind, S&P Global (China) Ratings. Copyright ©2020 by S&P Ratings (China) Co., Ltd. All rights reserved. The Companies

The top three firms in terms of rental income in 2019 were Dalian Wanda Commercial Management Group, China Resources Land and Red Star Macalline. Wanda Commercial is the industry leader, with more than 320 commercial sites covering 46 million square meters and raking in a rental income of 40.1 billion RMB.

Rental Income of Major Commercial Real Estate Companies

450 in 2019 400 350 300 250 200 150 100

RMB, 100 million 50 0 Wanda Red Star China Poly Guangzhou R&F Joy City Commercial Macalline GroupResources Land Developments Property and Holdings Source: Wind, S&P Global (China) Ratings Group Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

S&P Global (China) Ratings www.spgchinaratings.cn 17 Meet China’s Corporates: A Primer → Engineering and Construction July 9, 2020

Engineering and Construction

ANALYST

Zhang, Renyuan; Beijing; +86 10 6516 6028; [email protected]

The Market

Engineering and construction is one of China’s largest industries, in terms of number of enterprises and annual output value. The industry has boomed in tandem with large-scale investment in the property and infrastructure construction sectors. In 2019, China saw around 18 trillion RMB of fixed asset investment in infrastructure construction and 7.5 trillion RMB in real estate construction projects. Both capital- and labor-intensive, engineering and construction is highly market-oriented and competitive. Large state-owned enterprises (SOEs) lead the sector in terms of technical prowess and construction capacity, and can generally handle a project’s entire construction process, from design through to project management and materials procurement.

Firms at the opposite end of the industry are relatively limited in terms of the projects they can work on, with many subcontracting projects out to the larger SOEs.

Growth in Investment in Real Estate and Infrastructure Projects

200,000 45 180,000 40 160,000 35 140,000 30 120,000 25 % 100,000 20 80,000 15 60,000 10 RMB, 100 million 40,000 5 20,000 0 0 -5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Investment in Real Estate Projects Fixed Asset Investment in Infrastructure Projects Growth in Investment in Real Estate Projects Growth in Infrastructure Project Investment

From 2014 to 2017, the annual growth rate of infrastructure fixed asset investment was relatively high. In 2018, growth began to slow amid deleveraging and changes in the wider economy. The real estate sector saw a similar period of high annual growth, until regulations on the property market were gradually introduced from 2014. Growth has since fluctuated as a result, having a knock-on effect on engineering and construction.

S&P Global (China) Ratings www.spgchinaratings.cn 18 Meet China’s Corporates: A Primer → Engineering and Construction July 9, 2020

The Companies

According to the National Bureau of Statistics, there were about 95,000 engineering and construction enterprises in 2018, of which around 4,000 were SOEs. However, the SOEs have a significant market share of around 30-40%.

Eight Largest E&C Companies by Value of New Contracts, 2019

35,000

30,000

25,000

20,000

15,000

RMB, 100 million 10,000

5,000

0 China China Chemical China State Engineering Engineering Construction China Energy China Engineering Construction Metallurgical Corp. of China China Railway Railway Group China National China Construction Corp. of China Communications

In 2019, the total output value of China's construction industry was 25 trillion RMB, and the value of newly signed contracts that year was around 29 trillion RMB. Total output value of SOEs reached 8.5 trillion RMB, and contracts signed by SOEs were worth around 13 trillion RMB.

S&P Global (China) Ratings www.spgchinaratings.cn 19 Meet China’s Corporates: A Primer → Engineering and Construction July 9, 2020

Breakdown of Output Value and Amount of Newly Signed Contracts 350,000

300,000

250,000

200,000

150,000

RMB, 100 million 100,000

50,000

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Other Construction Firms' Newly Signed Contracts SOE Newly Signed Contracts Total Output of Other Construction Firms Total Output of SOE Construction Firms Source: National Bureau of Statistics, S&P Global (China) Ratings Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

Construction firms can generally be split into three groups: general contractors, professional contractors and labor service providers. These are further split into dozens of sub-groups in a hierarchical system designed to limit firms’ scope of production. These groups are based on factors such as net assets and the number of builders and professional architects on the firm’s staff. Past project performance is also taken into consideration, with authorities looking at the size and difficulty of previous construction projects. Top-ranked firms can obtain more market opportunities through this ranking system, which has in turn made it harder for small and medium-sized construction enterprises to land project contracts.

Less than 1% of China’s 56,912 contractors are ranked as “specialist” construction firms. However, these 478 companies contributed 23% of total output in the entire construction industry in 2017. These firms are strong in terms of their reputation and construction capacity.

