20181120-中国银河国际证券-Being_and_Nothingness__The_Issue_of_Goodwill_Reiterate_BUY_for_Large-Cap_Infrastructure_Plays_5页_886kb

A-Share Étude Summary: China Construction Sector

Core Content

This report from CGIS Research focuses on the impact of the CSRC's new policy on goodwill impairment for A-share construction and infrastructure companies, particularly highlighting the implications for valuation and risk.

Main Points

• Goodwill Impairment Policy Change: The CSRC has introduced more stringent standards for goodwill impairment, which is expected to significantly affect the financial statements of A-share companies.
• Risk for Smaller Companies: Smaller construction companies with high goodwill on their balance sheets are more vulnerable to impairment charges, which could lead to substantial increases in their P/B ratios and gearing ratios.
• Positive Outlook for Large-Cap Stocks: Large-cap infrastructure companies, such as CRCC (601186 CH) and CRG (601390 CH), are less affected due to their tangible assets and are recommended as "Buy" stocks.
• Hold Recommendation for CCC: CCC (601800 CH) is recommended as "Hold" due to its higher exposure to goodwill and lower resilience to impairment.
• Goodwill Accumulation: By end-September 2018, the total goodwill for A-share companies had reached over RMB1.45 trillion, which is approximately 4% of total net assets (excluding banks).
• Impairment Impact: The 2018/19 impairment losses are expected to be higher than the RMB1.4bn recorded in 2017, due to the new policy and reduced corporate profitability.
• Valuation Distortion: Goodwill can distort standard financial ratios, such as P/B and debt-to-equity, giving a misleading picture of a company's financial leverage and value.

Key Information

• Goodwill/Net Assets: The ratio of goodwill to net assets has increased from 1% in 2011 to 4% in 2018, highlighting the growth in M&A activity.
• Impairment Impact on Valuation: Companies with high goodwill are more likely to see a significant rise in their P/B ratio if goodwill is fully impaired.
• Recommendations:
  • Buy: CRCC (601186 CH), CRG (601390 CH)
  • Hold: CCC (601800 CH)
• High-Risk Companies: Some mid-cap companies, such as Beijing Orient Landscape & Environment (002310 CH), LingNan Eco & Culture-Tourism (002717 CH), and Misho Ecology & Landscape (300495 CH), are identified as high risk due to their higher goodwill/asset ratios and potential for significant valuation changes.

