CORPORATES SECTOR IN-DEPTH Nonfinancial Companies – China 24 June 2021 Credit Trend Monitor: Earnings rising with GDP; leverage trends driven by investment TABLE OF CONTENTS » Economic recovery drives revenue and earnings growth; leverage varies. Rising Summary 1 demand for goods and services in China (A1 stable), driven by the country's GDP growth, Auto and auto services 6 will benefit most rated companies this year and next. Leverage trends will vary by sector. Chemicals 8 Strong demand growth in certain sectors has increased investment requirements, which in Construction and engineering 10 turn could slow some companies’ deleveraging efforts. Food and beverage 12 Internet and technology 14 » EBITDA growth will outpace debt growth for auto and auto services, food and Metals and mining 16 beverages, and technology hardware. As a result, leverage will improve for rated Oil and gas 18 companies in these sectors. A resumption of travel, outdoor activities and business Oilfield services 20 operations, with work-from-home options, as the coronavirus pandemic remains under Property 22 control in China will continue to drive demand. Steel, aluminum and cement 24 Technology hardware 26 » Strong demand and higher pricing will support earnings growth for commodity- Transportation 28 related sectors. These sectors include chemicals, metals and mining, oil and gas, oilfield Utilities 30 services, steel, aluminum and cement. Leverage will improve as earnings increase. Carbon Moody's related publications 32 transition may increase investments for steel, aluminum and cement companies. But List of rated Chinese companies 34 rated companies, which are mostly industry leaders, will benefit in the long term because of market consolidation. Contacts » High spending needs will stall deleveraging for construction and engineering Lina Choi +852.3758.1369 companies despite solid revenue, EBITDA growth. A solid order backlog will drive the Senior Vice President [email protected] growth. But leverage will remain flat because of additional debt for project development. Ying Wang +852.3758.1327 » Greater competition as a result of the antitrust regulations will reduce EBITDA VP-Senior Analyst margin for internet and technology companies. Revenue growth will remain solid at [email protected] 15%-20%, supported by accelerated migration of consumption to online from offline. But Hong Wong +852.3758.1660 EBITDA growth will be slower than revenue growth for most rated companies as selling, Associate Analyst [email protected] marketing and research and development (R&D) costs rise. Most rated companies have low leverage, strong cash positions and diversified funding access to help them weather Clement Wong +852.3758.1561 Associate Managing Director potentially negative effects from tightened regulations. [email protected] » Rated developers’ leverage and interest coverage ratios will improve with solid revenue growth and debt controls. The developers’ weighted average revenue/ adjusted debt ratio will improve because the solid contracted sales in the past few years will support revenue growth. Regulatory controls and developers’ efforts to scale back land acquisitions will slow debt growth. MOODY'S INVESTORS SERVICE CORPORATES » Transportation and utilities companies’ leverage will improve, but spending needs will remain high. Toll road companies’ revenue will recover from the 2020 trough, driven by a resumption in traffic volumes and the end of the toll-free policy imposed in the first half of 2020. The energy demand recovery in China will benefit rated power and gas utilities companies. These recoveries will drive leverage improvement in both sectors. But spending needs will remain high: for toll roads companies to support continued urbanization, and for utilities to develop renewable energy projects. Exhibit 1 Most rated Chinese companies are investment grade; percentage of such companies has risen since November 2020 Unless otherwise specified, rated portfolio data are as of 15 June 2021; rated debt data as of 31 May 2021 Source: Bloomberg and Moody's Investors Service 2 24 June 2021 Nonfinancial Companies – China: Credit Trend Monitor: Earnings rising with GDP; leverage trends driven by investment MOODY'S INVESTORS SERVICE CORPORATES Exhibit 2 Earnings and cash flow rising with GDP for all sectors in 2021 Bond data as of 31 May 2021. Source: Bloomberg, Moody's Investors Service and Moody's Investors Service estimates 3 24 June 2021 Nonfinancial Companies – China: Credit Trend Monitor: Earnings rising with GDP; leverage trends driven by investment MOODY'S INVESTORS SERVICE CORPORATES Exhibit 3 Exhibit 4 Rated bond issuance of investment-grade companies in first five months of 2021 reached Rated bond issuance of high-yield companies in