20181120-中国银河国际证券-Goodwill__The_Hollow_Crown__6页_943kb

A-Share Étude Summary

Core Content

This report from China Galaxy International Securities analyzes the impact of goodwill impairment on A-share listed companies, particularly focusing on the increase in aggregate goodwill and the potential risks it poses. The report highlights that the Chinese Securities Regulatory Commission (CSRC) has introduced tighter standards for goodwill impairment, which may lead to increased write-offs in the coming years.

Key Findings

• Aggregate Goodwill: As of end-September 2018, the total goodwill of A-share companies has reached over RMB1.45 trillion, accounting for approximately 3.7% of the total net assets of the entire market.
• Impairment Risks: The CSRC's stricter guidelines could lead to higher impairment charges, which may negatively affect reported profits and dividend payouts.
• High Goodwill Companies: There are 114 listed companies with a market cap over RMB10 billion where goodwill constitutes more than 20% of their net assets. These companies are predominantly in the healthcare, media, consumer, and TMT sectors.
• Impact on Valuation Metrics: The report suggests that companies with significant goodwill may appear more attractive in terms of price-to-book and debt-to-equity ratios, but this could be misleading. If these companies face significant impairment, their valuation metrics will change significantly.
• Top 30 Companies: Among the 114 companies, the top 30 with the highest goodwill/net asset ratios are mostly in healthcare, consumer, and other sectors, with each sector accounting for one-third of these companies.

Main Points

• Healthcare Sector: Accounts for 18% of the 114 companies with high goodwill. These companies are typically trading at high price-to-book ratios, which could be affected significantly by impairment.
• Consumer Sector: Represents 15% of the companies with high goodwill. These companies also show high price-to-book ratios, suggesting potential valuation distortions.
• Media and TMT Sectors: These sectors have shown increased M&A activity, leading to high goodwill levels. The report indicates that these companies may be more vulnerable to impairment.
• Valuation Metrics: The report analyzes the impact of goodwill impairment on price-to-book (P/B) and adjusted PBR ratios, as well as net debt-to-equity and net debt-to-adjusted net assets ratios. These metrics are crucial for understanding the true financial leverage and valuation of companies.
• Investor Implications: Investors should closely monitor companies with high goodwill, as they may experience earnings disappointment or reduced profitability due to impairment charges.

Key Information

• Goodwill/Net Asset Ratio: Companies with a goodwill/net asset ratio over 20% are considered high-risk.
• Goodwill/Annualized Net Profits: This ratio is used to assess a company's ability to absorb potential write-offs.
• Price/Adjusted Net Assets: This metric provides a more accurate valuation by excluding goodwill and other intangibles.
• Net Debt/Equity Ratio: This ratio helps in assessing a company's financial leverage, and the report suggests that it can be misleading when combined with high goodwill.

Conclusion

The report concludes that while the increased goodwill may have distorted financial metrics, the CSRC's new guidelines are positive for long-term transparency and accuracy in financial reporting. It is expected that the impact of these changes will be more pronounced on smaller companies within the affected sectors, leading to a clearer understanding of the true fundamentals of listed companies.

Appendix A: List of Companies with Over 20% of Net Assets Contributed by Goodwill

Disclaimer

This report is issued by China Galaxy International Securities to institutional clients and is not directed at or intended for distribution to any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution would be contrary to applicable law or regulation. The report is based on information believed to be reliable, but no representation or warranty is made as to its accuracy, correctness, or completeness. The report is not an offer, invitation, or solicitation to buy or sell any securities. Past performance is not indicative of future performance. Investors should understand the investment objectives and related risks and consult their own financial advisers before making any investment decisions.

Disclosure of Interests

China Galaxy Securities Co., Ltd. is the direct and/or indirect holding company of the group of companies under China Galaxy International. China Galaxy International may have financial interests in the companies mentioned in this report, which may aggregate to an amount equal to or more than 1% of the market capitalization of the subject companies. Some directors, officers, and employees of China Galaxy International may also be directors or officers of the subject companies. China Galaxy International and the Relevant Parties may participate in financing transactions with the subject companies or perform services for them. The report is subject to change without notice, and China Galaxy International disclaims any liability arising from the inaccuracy, incorrectness, or incompleteness of this report.