S&P Global (China) Ratings www.spgchinaratings.cn 20 Meet China’s Corporates: A Primer → Flat Panel Display Technology July 9, 2020

Flat Panel Display Technology

ANALYST

Liu, Xiaoliang; Beijing; +86 10 6516 6040; [email protected]

The Market

China, South Korea and Japan are at the center of global flat-panel display manufacturing, with the Chinese mainland at the forefront of LCD panel manufacturing. In 2018, the world’s top 10 panel enterprises had a 90% market share in terms of shipments. Half of those top 10 firms are from the Chinese mainland: BOE Technology Group (BOE), TCL China Star Optoelectronics Technology (TCL CSOT), Huike Electronics (Shenzhen) (HKC), Nanjing Panda Information Industry Group (CEC Panda) and Xianyang Caihong Optoelectronics Technology (CHOT).

China has 57 production lines, which are mainly located in Guangdong, Sichuan, Shanghai, Hubei and Anhui.

Chinese manufacturers dominate the LCD market and have a larger production capacity than anywhere else. This will continue to grow as Korean manufacturers, themselves the biggest players in OLED technology, gradually shut down LCD production lines.

S&P Global (China) Ratings www.spgchinaratings.cn 21 Meet China’s Corporates: A Primer → Flat Panel Display Technology July 9, 2020

Share of Global LCD Production Capacity, 2019

Other 26%

China 48%

South Korea 20%

The Companies

In recent years, Chinese enterprises have continued to expand their LCD high-generation production capacity. New production is expected to largely focus on the Wuhan B17 10.5 generation line of BOE in 2020 and the T7 11 generation line of TCL CSOT in 2021.

In terms of OLED technology, a market in short supply and mainly controlled by Samsung and LGD, Chinese enterprises are mainly focused on small-size OLED (the highest level is 6-generation line) products, with large-size OLED still undergoing research and development. Chinese panel manufacturers such as BOE and Visionox are looking to invest in establishing AMOLED panel production lines and gradually increase production capacity.

Share of Global OLED Production Capacity, 2019

Other 1% China 20%

Japan 1%

South Korea 78%

S&P Global (China) Ratings www.spgchinaratings.cn 22 Meet China’s Corporates: A Primer → Household Appliances July 9, 2020

Household Appliances

ANALYST

Li, Dan; Beijing; +86 10 6516 6042; [email protected]

The Market

Since 2018, the domestic household appliances industry has seen a downturn due to increasing real estate regulations, the overall economic slowdown and high household appliance ownership in urban households. Total retail sales in 2019 of household appliances were 892 billion RMB, down 3.88%, according to data from China Market Monitor. In 2019, 92.16 million air conditioners were sold, down 0.7% year over year, while sales of refrigerators (43.4 million units) and washing machines (45 million units) hardly changed from 2018.

Exports performed better than domestic sales, due to growing demand in developing countries. However, a trend has emerged where larger appliances have seen declining sales overseas, but smaller appliances have shown good growth. In 2019, China's total household appliance exports were worth about $70.9 billion, growing 3.3% on the previous year. $25.7 billion of those were large appliances and $32.4 billion smaller appliances.

Home Appliances: Domestic Sales and Exports

16,000 14,000 12,000 10,000 8,000 6,000 10,000 Units 4,000 2,000 0 2016 2017 2018 2019 A/C Units Exports Value A/C Units Domestic Sales Value Fridge Domestic Sales Value Fridge Exports Value Washing Machines Domestic Sales Value Washing Machine Exports Value Source: Chinaiol, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved. Meanwhile, thanks to the growth of e-commerce and integration of online technology with logistics, installation and after-sales services, online sales of major home appliance products accounted for nearly 40% of all sales in 2019.

S&P Global (China) Ratings www.spgchinaratings.cn 23 Meet China’s Corporates: A Primer → Household Appliances July 9, 2020

The Companies

At present, the household appliances industry is dominated by a small number of companies. The top two appliance manufacturers, Gree and Midea, have significant competitive advantages, with the former maintaining a significant market share in air-conditioning units. However, the gap between Gree and rival firms is narrowing. While competition is still fierce, the overall profit level in the industry is not high.

Domestic Air Conditioner Sales by Brand in 2019

40%

35%

30%

25%

20%

15%

10%

0% Gree Midea Aux Haier Other

Domestic Fridge Sales by Brand in 2019

40%

35%

30%

25%

20%

15%

10%

S&P Global (China) Ratings www.spgchinaratings.cn 24 Meet China’s Corporates: A Primer → Liquor July 9, 2020

Liquor

ANALYST

Li, Dan; Beijing; +86 10 6516 6042; [email protected]

The Market

With an output of 7.859 million kiloliters by the end of 2019, China's liquor market has reached an enormous scale. However, growth momentum has slowed in recent years, as the sector turns away from high-end spirits to mass consumption of cheaper liquor. Overall profits have increased, and high-end brands have increased their prices amid a gradual de-stocking of liquor and increasing disposable income.

