Recently, the Shanghai Stock Exchange (SSE) completed the aftermath review and supervision of the corporate bond issuers' 2017 annual reports. An SSE official answered related questions today.
Q1: What efforts did the SSE make in urging the disclosure of the 2017 annual reports? Can you brief on the general situation in this regard?
A: As an important basis for the investors to make investment decisions and manage the credit risks for the bonds, the annual reports intensively reflect the operating and financial conditions and solvency of the issuers. The SSE has always attached great importance to the disclosure of annual reports, implemented the concept of law-based, strict and comprehensive regulation, focused on problems and risks, and earnestly fulfilled the responsibility for first-line regulation of disclosure of annual report information. On the basis of consolidating the achievements made earlier in the regulation of the periodic reports, this year the SSE has continued to advance relevant efforts to further improve the timeliness and effectiveness of the disclosure of the annual reports.
First of all, the SSE has made effective efforts in guiding the understanding and applicability of the rules for the annual reports. In order to help the issuers accurately understand the rules for disclosure of annual reports, the SSE has organized training for the personnel in some key jurisdictions and new issuers so as to define regulatory requirements and disclosure priorities. At the same time, the SSE has analyzed in a systematic way the difficulties, puzzles, common mistakes and problems that the issuers may encounter in the practice of disclosing the annual reports, and prepared the Q&A on regulation of disclosure of annual reports so as to interpret the rules and requirements in an easy-to-understand way and direct the issuers to successfully complete the preparation of the annual reports.
Secondly, the SSE has widely absorbed the market participants' suggestions on the annual reports. Through symposiums, surveys, visits and other means, the SSE has listened to the investors' suggestions on the disclosure of the annual reports, and adequately refined the requirements for disclosure on the basis of the investors' concerns. Moreover, in order to highlight the usefulness of information disclosure and moderately reduce the issuers' burden, the SSE has solicited the comments of a number of issuers on the requirements for disclosure of annual reports, and incorporated reasonable opinions in the annual report template.
Thirdly, the SSE has continued to improve the application of the XBRL (Extensible Business Reporting Language) template. Since the 2017 semi-annual reports, the SSE has applied the XBRL technology to the preparation of periodic reports and developed standardized templates, improving not only the standardization of disclosure but also the issuers' experience in report preparation. This year, the SSE has optimized the XBRL templates for periodic reports, and stressed the requirements for disclosure of the information closely related to solvency such as asset constraints, interest-bearing liability structure and changes, follow-on financing plans and external guarantee risks. .
Fourthly, the SSE has trialed classified regulation on the basis of the issuers' credit qualifications. Based on the bond issuer's entity credit rating, the SSE trialed the different periodic report templates applicable to the issuers with different credit qualifications in the preparation of the annual reports for the first time. More disclosure flexibility has been granted to the issuers with an AAA entity credit rating and the financial institution issuers on the premise of complying with the annual report guidelines; the SSE has also refined and enriched the requirements for other issuers' disclosure of solvency-related information, so as to further highlight the regulatory orientation, allocate the regulatory resources rationally and enhance the effectiveness of regulation.
With the above-mentioned measures, the timeliness and effectiveness have been continuously improved in the disclosure of this year's annual reports. On the SSE there are a total of 2,426 unlisted or quoted issuers (including corporate bonds) that should disclose their annual reports, and among them, 2,332 issuers released their annual reports before April 30 by rule, representing a rate of over 96% for the timely disclosure as well as a further steady improvement on a year-on-year basis. The SSE has sent the issuers failing to make the disclosure in a timely way the regulatory urging letters to require the disclosure in a time limit, and issued written warnings to some issuers on the basis of the actual situations of disclosure. In terms of the quality of information disclosure, this year the issuers' disclosures are more focused on the matters related to solvency, such as the overall debt basket and the term structure, the asset quality and constraints, and the cash flow fluctuations, fully highlight the rules and characteristics of bonds, and are far more improved than before in terms of breadth and depth, with the information disclosure much more effective.
Q2: What are the SSE's main concerns in the aftermath review of the annual reports this year?
A: Compared with previous years, in the aftermath review of the annual reports of the corporate bonds the SSE has continued to deepen the supervision of the information related to the issuers' solvency this year, based on the focus on risks and problems, and appropriately referred to and compared other information published by the issuers, in a bid to improve the integrity, pertinence and accuracy in the information disclosure of corporate bonds.
First of all, the SSE has strengthened targeted inquiries about the businesses and industries in which the issuers are engaged. By focusing on the businesses and industries, the SSE has urged the issuers to make detailed disclosures on key issues affecting their solvency and verified the rationality of their financial data. For example, the issuers with major changes in the business structure during the reporting period or the gross profit margin significantly different from that of other companies in the same industry are required to specify the relevant reasons in the specific operation model of the relevant business, the future development plans and other aspects; regarding the real estate industry, the SSE has paid attention to the sustainability of the issuer's profitability and the stability of cash flow from the perspectives such as the location of the main business, the progress of the projects that are under construction or for sale and the land reserve.