Financial Metrics Overview

| Ticker | Company | Market Cap (RMB Mn) | Goodwill 09/2018 (RMB Mn) | Common Shareholder Equity (RMB Mn) | Net Profit 2018E (RMB Mn) | P/B Sept 2018 (x) | Price/Net Tangible Asset (x) | Goodwill/Net Asset | Goodwill/Net Profit | Net Debt/Equity | Net Debt/Net Tangible Asset |
|--------|--------|-------------------|--------------------------|----------------------------------|--------------------------|------------------|----------------------------|-------------------|-------------------|------------------|----------------|-----------------------------|
| 601668.SH | 中国建筑 | 230,499 | 2,268 | 237,546 | 50,435 | 1.0 | 1.0 | 1% | 4% | 5% | 8% |
| 601800.SH | 中国交建 | 181,297 | 5,293 | 188,586 | 17,833 | 1.0 | 1.0 | 3% | 30% | 68% | 82% |
| 601390.SH | 中国中铁 | 173,539 | 829 | 168,897 | 17,599 | 1.0 | 1.0 | 0% | 5% | 22% | 25% |
| 601186.SH | 中国铁建 | 147,555 | 229 | 164,482 | 18,872 | 0.9 | 0.9 | 0% | 1% | 11% | 14% |
| 601669.SH | 中国电建 | 81,850 | 1,113 | 83,675 | 9,585 | 1.0 | 1.0 | 1% | 12% | 130% | 205% |
| 600068.SH | 葛洲坝 | 33,569 | 1,401 | 41,606 | 5,166 | 0.8 | 0.8 | 3% | 27% | 80% | 108% |
| 002310.SZ | 东方园林 | 27,847 | 2,323 | 12,119 | 2,737 | 2.3 | 2.8 | 19% | 85% | -10% | -34% |
| 600528.SH | 中铁工业 | 22,838 | 0 | 15,309 | 1,464 | 1.5 | 1.5 | 0% | 0% | -28% | -28% |
| 600970.SH | 中材国际 | 10,942 | 934 | 8,274 | 1,350 | 1.3 | 1.5 | 11% | 69% | -46% | -55% |
| 002717.SZ | 岭南股份 | 9,886 | 1,099 | 4,278 | 313 | 2.3 | 3.1 | 26% | 351% | 119% | 318% |
| 300495.SZ | 美尚生态 | 7,985 | 793 | 3,109 | 449 | 2.6 | 3.4 | 26% | 177% | 58% | 110% |
| 600939.SH | 重庆建工 | 9,889 | 0 | 6,776 | 781 | 1.5 | 1.5 | 0% | 0% | -57% | -40% |
| 002061.SZ | 浙江交科 | 11,665 | 0 | 6,886 | 479 | 1.7 | 1.7 | 0% | 0% | 71% | 71% |
| 002081.SZ | 金螳螂 | 8,839 | 411 | 7,079 | 278 | 1.2 | 1.3 | 7% | 185% | -8% | -4% |
| 002047.SZ | 宝鹰股份 | 8,504 | 185 | 3,974 | 510 | 2.1 | 2.2 | 5% | 36% | -7% | -7% |
| 002431.SZ | 棕榈股份 | 8,199 | 515 | 5,473 | 596 | 1.3 | 1.5 | 9% | 86% | -46% | -55% |
| 600039.SH | 浦东建设 | 5,036 | 0 | 5,617 | 257 | 0.9 | 0.9 | 0% | 0% | -10% | -5% |
| 600820.SH | 隧道股份 | 19,210 | 44 | 19,916 | 522 | 1.0 | 1.0 | 0% | 8% | 40% | 26% |
| 300237.SZ | 美晨生态 | 9,852 | 541 | 3,525 | 215 | 2.8 | 3.3 | 15% | 251% | -25% | -27% |
| 300284.SZ | 苏交科 | 8,103 | 879 | 4,017 | 426 | 2.0 | 2.6 | 22% | 206% | 7% | 18% |
| 300197.SZ | 铁汉生态 | 12,241 | 919 | 6,365 | 763 | 1.9 | 2.2 | 14% | 120% | 169% | 456% |
| 600491.SH | 龙元建设 | 11,014 | 62 | 9,301 | 755 | 1.2 | 1.2 | 1% | 8% | 70% | 77% |
| 002545.SZ | 东方铁塔 | 8,199 | 520 | 7,233 | 611 | 1.1 | 1.2 | 7% | 85% | 8% | 9% |
| 002542.SZ | 中化岩土 | 8,186 | 466 | 3,769 | 290 | 2.2 | 2.5 | 12% | 161% | 10% | 22% |
| 600326.SH | 西藏天路 | 6,473 | 30 | 2,612 | 52 | 2.5 | 2.5 | 0% | 0% | 31% | 70% |
| 600477.SH | 杭萧钢构 | 8,255 | 0 | 3,096 | 682 | 2.7 | 2.7 | 0% | 0% | 9% | 23% |
| 002482.SZ | 广田集团 | 8,839 | 515 | 7,079 | 278 | 1.2 | 1.3 | 7% | 185% | -8% | -4% |
| 002061.SZ | 浙江交科 | 11,665 | 0 | 6,886 | 479 | 1.7 | 1.7 | 0% | 0% | 71% | 71% |
| 002051.SZ | 中工国际 | 14,598 | 245 | 8,854 | 1,329 | 1.6 | 1.7 | 3% | 18% | 24% | 20% |
| 600970.SH | 中材国际 | 10,942 | 934 | 8,274 | 1,350 | 1.3 | 1.5 | 11% | 69% | -46% | -55% |
| 002047.SZ | 宝鹰股份 | 8,504 | 185 | 3,974 | 510 | 2.1 | 2.2 | 5% | 36% | -7% | -7% |

Conclusion

The CSRC's new policy on goodwill impairment is likely to increase the financial burden on smaller construction companies, leading to higher P/B and gearing ratios. In contrast, large-cap infrastructure companies with strong fundamentals and tangible assets are better positioned to withstand these changes and are recommended as Buy. The report also highlights the importance of understanding the true financial leverage and valuation of companies by adjusting for goodwill and intangible assets.