Liquor Production and Sales

1,600 104.00% 1,400 102.00% 1,200 100.00% 1,000 98.00% 800 96.00% 600

10 Million Liters 400 94.00% 200 92.00% 0 90.00% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Liquor Output Liquor Production and Sales Rate (Excluding 65% proof, R Axis)

S&P Global (China) Ratings www.spgchinaratings.cn 25 Meet China’s Corporates: A Primer → Liquor July 9, 2020

Revenue and Profit of Liquor Producers

2019.8 2018 2017 2016 2015 2014 2013 2012 2011

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 RMB, 100 million

Liquor Producers Total Profits Liquor Producers Operating Revenue

The Companies

The liquor market is fragmented, with no single company enjoying a dominant market share. The industry can be divided into three segments: high-end nationally recognized brands, regionally renowned distillers, and middle- and low-end producers.

Competition is benign in the high-end market, with Moutai, Wuliangye and Guojiao 1573 regarded as the biggest brands. These enterprises are held in high renown nationwide for their long histories, branding and advanced distilling technology. Kweichou Moutai is famous for its flagship product Feitian Moutai, which enjoys the highest retail price among major competitors. Moutai products traditionally featured in state banquets and are at the forefront of China`s high-end liquor market.

Greater competition exists among the regional renowned distillers, with brands like Jiannanchun, Fenjiu, Shuijingfang, Langjiu and Yanghe are all key players in their own respective regions. The middle and low-end market has a large number of enterprises and fierce competition.

S&P Global (China) Ratings www.spgchinaratings.cn 26 Meet China’s Corporates: A Primer → Liquor July 9, 2020

Revenue Share of Chinese Liquor Producers

Wuliang Yibin 7%

Kweichow Moutai 14% Others 67%

Policy

The liquor industry is highly market-oriented, and government policies have a relatively small influence on the industry’s supply side. In 2005, the National Development and Reform Commission placed certain restrictions on liquor production lines, halting new liquor production licenses and limiting the establishment of new distilleries. This led to higher concentration in the industry, but there was minimal influence on total liquor output. In November 2019 the restrictions were lifted, which going forward should boost the industry and give play to high- quality resources while improving famous liquor-producing regions’ production capacity.

However, liquor consumption has previously been be curbed by certain regulations. In 2012, an anti-corruption campaign and a drink-driving ban severely hit government and business demand for liquor, leading to a sharp drop in sales growth for most distillers. This was later compensated by rising demand from individual consumers due to adjusted branding and marketing focus, resulting in an industry-wide pick up in revenue and profit growth

S&P Global (China) Ratings www.spgchinaratings.cn 27 Meet China’s Corporates: A Primer → Online and Mobile Gaming July 9, 2020

Online and Mobile Gaming

ANALYST

Liu, Xiaoliang; Beijing; +86 10 6516 6040; [email protected]

The Market

In 2018, gaming was an industry worth more than $130 billion worldwide. Chinese firms have staked their place in the international gaming arena, with Tencent bringing in more revenue ($19.7 billion) than any other company. Other Chinese developers and gaming studios like NetEase, 37 Interactive Entertainment and Perfect World also made the 2018 top 25 gaming companies in terms of revenue.

2018 Top 25 Global Gaming Companies by Revenue

250

200

150

100

US$ 100 million 50

0 EA Mixi Sony SEGA Apple Nexon Google NCSoft Ubisoft Konami Tencent NetEase CAPCOM Nintendo Take Two Microsoft 37GAMES Netmarble Square Enix Cyber Agent Warner Bros Perfect World Bandai Namco Aristocrat Leisure Aristocrat Activision Blizzard Note: Blue columns indicate Chinese companies. Source: Newzoo, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

China was a relative latecomer to the gaming industry, but in a short space of time has grown into the world’s biggest gaming market. Recent years have seen rapid growth thanks to the development of Internet technology, VR and AI. In 2019, the sales volume of China's game market reached 233 billion RMB, an increase of 8.7% year-over-year. Unlike other markets where the console is king, China’s growth has been built on mobile gaming, a sector which saw sales revenue of 151.3 billion RMB in 2019, representing year-over-year growth of 13.0%.

There were 640 million people playing video games in 2019 in China, a figure which has gradually settled amid a slowdown in the growth rate of mobile gamers. The development of China's mobile network and popularity of smartphones led to rapid growth in mobile gaming. However, by the end of 2018, the smartphone penetration rate had become saturated, with 112.2 units per 100 people. In 2019, the number of mobile gamers increased by 2.5% to 620 million, a slowdown of 6.7 percentage points over the previous year.

S&P Global (China) Ratings www.spgchinaratings.cn 28 Meet China’s Corporates: A Primer → Online and Mobile Gaming July 9, 2020

Sales Revenue of China's Games Market

38% 38% 2,500 40% 34% 35% 35% 2,000 27% 30% 23% 23% 1,500 25% 18% 20% 1,000 15% 9% RMB, 100 RMB, million 5% 10% 500 5% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

The Companies

The mobile game industry has high concentration, with the country’s top 5 developers releasing 82.9 percent of mobile game releases in 2019. This was up 3.9 percentage points year-over-year, with giant developers like Tencent, NetEase and 37 Interactive Entertainment accounting for 51.9 percent, 15.8 percent and 10.4 percent of releases respectively. Multiplayer Online Battle Arena (MOBA) games like King of Glory, a hugely successful title which has been the most profitable mobile game in China for three consecutive years, have driven the rapid development of related industries such as e-sports and game live streaming.

