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    Corporate comedown: Chinese companies, led by the state to pursue overseas acquisitions, are beginning to feel financial pain from past spending exuberance. (Illustration by Eric Chow)
    Cover Story

    Asia300: Chinese companies face surging write-offs

    After a global investment spree, impairments weigh on tech and energy companies

    HONG KONG/TOKYO -- For Tencent Holdings, 2018 was a record year for investment. The Chinese internet company splashed out 40.9 billion yuan ($6.1 billion) to buy stakes in companies across a wide range of industries -- from e-commerce to online gaming, media to investment banking.

    "Investment is Tencent's core strategy," President Martin Lau Chi-ping told investors in Beijing in February. Lau, the right-hand man of Pony Ma Huateng, co-founding chairman and CEO, said the tech conglomerate has invested in over 700 companies since 2008 -- a whopping 122 of which are now valued over $1 billion, either as listed companies or unlisted unicorns.

    The value of companies in which Tencent owns a stake of at least 5% exceeds $500 billion. That portfolio includes two of last year's largest initial public offerings: Meituan Dianping, a food delivery and online services site, and Pinduoduo, a social e-commerce platform.

    It is an impressive record, but Lau seems to have little to say about the flip side of these successes. A month after the event in Beijing, Tencent revealed that it had written down the value of its investments by 17.5 billion yuan -- a sixfold increase from the year before. The company did not disclose which of its portfolio companies were involved, but the substantial loss dragged its final-quarter net profit down by 32% on the year to 14.2 billion: the steepest fall in quarterly profit since 2005.

    Tencent Chairman and CEO Pony Ma Huateng speaks at the World Internet Conference in Wuzhen in November. The company revealed it has written down the value of its investments by 17.5 billion yuan -- a sixfold increase in impairments from the year before.   © Reuters

    Tencent is not the only Chinese company facing big write-downs after pursuing an aggressive global mergers and acquisitions strategy. In the years after the onset of the financial crisis in 2007 and 2008, Chinese companies embarked on an international M&A spree, supported by easy money policies and Beijing's strategic push for zouchuqu, or "going abroad."

    Tencent's M&A strategy was fueled by its competition with archrival Alibaba Group Holding. Both companies wanted to expand their businesses as quickly as possible through acquisitions, both at home and in high-growth areas like Southeast Asia. Energy and natural resources companies were also aggressive as they sought new ways to feed the ever-growing demands for oil, gas and minerals. China's conglomerates also scooped up foreign assets, sometimes at inflated prices.

    Now, many Chinese companies are being forced to take impairment charges as a result of all that investment. As Tencent's annual report states, assets had to be written off as losses due to "revisions of financial/business outlook ... and changes in the market environment of the underlying business."

    China- and Hong Kong-based companies on the Asia300 roster -- 300-plus listed companies in Asia, excluding Japan -- disclosed investment-related losses totaling $123.4 billion for 2018, according to data gathered through April 22 and analyzed by the Nikkei Asian Review. This was up 14% from the previous year, mainly owing to the financial sector, where impairments are traditionally high -- but the trend also runs throughout Chinese industries.

    The write-downs are coming into view in part because of the economic slowdown in China, which has been exacerbated by the trade war with the U.S.

    "Historical misspendings are reflected in the financial statements," noted Leo Hu, director of corporate ratings at S&P Global Ratings in Hong Kong.

    The frenzied competition between Tencent and its archrival has resulted in deep write-downs for both companies. Alibaba notched 7.91 billion yuan in write-downs for the nine months to December, on the heels of 20.4 billion for the full financial year to March 2018. The latter includes 18.1 billion yuan of impairment losses related to Alibaba Pictures, in which the company first invested in 2014.

    The charges are steep, but Tencent and Alibaba still compete for the title of China's most profitable company.

    Hefty losses on acquired assets are also found in China's energy sector, where state-owned oil companies have been at the vanguard of Beijing's expansion policy. While much of the world was struggling with the financial crisis, China's big three state-owned oil majors, CNOOC, PetroChina and China Petroleum & Chemical (Sinopec) were on an overseas shopping spree.

    Companies like state-owned oil producer CNOOC have headed China's global expansion: Above, former CNOOC chief executive Li Fanrong is greeted by then-president of Brazil, Dilma Rousseff, at the signing of a pre-salt exploration contract in Brazil in December 2013.   © Reuters

    CNOOC has been one of the most active. Among its big investments was a 50-50 joint venture with Argentina's Bridas Energy Holdings in 2010.

    The $3.1 billion investment in Bridas was meant to serve two goals: to feed the ever-growing energy demand at home, while also expanding the company's footprint. "Bridas ... is a very good beachhead for us to enter Latin America. Through this transaction, we'll establish a fair presence in this region," said Yang Hua, then-president and current chairman.