Secondly, the SSE has focused on the issuers' financing ability and liquidity. This year, the SSE has strengthened the requirements for disclosure of the issuer's overall debt burden, debt structure and short-term financing needs. In the review, according to the cash balance, the capital demands for business and investment, interest-bearing debts to be repaid in the short term, bank credits, the remaining limit for bond issuance and other conditions, the SSE has required the issuers to assess the sustainability of follow-up financing and clarify the short-term financing needs and arrangements for liquidity, and urged the issuer to make effective arrangements and preparations for debt repayment as early as possible.
Thirdly, the SSE has focused on the funds outstanding for transactions and their impact on the issuer's cash flow. The large amounts and the long terms of the funds outstanding for transactions are prominent problems for some issuers of corporate bonds. During the review of the annual reports, the SSE has paid much attention to receivables, prepayments and other cases of large amounts, significant increases or remarkable mismatches with the business for the funds outstanding for transactions, and required the issuers to disclose the background, nature, main counterparties and other details for the related funds, so as to accurately reflect the issuer's capital occupancy and cash flow status. The issuers with a high concentration of counterparties are required to specify the correlation with the capital occupiers, in a bid to prevent improper capital occupation by related parties.
Fourthly, the SSE has strengthened the review of the information about issuer's main asset value and liquidity. In order to truly reflect the issuer's asset situation, the SSE has intensified targeted inquiries about the book value of all assets in review, and paid attention to the adequacy of the provision for impairment of important assets in accordance with the background of the formation of large-amount goodwill, the ages of the receivables and the conditions of the counterparties, the ages and prices of the inventories and other situations. With respect to the issuers whose main incomes or assets are from their subsidiaries, the SSE has closely followed the stability of their control over important subsidiaries, the restrictions on the stock equity of their subsidiaries as well as the sustainability of the proceeds from their subsidiaries.
Fifthly, the SSE has stepped up the supervision of the issuer's governance structure and matters for standard operation. In addition to further paying attention to the use of raised funds, fulfillment of the commitments in the prospectus and other normal matters, the SSE has also focused on the supervision of the issuer's governance structure and matters related standard operation. For example, the issuers, who are highly dependent on connected transactions or have mixed assets or businesses with related companies, are required to strictly check the independence and explain the rationality and pricing basis for the connected transactions; the SSE has been concerned about the issuers with higher equity pledge rates in terms of the actual controller's financing and external guarantees and its impact on the issuer's ability to pay debts. In addition, the SSE has also consulted the integrity information about some issuers and their actual controllers and major subsidiaries, and paid close attention to the situations of those who were listed as the dishonest subject to enforcement with verification required.
This year, the SSE has imposed regulatory inquiries on 42 corporate bond issuers, requiring them to make additional disclosures or improvement within a time limit, so as to effectively enhance the quality of information disclosure for the annual reports. At present, the relevant issuers have basically completed the supplementary disclosures as required.
Q3: According to the annual reports, how is the general business and financial performance of the corporate bond issuers in 2017?
A: In 2017, with China's supply-side structural reform deepened, the driving force for the economic growth was gradually shifted from investment to industrial upgrading and technology. With the financial leverage remaining relatively stable, the issuers have seen their performance generally improved, their profitability significantly enhanced, the overall credit level lifted and their entity qualification gradually strengthened. At the same time, in the process of cutting capacity and reducing leverage, a small number of issuers showed poor pressure-bearing capacity and weak solvency, which are worth further attention.
(1) The profitability has been significantly improved, and the sources of incomes have been concentrated on the main businesses.
In 2017, benefited from the structure including a large number of large-sized quality issuers, the SSE market saw the overall profitability of unlisted or quoted issuers of corporate bonds significantly improved and their operating incomes and profit sizes remarkably increased. The issuers recorded a total operating income of RMB34.81 trillion in 2017, a year-on-year increase of about 17.48%; their net profit amounted to RMB1.74 trillion, an increase of 15.11% year-on-year; their net profit attributable to the parent companies increased by 9.19% year-on-year, and their net profit with non-recurring profit and loss deducted grew by 29.30% year-on-year. The improvement in earnings mainly came from the main businesses.
From the perspective of industry classification, in 2017, the performance of entity (non-financial) issuers was eye-catching thanks to real progress in reducing capacity and inventories. Among them, the profitability of manufacturing issuers increased steadily, and in 2017, their operating income rose by 12.15% year-on-year, with their net profit with non-recurring profit and loss deducted up by 26.52% year-on-year. In particular, the profits of coal, steel and other industries improved in an all-round manner, with the issuers' operating income up by 22.44% year-on-year and their net profit with non-recurring profit and loss deducted turned from loss to profit. The issuers in the real estate industry registered sizable earnings, with their operating income up by about 19.92% year-on-year and their net profit with non-recurring profit and loss deducted up by 53.08% year-on-year in 2017.