Distribution of Top 100 Mobile Major Chinese Mobile Game Games by Genre Companies, 2019 Card Games 3% Other 7% Other, 10% Racing Games 7% 1st-person CMGE, 3% Shooters RPGs Tencent 46% Games, 8% 37GAME, 51.9%, 52% 10% Strategy 14% Netease Games, 16%

MOBA 15% Source: GPC, IDC, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights Source: Analysys Data, S&P Global (China) Ratings. reserved. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights

reserved.

S&P Global (China) Ratings www.spgchinaratings.cn 29 Meet China’s Corporates: A Primer → Online and Mobile Gaming July 9, 2020

As the market matures, game studios’ individual R&D capabilities have rapidly improved, and the entry of games into overseas markets has brought further opportunities. In 2019, the revenue of China's domestically developed games was RMB 195.76 billion. Last year also saw Chinese - developed games reach a sales volume in overseas markets of $11.19 billion, with year-over-year growth of 21.0%. These domestically produced games focus on the United States, Japan, and South Korea, with the three markets accounting for 30.9%, 22.4% and 14.4% of overseas sales revenue respectively.

Policy

Recent years have seen the government continuously strengthen supervision of the game industry, raising the threshold for companies entering the sector. This prompts enterprises to improve product quality and enhances industry concentration. Since 2018, the approval process for new game releases has slowed significantly. In 2019, 1,570 titles were released in China, only one fifth of that in 2017. According to data from Sky Eye, 2018 and 2019 saw 8,306 and 15,987 game companies take the initiative to cancel their businesses respectively.

S&P Global (China) Ratings www.spgchinaratings.cn 30 Meet China’s Corporates: A Primer → Power Generation July 9, 2020

Power Generation

ANALYST

Zhang Renyuan; Beijing; +86 10 6516 6028; [email protected]

The Market

China’s electricity consumption has continued to mirror overall economic growth patterns, with consumption in 2019 up by 45% from 2012. As economic growth slows, so has electricity consumption, with last year’s 7,225.5 billion KWH only 4.5 percent up from 2018, the slowest year-over-year growth since 2016. In 2020, the COVID-19 outbreak saw electricity consumption shrink in the first quarter, with cumulative year-over-year growth of -6.5%.

The Slowing Economy has Caused a Decline in Electricity Consumption 30

% 10

(5)

(10) 2008-12 2010-05 2011-10 2013-03 2014-08 2016-01 2017-06 2018-11

Real GDP, Cumulative YoY Growth Electricity Consumption, Cumulative YoY Growth Source: Wind, National Bureau of Statistics, S&P Global (China) Ratings Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

Secondary industries are the largest power consumers. In 2019, electricity consumption was 4,936.2 billion KWH, accounting for 68% of total consumption. Individual consumers’ rising living standards have seen them take up a larger chunk of consumption, with 1,025 billion KWH in 2019, accounting for 14% of the total consumption.

S&P Global (China) Ratings www.spgchinaratings.cn 31 Meet China’s Corporates: A Primer → Power Generation July 9, 2020

Electricity Consumption by Industry Type (100 million KWH) 70,000

60,000

50,000

40,000

30,000

20,000

10,000

0 2012 2013 2014 2015 2016 2017 2018

Primary Industries Secondary Industries Tertiary Industries

The Companies

Coal is king in China’s energy sector, thanks to its low prices and huge available reserves. In 2019, 5.05 trillion KWH out of 7.3 trillion KWH of electricity came from thermal power. Despite coal’s dominance, China remains dedicated to developing a green and low-carbon green power supply.

China's Six Largest Gencos by Installed Capacity, 2019

30,000

25,000

20,000

15,000

10,000 KW 10,000

5,000

0 China China Datang CHN Energy China State Power China Three Huaneng Corporation Huadian Investment Gorges Group Corporation Corporation Corporation

Source: Public information Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved. Ongoing efforts to reduce emissions such as increasing the capacity of individual units to improve their coal burning efficiency and increased investment in environmental protection have benefitted from national industrial policies, boosting the proportion of green energy generation in China. The share of electricity generated by thermal power fell from 79% in 2012 to 69% in 2019.

S&P Global (China) Ratings www.spgchinaratings.cn 32 Meet China’s Corporates: A Primer → Power Generation July 9, 2020

According to the “BP 2019 Energy Yearbook”, by 2018, China's renewable energy consumption had reached 143.5 million tons of oil equivalent and renewable energy generation had reached 634.2 terawatt hours. Both indicators ranked first in the world.

