Overall Analysis Report on 2019 Annual Reports of Companies Listed on SSE Main Board

05 May 2020

By April 30, 2020, 1,476 companies listed on the main board of the Shanghai Stock Exchange (SSE) released their 2019 annual reports, and the other 38 companies disclosed main business performance data in the year. Statistics show that the companies on the SSE main board achieved positive growths in operating income, net profit, net profit after deducting non-recurring gains and losses and operating cash flow, and continued to serve as the ballast in the national economy, which also reflects the strong resilience of China's economy, and provides sufficient room for maneuver in overcoming complex difficulties in 2020. At the same time, in the face of the complicated situation of rising risks and challenges at home and abroad, companies on the SSE main board generally faced pressure in operation, and some companies encountering significant operational difficulties needed to reconfigure to improve performance and quality.

1. The overall performance was stable with improvements, and the high-quality blue chips played an important role in resisting risks and stabilizing growths.

In 2019, focusing on the main business, companies on the SSE main board showed stable performance with improvements on the whole, and recorded a total operating income of RMB37.21 trillion in the year, an increase of 9% year-on-year, accounting for nearly 40% of national GDP; a total net profit of RMB3.19 trillion was posted, a year-on-year increase of 9%. Among the companies, more than 90% made profits, with the total number exceeding 1,370. At the same time, with solid efforts made in operating quality, a total net profit of RMB2.97 trillion after deducting non-recurring gains and losses was registered, a year-on-year increase of 8%. The net profits after deducting non-recurring gains and losses were positive for 80% of the companies, with more than 70% of the companies reporting a positive figure for three consecutive years; about half of the companies expanded year-on-year, and more than 330 companies achieved growth for three consecutive years. Against the background of complicated and changeable internal and external economic situations and deepened economic restructuring, it was extremely difficult for SSE-listed companies to realize performance on the basis of the existing large sizes of revenue and profits.

By sector, in 2019, the SSE-listed industry and commerce companies operated soundly with revenue growing rapidly and overall operating performance was stable, with total operating income at RMB28.98 trillion, an increase of 8% year-on-year, and net profit at RMB1.21 trillion, basically at par with last year. In the same period, the overall performance of the financial companies on the SSE market saw steady growth, with a total operating income of RMB 8.23 trillion and a total net profit of RMB1.97 trillion, up by 13% and 14% respectively.

The SSE main board has attracted a large number of high-quality blue-chip enterprises, which become bedrock of China's economic development. Among them, large-cap blue chips have made significant contributions. SSE50 Index companies recorded an operating income of RMB19.19 trillion and a net profit of RMB2.17 trillion, up by 9% and 11% year-on-year respectively, accounting for 52% of the total operating income and 68% of the total profit on the SSE market; SSE180 Index companies registered an operating income of RMB26.03 trillion and a net profit of RMB2.70 trillion, both up by 10% year-on-year, accounting for 70% of the total operating income and 85% of the total profit on the SSE market. Similarly, small and mid cap companies also performed well, which were active in adaptation and transformation with impressive performance. Small and mid cap companies with market cap under RMB50 billion totaled RMB13.42 trillion in operating income and RMB522.7 billion in net profit, and nearly 90% of them were profitable. Among companies with market cap under RMB10 billion, about 87% made profits, and nearly 40% achieved growths in both revenue and net profit.

Leaders on the SSE main board have been focusing on main business. Their solid performance helps them resisti risks and stabilize growth. These companies include “banks, securities companies and insurance companies” in the financial sector, the leading industrial enterprises in the real economy, China’s centrally-administrated enterprises such as CRRC Corporation Limited, China State Construction Engineering Corporation Limited and China CSSC Holdings Limited, the major private companies such as Sany Heavy Industry Co., Ltd., Hengli Petrochemical Co., Ltd. and Foshan Haitian Flavouring and Food Company Ltd., the companies with cutting-edge technologies such as Shenzhen Goodix Technology Co., Ltd., Gigadevice Semiconductor (Beijing) Inc., Yonyou Network Technology Co., Ltd. and Jiangsu Hengrui Medicine Co., Ltd., as well as the companies characterized by “small size and profitability” such as Henan Mingtai Al. Industrial Co., Ltd., Shanghai Shuixing Home Textile Co., Ltd. and Zhejiang Jasan Holding Group Co., Ltd.