From the perspective of the nature of enterprises, the profit indicators of both state-owned and private issuers improved significantly compared with last year, and particularly the private enterprises reported even greater improvement in profit. In 2017, the operating income of private enterprise issuers increased by 25.57% year-on-year, about 9 percentage points higher than that of state-owned enterprise issuers. Due to the rigid expenses such as cost and expenses, the net profit of private enterprise issuers attributable to the parent company went up by 7.42%, about 1 percentage point higher than that of the state-owned enterprise issuers.
(2) Initial results have been achieved in de-leverage, and the debt maturity structure is yet to be adjusted.
In 2017, the supply-side reform began to move from the stage of "industry improvement driven by capacity reduction" to the stage of "de-leverage driven by high profits", and initial results were made in de-leverage of the corporate bond issuers. First of all, the debt growth rate slowed down noticeably. In 2017, the growth rate of interest-bearing debts decreased from 20.50% in 2016 to 13.39%. Specifically, the growth rate of interest-bearing debts for municipal construction issuers dropped from 19.66% to 14.46%. Secondly, the asset-liability ratio was stable on the whole. At the end of 2017, the average asset-liability ratio of private enterprise issuers was 61.03%, down by 0.24% from the same period of the previous year, and the average asset-liability ratio of state-owned enterprise issuers stood at 58.89%, a small year-on-year increase, indicating that the financial leverage was overall controllable with the ratio still lower than the market average.
On the other hand, from the perspective of the debt maturity structure, the issuers' proportion of long-term debts in interest-bearing debts decreased compared with the same period of the previous year, with the proportion of the short-term debts increased, which put higher demands on the issuers' capacity for liquidity management, with some issuers facing certain pressure on liquidity. In 2017, the short-term debts of the issuers accounted for about 34.70% of their interest-bearing debts, an increase of 1.39 percent over the same period last year. From the perspective of the nature of enterprise, the interest-bearing liabilities of state-owned enterprise issuers were still dominated by long-term debts, while the private enterprise issuers saw financial leverage slightly reduced with the debt maturity structure showing the tendency toward short-term debts.
(3) The outward investment tends to be cautious, and the "hematopoietic" function of the manufacturing industry is enhanced.
In order to cope with the pressure of market financing, the issuers showed a more cautious attitude towards outward investment and actively controlled liquidity risks. In 2017, the net cash outflow from the issuers' investment activities decreased by approximately 23.06% over the same period of last year. Both the state-owned and private enterprise issuers' net cash outflows for outward investment declined to varying degrees. Specifically, the net cash outflow from state-owned enterprises' investment activities shrank by approximately 25.40% year-on-year, compared with a drop of about 7.77% year-on-year for private enterprises.
The issuers in different industries differentiated in their performance of the operating cash flow. The issuers in the manufacturing industry saw their own "hematopoietic" function strengthened as in 2017, the operating cash inflow into the manufacturing industry increased by 15.76% year-on-year, with the overall operating cash flow remaining steady and positive. At the same time, the asset-liability ratio of the issuers in the manufacturing declined slightly, as the average EBITDA interest coverage ratio increased by 0.31 compared with the same period of the previous year, the liquidity ratio rose by 0.05, the enterprises began to transform from the financing and investment-driven growth mode to the endogenous growth dependent on operating businesses, and the solvency was improved on the whole. The issuers in the real estate industry saw the cash inflow into operating activities in 2017 increased by 34.86% year-on-year. However, due to the construction cycle, the operating cash outflow also went up significantly. As a result, the net cash inflow into operation in 2017 decreased by 57.60% year-on-year, and the liquidity pressure was also amplified with the operating incomes increased.
(4) The net amount of the raised funds has decreased, and the pressure on capital turnover has increased.
Although the overall profitability of the issuers was encouraging in 2017, the net cash inflow from financing activities decreased by approximately 14.56% compared with the same period of the previous year, and the net inflows from fundraising activities of the issuers in real estate, municipal construction, manufacturing and other major industries showed varying degrees of decline. Some issuers with weak financial strength found the refinancing more difficult through loans, bond issuance, linking up with wealth management products and other channels. In this context, a small number of issuers with relatively high debt leverage formed previously and weak liquidity management may be under greater pressure. It is necessary to guide the supply and demand sides of the capital in solving information asymmetry, lower levels of trust and other problems, and urge such issuers to improve information disclosure quality, strengthen liquidity management, increase revenues and reduce expenditures through multiple channels, make arrangements for redemption funds in advance and effectively prevent liquidity risks and credit risks. The SSE will also pay close attention to the changes in the relevant issuers' operations and solvency, urge the trustees to perform their duties, strengthen risk monitoring and resolution, and maintain the healthy and stable development of the bond market.