Structure of Electricity Supply

80,000 80% 70,000 78% 60,000 76% 74% 50,000 72% 40,000 70% 30,000 68% 20,000

Power Output (KWH) 66% 10,000 64% 0 62% 2012 2013 2014 2015 2016 2017 2018 2019 Hydropower Thermal Power Nuclear Power Wind Power Solar Energy Proportio of Thermal Power (R Axis) Source: China Electricity Council, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

Policy

Authorities are gradually changing China's electricity pricing mechanism, moving away from official benchmark prices to a more market-oriented model. Since 2004, benchmark pricing for thermal power has been set by the state based on each province. Given coal’s prominence, the thermal power pricing is also used as the pricing basis for renewable energy such as wind power and photovoltaic power.

Electricity market reform, which began in 2015, aims to encourage thermal power companies to negotiate electricity prices more directly with end users as part of wider marketization efforts. Starting from January 2020, the benchmark price for thermal power will be replaced by a "benchmark + floating mechanism" after more than a decade of operation.

China's electricity pricing is gradually reformed towards marketization

2004: Set benchmark price for 2015: Electricity market 2020：Benchmark price 2020-2021: subsidies thermal power by the government reform becomes history phased out Subsidies phased out for Market-oriented pricing Thermal power pricing New energy pricing is based on newly connected renewable methods were gradually mechanism: "benchmark thermal power prices + subsidies energy generation, grid improved + fluctuation" pricing will be implemented

Note: Red represents government-regulated pricing and green represents more market-oriented pricing. Source: Public information, S&P Global (China) Ratings. Copyright ©2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

S&P Global (China) Ratings www.spgchinaratings.cn 33 Meet China’s Corporates: A Primer → Real Estate Development July 9, 2020

Real Estate Development

ANALYST

Liu, Xiaoliang; Beijing; +86 10 6516 6040; [email protected]

The Market

Real estate is one of the pillar industries of China's economy. Rapid development in recent decades built on growth in the wider economy, accelerated urbanization and increasing household incomes has seen investment in real estate development increase from about 624.5 billion RMB in 2001 to over 13.2 trillion RMB in 2019, with compound annual growth of about 17.4%.

Real Estate Investment and YoY Growth

140,000 35

120,000 30

100,000 25

80,000 20

60,000 15

40,000 10

20,000 5

0 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Investment in Real Estate Development YoY Growth in Real Estate Development Investment (R Axis) Source: National Bureau of Statistics, Wind, S&P Global (China) Ratings Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

Commercial real estate’s annual sales volume increased from about 462.6 billion RMB in 2001 to over 15.9 trillion RMB in 2019. Residential property represents by far the biggest slice of the market, accounting for 87.3% in 2019, compared to office (3.3%) and commercial retail property (7.0%). Sales center on eastern China, where 52.5% of national sales were made last year.

Property prices and floor area sold have both maintained rapid growth. Around 1.72 billion square meters of commercial property was sold in 2019, while prices have risen from an average of about 2,226 yuan per square meter in 2001 to 9,310 yuan in 2019.

S&P Global (China) Ratings www.spgchinaratings.cn 34 Meet China’s Corporates: A Primer → Real Estate Development July 9, 2020

Sales Volume and Growth of Commercial Property

180,000 100 160,000 80 140,000 60 120,000 100,000 40

80,000 20 60,000 0 RMB, 100 million 40,000 -20 20,000 0 -40 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Commercial Property Sales Commercial Property Sales YoY Growth (R Axis) Source: National Bureau of Statistics, Wind, S&P Global (China) Ratings Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

The market varies from city to city. Average property prices in first-tier cities reached 41,527 RMB per square meter in 2019, up 0.6% year-over-year. In second tier cities, average prices were 13,868 RMB per square meter, and third tier cities’ average prices were 9,297 RMB per square meter, with both groups increasing 5.3% and 6.1% year-over-year respectively. After the government began to implement its "houses are for living in, not for speculation" policy in 2016, the year-over-year growth rate of prices in first-tier cities fell the most, amid an overall slowdown across the property sector.

Overview of Average Housing Prices Across Chinese Cities

45,000 30 40,000 25 35,000 20 30,000 15 25,000 (%) 10 20,000 5 15,000 RMB/Sq. Meter 10,000 0 5,000 -5 - -10 2011 2012 2013 2014 2015 2016 2017 2018 2019 1st Tier Cities Residential Property ASP 2nd Tier Cities Residential Property ASP

3rd Tier Cities Residential Property ASP 1st Tier Cities ASP YoY Growth (R Axis)

2nd Tier Cities ASP YoY Growth (R Axis) 3rd Tier Cities ASP YoY Growth (R Axis) Note: 1st tier cities: Beijing, Shanghai, Guangzhou, Shenzhen; 2nd tier cities: Tianjin, Chongqing, Hangzhou, Nanjing, Wuhan, Shenyang, Chengdu, Xi'an, Dalian, Qingdao, Ningbo, Suzhou, Changsha, Jinan, Xiamen, Changchun, Harbin, Taiyuan, Zhengzhou, Hefei, Nanchang, Fuzhou (22 in total); 3rd tier cities: 74 cities in total. Source: Wind, Data adjusted by S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

S&P Global (China) Ratings www.spgchinaratings.cn 35 Meet China’s Corporates: A Primer → Real Estate Development July 9, 2020

The Companies

China's real estate industry is relatively fragmented and competitive, but market concentration is increasing as the industry matures. There are 97,937 real estate developers in China, according to the latest data from the National Bureau of Statistics.