2. Focusing on performance and quality, companies further strengthen their main business.

In 2019, industry and commerce companies on the SSE main board recorded a total of RMB1.03 trillion in the net profit after deducting non-recurring gains and losses, which was basically unchanged from the last year. 80% of the companies posted positive net profits after deducting non-recurring gains and losses, and more than 70% of the companies remained profitable in main business for three consecutive years. Affected by various internal and external factors, industry and commerce companies saw their growth slow down, and some industries experienced a decline in performance.

In terms of operating quality, industry and commerce companies become more stable and healthy. Throughout the year, they achieved a total operating cash flow of RMB2.59 trillion, an increase of 8% year-on-year. Among the companies, 80% posted positive operating cash flow, and more than 60% steadily gained a net operating cash inflow for three straight years. In addition, more than 1,030 companies posted positive figures in both net profit after deducting non-recurring gains and losses and operating cash flow, of which more than 840, or 60% of them, saw operating cash flow exceed net profit after deducting non-recurring gains and losses. The numbers indicate that profits from the main business were backed by sufficient cash flows and the quality of the profits was high.

With regard to asset structure, industry and commerce companies on the SSE main board continued to grow in size with stable asset-liability ratio. As of the end of 2019, total assets of those companies amounted to RMB44.13 trillion, a year-on-year increase of 10%, and the overall asset-liability ratio stood at 61.56%, which was basically the same on a year-on-year basis, and remained at around 60% for three consecutive years. Specifically, SOEs’ asset-liability ratio was 61.46%, similar to that of private entities at61.90%; the overall asset-liability ratio of the manufacturing industry decreased by 0.39 percentage point year-on-year, and the larger drops of more than a percentage point were recorded in coal, iron and steel, chemical and other industries, showing the initial results in deleveraging.

By ownership, SOEs accelerated the pace of reform to improve performance, contributing a total of RMB22.76 trillion in operating income, an increase of 8% year-on-year, and net profits before and after deducting non-recurring gains and losses reached RMB877 billion and RMB760 billion respectively, almost the same as the previous year, with their operating cash flow at RMB2 trillion, a year-on-year increase of 5%. The private industry and commerce companies maintained their operational resilience under the downward pressure in the market, with a total operating income of RMB6.22 trillion, a net profit of RMB355.7 billion, and a net profit of RMB268.4 billion after deducting non-recurring gains and losses, showing the similar year-on-year growth rate to that of state-owned entity companies, but the operating cash flow of RMB589.4 billion represented a significant improvement, with a year-on-year growth rate of 22%.

3. More than 60% of industries registered increases in net profit, and nearly 40% experienced a decline.

The SSE main board brings together major sectors that are important to national economy and people's livelihood and still have space for maneuver and anti-risk capability under the downward macroeconomic pressure, as the system of sectors is complete with full-fledged supporting industries. In 2019, all sectors on the SSE main board achieved steady growths in operating income, but the business results were somewhat differentiated, as over 60% of the industries recorded increases in net profit, and nearly 40% suffered varying degrees of decline.

Some traditional cyclical industries in the upstream and midstream sectors were gradually slowing down and stabilizing or showed some drops after experiencing the early high-speed growths, while the equipment manufacturing industry expanded rapidly. Specifically, among the upstream industries, the non-ferrous industry posted a net profit of RMB11.2 billion, an increase of 11% year-on-year; the coal industry registered a net profit of RMB86.2 billion, which was almost the same as the previous year; the petroleum industry made a net profit of RMB104.9 billion, a year-on-year decline of 11%. Among the midstream industries, the chemical and iron and steel industries achieved net profits of RMB42.4 billion and RMB31.6 billion respectively, down by 28% and 49% year-on-year, mainly due to rising raw material prices, falling product prices and other factors. With the driving force of the demand of infrastructure construction, the growing demand in equipment renewal and the influence of the “Belt and Road” initiative, the manufacturing industries of general equipment, special equipment and transportation equipment reported net profits of RMB11 billion, RMB24.4 billion and RMB21.5 billion respectively, up by 21%, 62% and 52% year-on-year, with the growth rates of the net profit after deducting non-recurring gains and losses at 26%, 74% and 35% respectively.