first five months of 2021 totaled USD 11.8 USD 21 billion billion Rated bond issuance (left axis) Weighted average coupon Average tenor Rated bond issuance (left axis) Weighted average coupon Average tenor 60 14 50 14 12.6 45 50 12 12 40 8.6 10 8.9 9.4 35 8.7 8.9 10 40 8.3 8.5 30 6.0 8 7.1 7.8 8 30 25 6.2 6 6 4.4 20 20 3.7 3.4 3.6 4 15 4 2.7 2.9 3.8 10 10 2 4.2 3.9 3.4 2 5 2.9 2.9 Moody's rated issuance ($ billion) ($ issuance rated Moody's Moody's rated issuance ($ ($ billion) issuance rated Moody's 0 0 0 0 2016 2017 2018 2019 2020 5M2021 2016 2017 2018 2019 2020 5M2021 Exhibit excludes infrastructure companies. Exhibit excludes infrastructure companies. Sources: Moody’s Investors Service, Dealogic and Bloomberg Sources: Moody’s Investors Service, Dealogic and Bloomberg Exhibit 5 Exhibit 6 Market can absorb bond maturities in the next few years Onshore bonds account for most maturities through 2025 Issuance in recent years exceeds maturities through 2025 Investment Grade High Yield Onshore Offshore 400 250 350 300 200 250 200 150 150 USD billionUSD 100 100 50 USD billion 0 50 2017 2018 2019 2020 Jan-May Jun-Dec 2022 2023 2024 2025 2021 2021 0 Bonds Outstanding by Year of Issuance Maturities Jun-Dec 2021 2022 2023 2024 2025 Data include rated and unrated onshore and offshore bonds issued by Moody’s-rated Chinese nonfinancial companies Data include rated and unrated onshore and offshore bonds issued by Moody’s-rated Chinese nonfinancial companies during each period that are outstanding as of 31 May 2021. during each period that are outstanding as of 31 May 2021. Sources: Moody’s Investors Service and Bloomberg Sources: Moody’s Investors Service and Bloomberg 4 24 June 2021 Nonfinancial Companies – China: Credit Trend Monitor: Earnings rising with GDP; leverage trends driven by investment MOODY'S INVESTORS SERVICE CORPORATES Auto and auto services - Unit sales to recover in 2021 as economic growth rebounds Exhibit 7 Exhibit 8 Rating distribution Outlook distribution Data as of 15 June 2021; seven rated companies Data as of 15 June 2021; seven rated companies Source: Moody's Investors Service Source: Moody's Investors Service Exhibit 9 Exhibit 10 Unit sales will rise in 2021, driven by economic recovery; sales Dongfeng, Geely and Beijing Auto’s leverage will improve in 2021 growth will slow in 2022 from normalized base and 2022 as EBITDA increases with unit sales Dongfeng Motor Group Beijing Auto Geely Dongfeng Motor Group Beijing Auto Geely 25% 5x 20% 15% 4x 10% 3x year growth % year - 5% on - 0% 2x -5% Adjusted debt/EBITDAAdjusted -10% 1x Unit sales year Unitsales -15% -20% 2018 2019 2020 2021E 2022E 2018 2019 2020 2021E 2022E Beijing Auto and Dongfeng unit sales include 100% of their respective joint ventures' sales. Financial metrics for Dongfeng are based on financials after adjusting for the pro rata Sources: Company information, China Association of Automobile Manufacturers (CAAM) and consolidation of its key joint ventures. Moody's Investors Service estimates Beijing Auto's financials and credit metrics are based on Beijing Auto's company financials that account for the Beijing Benz JV on a consolidated basis and account for the Beijing Hyundai JV on an equity method basis. Our analysis of Geely's financial metrics accounts for the 50%-owned Lynk & Co joint venture on a consolidated basis. Sources: Moody’s Financial Metrics and Moody's Investors Service estimates 5 24 June 2021 Nonfinancial Companies – China: Credit Trend Monitor: Earnings rising with GDP; leverage trends driven by investment MOODY'S INVESTORS SERVICE CORPORATES Auto and auto services - Unit sales to recover in 2021 as economic growth rebounds Credit trends and developments to monitor » China’s robust economic recovery in 2021 will support a rise in auto unit sales » Rebound in unit sales in 2021 is off a low base as auto sales fell three consecutive years during 2018-20 » Impact of investments in research and product development relating to electric vehicles on profitability Companies of interest » China Grand Automotive Services Grp Co., Ltd's (B1 negative) leverage will decrease to around 6.0x-6.5x over the next 12-18 months. China Grand Auto's debt leverage, measured as Moody's-adjusted debt/EBITDA, was about 8.7x as of 31 December 2020, mainly because of its weak performance as a result of the pandemic. » Geely’s (Baa3 stable) product breadth and strength will improve, supported by the expansion of its new energy vehicle and Lynk & Co joint venture model lineup » Zhongsheng (Baa3 stable) will maintain its prudent financial policy and grow its business given its solid brand portfolio, high exposure to the luxury segment and efficient operation management 6 24 June 2021 Nonfinancial Companies – China: Credit Trend Monitor: Earnings