Major Real Estate Developers in China, Ranked by Total Contracted Sales in 2019 9,000 8,000 7,000 6,000 5,000 4,000 3,000

RMB, 100 million 2,000 1,000 0 Country Vanke China Sunac Poly Greenland China Seazen Shimao China Garden Evergrande Developments Overseas PropertyResources Land & Investment Land Source: CRIC，S&P Global (China) Ratings Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved. Over the past few years, the market share of the top 200 enterprises has gradually increased, and China's real estate industry has become more concentrated. By 2019, the sales amount of the three largest real estate enterprises accounted for more than 10% of the total industry.

Policy

Government regulations impact the sector through industrial policies, regulating land supply and other economic measures. Efforts to rein in an overheated property market have seen restrictions imposed to stabilize prices. Since 2016, the government has maintained that "houses are for living in, not for speculation," while paying more attention to long-term, steady development.

Policy Changes Have a Significant Effect on China's Property Market 40 "Houses are for Property 35 Regulation & living in, not for purchases control speculation" 30 restricted strengthened 25 in certain 20 regions 15 (%) 10 5 Curbs eased, 0 interest rates (5) reduced (10) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sold GFA Change YoY Property ASP Change YoY

S&P Global (China) Ratings www.spgchinaratings.cn 36 Meet China’s Corporates: A Primer → Semiconductors July 9, 2020

Semiconductors

ANALYST

Liu, Xiaoliang; Beijing; +86 10 6516 6040; [email protected]

The Market

China has one of the world’s largest semiconductor industries, with a complete supply chain. According to the World Semiconductor Trade Statistics, global semiconductor sales in 2019 were worth $410 billion, $144.1 billion of which came from China, accounting for 35.1% of the global market.

China's Semiconductor Market Share Continues to Grow

5,000 40% 4,500 35% 4,000 30% 3,500 3,000 25% 2,500 20% 2,000 15% 1,500 US$, 100 million 10% 1,000 500 5% 0 0% 2014 2015 2016 2017 2018 2019 China Semiconductor Sales Global Semiconductor Sales Proportion of China Sales Source: Wind, World Semiconductor Trade Statistics, data compiled by S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved. The fabless industry (made up of chip retailers and designers which outsource fabrication) is the largest semiconductor sub-sector, followed by the outsourced semiconductor assembly and test (OSAT) industry. The foundry industry is the smallest sub-sector overall.

Mainland fabless firms saw compound operating revenue growth over 2014-19 of 24%, with global market share more than doubling from 5% in 2010 to 13% in 2018.

S&P Global (China) Ratings www.spgchinaratings.cn 37 Meet China’s Corporates: A Primer → Semiconductors July 9, 2020

China's Semiconductor Market is Growing Rapidly

3,500

3,000

2,500

2,000

1,500

1,000 RMB, 100 million

500

0 2014 2015 2016 2017 2018 2019

Chip Design Chip Manufacture Package and Testing

The Companies

Despite rapid growth in recent years and the emergence of companies like Hisilicon, UNISOC and Huiting Technology, mainland fabless enterprises still lag behind their international competitors in terms of technology. While global rivals lead in applying semiconductor tech to smartphones, cars and other embedded chip markets, domestic fabless products generally focus on the middle and low-end chip market or niche fields such as automation, military technology and aerospace.

While the OSAT industry is smaller in scale than the fabless sector, its firms are major players globally in terms of their technology, with JCET Group, Huatian Technology and Nantong Fujitsu Microelectronics ranking third, sixth and seventh as of the end of 2018 in terms of market share.

Policy

Semiconductors have been earmarked as a strategic industry in China. In June 2014, the State Council proposed the establishment of the national integrated circuit industry fund (the "Big Fund"), with the aim of boosting research and development. The first phase of the Big Fund saw investment of 138.7 billion RMB, with 514.5 billion RMB leveraged from the private sector and put towards supporting the manufacturing of integrated circuit chips. In October 2019, the second phase of the fund was established with registered capital of 204.15 billion RMB, with a further 600 billion RMB expected to be leveraged from social funds. This round is set to focus on boosting semiconductor equipment and materials.