The downstream industries of Consumer Staple continued to maintain rapid growth, Consumer Discretionary showed some differentiation, and the service and supporting industries tended to grow steadily. Specifically, food and beverage, wholesale and retail, real estate and construction posted net profits of RMB80.8 billion, RMB44.8 billion, RMB120.9 billion and RMB146.1 billion, up by 17%, 30%, 13% and 13% year-on-year, respectively, mainly benefiting from the steady growth of basic consumer demand, the accelerated release of emerging consumer potential and the continued increase in fixed asset investment. The pharmaceutical industry totaled a net profit of RMB31.3 billion, a slight increase of 2% year-on-year, mainly due to the policies such as volume-based procurement and consistency evaluation accelerating industrial restructuring and differentiation, with the trend of survival of the fittest gradually emerging. The auto industry recorded a net profit of RMB50.3 billion, a year-on-year decline of 27%, with the operating performance under pressure. Among the service and supporting industries, the electricity and heating industry and the transportation saw their growth rates stabilizing and their net profits amount to RMB72.6 billion and RMB106.4 billion, up by 1% and 8% year-on-year, respectively, with their net profits after deducting non-recurring gains and losses increasing by 8% and 9% respectively.

4. Research and development (R&D), and investment and financing continued to increase, providing a development boost for transformation and upgrading.

With the innovation-driven strategy, the companies on the SSE main board continued to step up investment in R&D, and accelerated the application of scientific and technological achievements. New drivers are growing rapidly. In 2019, total R&D investment of the SSE-listed industry and commerce companies totaled about RMB447.8 billion, a year-on-year increase of about 14%, and among the companies, 70 saw their R&D investment proportion exceed 10%, more than 480 invested more than RMB100 million in R&D, the engineering construction, auto manufacturing and other industries ranked high in R&D investment, and the software and information technology services and the Internet services industries were among the leaders in R&D investment. In the process, traditional manufacturing industries transformed from old to new drivers through technological innovation while strategic emerging industries gathered momentum and switched into a high gear.

Asset investment and mergers and acquisitions (M&A) and reorganizations jointly boosted the internal and external development of the companies on the SSE main board in a coordinated manner. In terms of organic asset investment, in addition to R&D investment, the long-term asset expenditures for the acquisition and construction of fixed assets by the entity companies on the SSE main board totaled RMB1.93 trillion yuan, an increase of 11% year-on-year, and specifically, the manufacturing industry maintained an 8% growth rate, effectively advancing the optimization and upgrading of the production capacity structure. With regard to external M&A and reorganizations, industrial logic became the “keynote” of the SSE main board. In 2019, there were about 1,050 M&A and reorganization transactions involving a total amount of approximately RMB770 billion, and 51 projects of major asset restructuring were completed, with an amount of approximately RMB182 billion involved. Although there were drops in transaction number and amount, irrational cross-industry M&A decreased, the valuation became more rational, and the overall quality improved. In the process, SOEs promoted reform and development and explored market-oriented mechanisms, such as Dalian Port (PDA) Company Limited, Jinzhou Port Co., Ltd. and Yingkou Port Liability Co., Ltd. introducing China Merchants Group to drive the economic development of the hinterland. Also private enterprises integrated superior resources to resist risks and challenges, such as Gigadevice Semiconductor (Beijing) Inc. acquiring Silead Inc. to rapidly enhance the scale effect of integrated circuit chips.

The financing side maintained steady growth and provided strong support for the business and investment activities of the listed companies. In 2019, the overall financing size of the entity companies on the SSE main board stood at approximately RMB9.62 trillion, an increase of 7% year-on-year, and specifically, the total funds raised by the manufacturing industry increased by about 10% year-on-year. Structurally, the direct financing totaled about RMB1.16 trillion, of which the equity financing accounted for about 54%, a year-on-year increase of 17%, showing good momentum of growth. The refinancing market in the capital market was more active, as the companies on the SSE main board raised a total of RMB522.2 billion through refinancing, a year-on-year increase of 33%. Convertible bonds and preferred shares were major growth points on the refinancing market in the year. A total of 59 SSE-listed issued convertible bonds throughout the year, raising more than RMB180 billion; seven SSE-listed banks issued preferred shares with a total amount of more than RMB200 billion raised. At the same time, the public issuance of additional shares returned to the market, with the offering successfully completed by the companies such as Zijin Mining Group Company Limited and Nancal Technology Co., Ltd.

5. The amount of dividend reached a new high, and corporate social responsibility has become a convention of the blue chips.

In 2019, the companies on the SSE main board extended their fine tradition of high returns and generous dividends, and continued to enhance investors' sense of gain. A total of about 1,110 companies announced their plans for dividend distribution, accounting for 81% of the total number of the profitable companies, the overall dividend ratio was 32.4%, and the total dividend amounted to RMB1.07 trillion, a record high. Particularly, more than 810 companies arranged a dividend ratio of more than 30%, the dividend ratio of about 230 companies exceeded 50%, with Industrial and Commercial Bank of China Limited topping the chart of amounts with a total dividend of RMB93.7 billion, and 22 companies each paid more than RMB10 billion in cash. At the same time, more than 570 companies distributed dividends in a ratio of more than 30% for three consecutive years, and more than 90 companies paid dividends in a proportion of more than 50% for three years in a row. The group of companies distributing dividends in high ratios has been formed. Among the companies, in addition to the banks and the leading enterprises in the extractive industry that paid cash dividends to investors for years, the companies in other industries such as Inner Mongolia Yili Industrial Group Co., Ltd., Daqin Railway Co., Ltd., Yanzhou Coal Mining Company Limited and Datang International Power Generation Co., Ltd. have also become examples of long-term high-ratio dividend distribution.

In the area of poverty alleviation, the companies on the SSE main board continued to promote targeted poverty alleviation and eradication, supporting the country’s efforts in consolidating the achievements in poverty alleviation and realizing the goals for fighting against poverty. In 2019, about 690 companies disclosed information about targeted poverty alleviation, involving the measures in industry, employment, education and other fields. Among the companies, there emerged a large number of typical cases. The poverty alleviation project of China Pacific Insurance (Group) Co., Ltd. covered approximately 5.13 million people in the poverty-stricken households recorded and registered nationwide, and provided risk protection for poverty-stricken areas with a total insured amount of RMB2.32 trillion. Bank of Jiangsu Co., Ltd. provided more than RMB24 billion in poverty alleviation loans, assisting more than 9,000 people recorded and registered for poverty; Huaneng Lancang River Hydropower Inc. invested RMB516 million in poverty alleviation throughout the year, and among those benefited, the three poor counties of Cangyuan, Gengma and Shuangjiang got rid of poverty one year ahead of schedule, the incidence of poverty in Lancang County dropped from 46.68% to 1.61%, and Dangzuo Village in Tibet and Baiyan Village in Fuyuan County were lifted from poverty; Fuyao Glass Industry Group Co., Ltd. and its chairman donated a total of about RMB12 billion, involving disaster relief, poverty alleviation, aid, education, culture and other aspects, to provide financial support for the poverty alleviation projects in Xinjiang, Fujian, Hubei, Ningxia and other areas.