S&P Global (China) Ratings www.spgchinaratings.cn 38 Meet China’s Corporates: A Primer → Semiconductors July 9, 2020

Table 2

Date Releasing Departments Policies

6/24/2014 State Council Outline of National Integrated Circuit Industry Development

5/8/2015 State Council Made in China 2025

9/29/2015 National Manufacturing Strategy Advisory Technology Roadmap for Key Sectors of Made in China Committee 2025

7/27/2016 General Office of the CPC Central Outline of National Informatization Development Committee, General Office of the State Strategy Council

8/1/2016 State Administration for Market Regulation, Standardization and Quality Improvement Plan of Standardization Administration, Ministry of Equipment Manufacturing Industry Industry and Information Technology

12/15/2016 State Council "Thirteenth Five-Year" Development Plan for National Informatization

11/29/2016 State Council "Thirteenth Five-Year" Development Plan for National Strategic Emerging Industry Development

12/30/2016 Ministry of Industry and Information Development Guidance of Information Industry Technology, National Development and Reform Commission

12/30/2016 Ministry of Industry and Information New Material Industry Development Guidance Technology, National Development and Reform Commission, Ministry of Science and Technology, Ministry of Finance

4/14/2017 Ministry of Science and Technology "Thirteenth Five-Year" Development Plan of National High-tech Industrial Development Zone

12/22/2017 Ministry of Finance 、 Ministry of Industry Notice Regarding the Adjustment of the Relevant and Information Technology、 General Catalogue of the Import Tax Policy for Major Technical Equipment administration of customs、 State Administration of Taxation、 National Energy Administration

3/28/2018 Ministry of Finance , State Administration of Notice on Issues Concerning Corporate Income Tax Taxation, National Development and Reform Policies of Integrated Circuit Manufacturing Enterprises Commission, Ministry of Industry and Information Technology

S&P Global (China) Ratings www.spgchinaratings.cn 39 Meet China’s Corporates: A Primer → Steel July 9, 2020

Steel

ANALYST

Wang, Lei; Beijing; +86 10 6516 6038; [email protected]

The Market

Long established as the world's largest steel producer, China produced 990 million tons of crude steel in 2019, accounting for 53 percent of global output. Hebei is China’s top steel-producing province, with crude steel output of 240 million tons in 2019, close to one quarter of China's overall output. More than half of domestic demand for steel comes from the real estate and infrastructure construction sectors alone.

Comparing Global, Chinese and Hebei Steel Production

2,000 60% 50% 1,500 40% 30% 1,000 20%

Million Tons Million 500 10% 0% 0 -10% 1998-01 2001-01 2004-01 2007-01 2010-01 2013-01 2016-01 2019-01 Global China Hebei China's Share of Global Output Hebei's Share in China's Output YoY Growth of China's Crude Steel Production (R Axis) Source: Wind, National Bureau of Statistics, S&P Global (China) Ratings Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

The Companies

Following supply-side reform, the application of electric furnaces increased, representing around 11% of total output. Electric furnaces enable flexible production lines and are generally not affected by environmental policies, however costs are relatively high. During a downturn in the industry, high-cost electric furnaces can be shut down at any time, so the supply of the industry has become more flexible, thus supporting steel prices.

China’s steel companies are generally large but not strong. After supply-side reforms and the removal of some outdated excess production capacity, industry concentration is constantly improving. China Baowu Steel Group, Hebei Iron and Steel (HBIS Group), Jiangsu Shagang Group, Ansteel Group, Ltd. and Beijing Jianlong Heavy Industry Group are the top five players.

S&P Global (China) Ratings www.spgchinaratings.cn 40 Meet China’s Corporates: A Primer → Steel July 9, 2020

Top 10 steel producers in China, 2018 80

Million tons 30

0 Baowu Steel Steel & Iron Ansteel Jianlong Shougang Shagang Steel and Iron Valin Magang* Steel Benxi Jiangsu Beijing Shandong Hebei China

Although production is large in scale, the sector is dominated by ordinary steel and lacks variety. The competitiveness of steel enterprises is still reflected in terms of scale and cost, with relatively small added value brought by brand and product performance. In recent years, the proportion of Chinese specialty steel in crude steel output has been about 13%, compared to 24% for Japan. Policy

2016’s supply side reform reshaped the industry, reducing excess capacity and improving industry resilience. By 2018, China's steel industry eliminated 150 million tons of excess crude steel capacity and 140 million tons of substandard steel capacity. Prices rebounded due to a rapid contraction in industry supply, and a significant uptick in profitability for steel companies has seen a significant improvement in financial conditions.

Steel Prices and Blast Furnace Operating Rate

6,000 120.00

5,000 100.00

4,000 80.00

3,000 60.00

RMB/Ton 2,000 40.00

1,000 20.00

0 0.00 2012-08-012013-08-012014-08-012015-08-012016-08-012017-08-012018-08-012019-08-01 RMB/Ton Rebar Price Blast Furnace Operating Rate of 163 Steel Companies Source: Wind, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

S&P Global (China) Ratings www.spgchinaratings.cn 41 Meet China’s Corporates: A Primer → Subways July 9, 2020

Subways

ANALYST

Li, Dan; Beijing; +86 10 6516 6042; [email protected]

The Market

By the end of 2019, 40 Chinese cities had established urban railway lines, with early adopters like Shanghai, Beijing, Guangzhou and Nanjing incorporating subway, monorail and even maglev technology into their expansive networks.