In terms of environmental protection, the companies on the SSE main board were active in responding to the national initiatives and participating deeply in the battle against pollution, so as to jointly promote the continuous improvement of the quality of the ecology and environment. Up to now, about 620 companies have established an environmental information disclosure mechanism to proactively disclose information about environmental protection and pollution discharge, with the investments in environmental protection continuously increased. For example, Baoshan Iron & Steel Co., Ltd. invested a total of about RMB10.7 billion in environmental protection throughout the year, and implemented measures to deal with waste gas, water and solid waste while clean up the environment and plant more greens to make it more beautiful. The company also accelerated the construction of a green urban steel plant and implement the transformation to ultra-low emission in an all-round manner, with the performance of major environmental indicators continuously improved; Aluminum Corporation of China Limited made a total investment of more than RMB2 billion throughout the year, as more than 60 projects of indicator improvement and transformation for environmental protection were implemented, and 12,000 mu of land was reclaimed, with the total land reclamation reaching 78,500 mu and a reclamation ratio of over 86%; Zijin Mining Group Company Limited spent a total of RMB725 million on the projects of environmental protection and ecological improvement in 2019, including RMB94.8105 million in ecological restoration, with 5.2848 million square meters of vegetation restored, and 1.3418 million flowers and trees of different species planted.

6. Difficulties and opportunities coexisted, and it was necessary to improve company quality in overcoming difficulties.

The 2019 annual reports also showed that some companies met certain difficulties and risks in operation, and a small number of companies experienced declines in performance or losses. According to statistics, in 2019, 141 companies on the SSE main board suffered losses, almost the same as the number of 143 companies in 2018, accounting for about 10% of the total number of the SSE-listed companies. Judging from the overall amount, the losses totaled about RMB117.8 billion in 2019, which was also nearly unchanged from the figure of about RMB115.2 billion in 2018.

Regarding the analysis of the specific circumstances of the loss-making companies, some companies encountered great difficulties due to the impacts of the industrial cycle and the economic situation. In some industries, the cost was rising and the demand was weak; some companies were unprepared in the face of the market changes as they had expanded too fast in the earlier stages and found it difficult to digest the costs in time. But at the same time, in addition to their own operational problems, quite a few loss-making companies also had the problems in corporate governance, financial authenticity, consequence of high-premium acquisition and other aspects. In addition, a small number of companies could not get rid of the doubts about the authenticity of their previous performance, and there may even be a suspicion of covering up the previous problems through a "thorough bath". Some of these companies had the delisting risk warnings issued due to continuous losses in business performance and received disclaimer of opinion from auditing companies.

The pledge and goodwill risks were somewhat relieved on the whole. As of the end of 2019, there were 1,170 companies with pledged shares on the SSE main board, a net decrease of 203 from the beginning of the year, and 143 companies saw the controlling shareholders pledge more than 80% of their shares, a net decrease of 51 from the beginning of the year. In 2019, the balance of goodwill of the companies on the SSE main board was RMB535.5 billion, with a total of RMB18.5 billion withdrawn in goodwill impairment reserve, which was much lower than the RMB38.3 billion in 2018, accounting for 0.06% of the total net asset and approximately 0.58% of the net profit. Overall, the risks of pledge and goodwill have been released to a certain extent. However, from a structural point of view, the high risk of pledge still continues at some private enterprises, and the goodwill of some companies reorganized with high valuation, goodwill and commitment in the earlier stages remains high, which still requires close attention and handling properly in the future.

To deal with the circumstances, under the coordination of the China Securities Regulatory Commission (CSRC), the exchange will adhere to the main line of improving the quality of listed companies, attach importance to both regulation and development, and give equal priority to supervision and service. On the one hand, we should deepen the reform of the basic system of the capital market, and in accordance with the principles of marketization and rule of law, take measures to support listed companies in transformation and upgrading to grow better and stronger. For the companies with operating difficulties in the short term, we will help them out of difficulties through multiple channels, stimulate their vitality, and stabilize market expectations. On the other hand, we will effectively protect the interests of investors, closely monitor the "key minority", tighten the market discipline, pay special attention to the authenticity of the financial information disclosed by the listed companies, impose "zero tolerance" on counterfeiting and fraud, and efficiently maintain market order and foundation for integrity.

SSE Capital Market Institute