Length and Passenger Numbers of China's Rail Transit Network 250 6000

200 5000 4000 150 3000 100 2000

50 1000 100 million (journeys made)

0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018

The number of rail transit projects under construction has remained high in recent years, with 61 new projects in the works by the end of 2018, covering a planned 6,374 kilometers and representing investment of 4,268.85 billion RMB.

S&P Global (China) Ratings www.spgchinaratings.cn 42 Meet China’s Corporates: A Primer → Subways July 9, 2020

Overview of Rail Transit Systems in Major Cities, 2019

800 25 700 20 600

500 15 400 10

Kilometers 300 200 5 100 0 0

Distance in Operation (km) Lines Constructed (R Axis)

Policy

In July 2018, the State Council released guidelines stating that subway construction would be to serve cities’ urban centers and key areas detailed in urban planning. For cities intending to build subways and light rail systems, they need to meet the requirement of general public budget revenue and GDP above 30 billion yuan and 300 billion yuan respectively. These cities’ debt ratios will be subject to review and auditing. These guidelines may, to some extent, restrain overheated growth of China's rail transit construction and annual investment, and ensure the industry’s sustainable development.

Urban Rail Transit Projects Under Construction and Completed Investments 7,000

6,000

5,000

4,000

3,000

2,000

1,000

0 2013 2014 2015 2016 2017 2018 Lines Under Construction (km) Completed Investments in Rail Transit Projects (RMB, 100 million)

S&P Global (China) Ratings www.spgchinaratings.cn 43 Meet China’s Corporates: A Primer → Toll Roads July 9, 2020

Toll Roads

ANALYST

Li, Dan; Beijing; +86 10 6516 6042; [email protected]

The Market

By the end of 2018, China had constructed a 168,000-kilometer network of toll roads nationwide, representing 3.5% of the country’s entire road network. Most of the toll roads (82%) are expressways, a number which will slowly increase to 100% as authorities look to make all other roads funded by public finances. With high population density in the east, China’s coastal provinces have denser expressway networks than western regions.

Total Length and Revenue of China's Toll Roads

180,000 6000 160,000 5000 140,000 120,000 4000 100,000 3000 80,000

Kilometers 60,000 2000 40,000 1000 20,000 0 0 2013 2014 2015 2016 2017 2018 Length of Toll Roads: Bridges and Tunnels Toll Road Length: Secondary Roads Toll Road Length: Primary Roads Toll Road Length: Expressways Toll Revenue (RMB 100 million, R Axis) Source: Toll roads' published data, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

In 2018, toll revenue reached 555.24 billion RMB, up 8.2 percent year-over-year. China’s toll roads are either for-profit or non-profit, with the latter using income for loan payments and maintenance costs. Profit-driven toll roads are owned by domestic or foreign entities, with a limit of 30 years’ concession in most regions. Non-profit roads are limited to 20 years.

S&P Global (China) Ratings www.spgchinaratings.cn 44 Meet China’s Corporates: A Primer → Toll Roads July 9, 2020

Length, Revenue of Non-Profit and For-Profit Toll Roads

120,000 4000

100,000 3500 3000 80,000 2500 60,000 2000 1500 Kilometers 40,000 1000 20,000 500 0 0 2013 2014 2015 2016 2017 2018

Length of Non-Profit Toll Roads Length of For-Profit Toll Roads Revenue of Non-Profit Toll Roads (RMB 100 million, R Axis) Revenue of For-Profit Toll Roads (RMB 100 million, R Axis) Source: Toll roads published data, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

The Companies

Highway companies are generally under a heavy debt burden. With significant investment required and a long payback period. China’s expressways are mostly constructed by companies owned by provincial governments or transportation departments, with financing usually through bank loans. Non-profit toll roads struggle to generate income at a similar level to commercial toll roads and rely on government funding for around 25% of overall construction costs, compared to only around 10% for for-profit toll roads.

Investment in Toll Road Construction and Debt Outstanding (2018)

For-Profit Toll Road Debt Outstanding

Non-Profit Toll Road Debt Outstanding

For-Profit Toll Roads Accumulated Investment

Non-Profit Toll Roads Accumulated Investments

0 10000 20000 30000 40000 50000 RMB, 100 million

Government Equity Non-government Equity Bank Loans Other Debt

S&P Global (China) Ratings www.spgchinaratings.cn 45 Meet China’s Corporates: A Primer → Toll Roads July 9, 2020

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S&P Global (China) Ratings www.spgchinaratings.cn 46