    However, the full cost of the investment was highlighted only recently in CNOOC's annual report, under an accounting item separate from impairment. While technically not a write-off, a loss of 5.1 billion yuan was recognized as "share of losses of associates and a joint venture" on its 50% investment in BC Energy Investments in Argentina, owing to "huge depreciation of the Argentina peso against the U.S. dollar and the sharp increase in interest rates."

    PetroChina led nonfinancial companies in impairment losses by recording a write-off of 34.5 billion yuan last year, with 77% of that coming from fixed assets and oil and gas properties.

    Impairment losses for the big three energy companies totaled 46.9 billion yuan -- 18% less than in 2017, when depressed oil prices fed into a peak in impairment charges. But even after recognizing these losses, the big three still managed to increase their aggregate bottom line for 2018 by more than $10 billion on the year.

    The cost of international ambition has also hit CRRC, the world's largest railway vehicle and equipment company, which in 2014 appeared to have struck a transformative deal with Germany's BOGE. Its predecessor company, then known as CSR, paid 290 million euros ($326 million in current value) to acquire the German rubber and plastic manufacturer. It was the company's largest ever overseas acquisition.

    This was a politically symbolic deal, made at a time when the Sino-German relationship was in much better shape than today. The official signing in Berlin was witnessed by President Xi Jinping and Chancellor Angela Merkel.

    CSR boasted about the significance of "acquiring century-old brand BOGE Company" from ZF, one of the top global car component manufacturers, in its 2014 annual report. The move was a step toward becoming the "[nation's] largest supplier," it said, and one of the "world's [most] advanced" makers of "automobile vibration and noise reduction products."

    Three years later, it crowed in a press release that it had created an "M&A legend" with the deal, noting that revenue and net profit since the acquisition were "beyond the commercial plan provided by the former shareholder."

    Lately the company hasn't been so effusive, however. In the fine print of CRRC's latest annual report, the company revealed that 529.9 million yuan, or 75% of the goodwill for BOGE, had to be written off, due to "continuous weakness of global market performance and the continued decline of the production and sales quantities in the industry."

    Another European misadventure for a Chinese company has been Fosun International's acquisition of a stake in Greek retailer Folli Follie in 2011, two years into Greece's debt crisis. The charge of 141 million euros was recognized as "fair value loss," according to the company's latest annual earnings release, linked to a probe by Greek regulators into disclosures around their Asian business.

    That deal was just one of many overseas acquisitions by Fosun, which -- along with Anbang Insurance, HNA Group and Dalian Wanda Group -- came under scrutiny in 2017, as Beijing grew concerned about capital flight.

    Trade uncertainty

    In his annual letter to shareholders, Citic Chairman Chang Zhenming makes much of the fact that this is the conglomerate's 40th anniversary. Citic, the state-owned investment company, was conceived at the beginning of China's "reform and opening up" period, when Deng Xiaoping was seeking a vehicle to tap global financial markets and lure much-needed capital from abroad.

    In his letter, Chang credited the conglomerate's evolution -- from registered capital of 200 million yuan to present total assets of over 7 trillion yuan -- to "disciplined investing, a global outlook and an emphasis on partnership."

    Somewhat contrary to his official claim, however, the company's impairment losses have held at around $10 billion or more in recent years. Last year was no exception, when losses totaled 75.5 billion Hong Kong dollars ($9.6 billion).

    "The reality is that we still have real hurdles to overcome"

    Chang Zhenming, chairman of Citic, on the flagship Sino Iron project facing at least HK$54 billion in impairments

    These are mostly due to bad loans in financial services. But a good chunk also comes from the Sino Iron project, Australia's largest magnetite iron ore mine, in which Citic has invested since 2009. Impairment losses have mounted to at least HK$54 billion over the last five years.

    Despite Citic's phenomenal expansion, stock market investors have held back in recent years: Its share price is less than half of its recent high in 2011, in part due to concerns about long-running issues in its Australian investment. "The reality is that we still have real hurdles to overcome to put Sino Iron on a long-term sustainable footing," Chang said.

    Japanese trading company Itochu, a cross-shareholding strategic partner of Citic, was forced to record impairment losses of 143 billion yen ($1.28 billion) on its holdings for the October-December quarter.

    Citic's iron ore mine in Western Australia, in August in 2012: In recent years, the troubled project has helped propel annual impairment losses of around $10 billion Hong Kong dollars.   © Reuters

    In terms of the sheer size of their impairments, China's more traditional banks far outstrip those of nonfinancial companies. Due to a chronic issuance of bad loans, the Chinese banking system has seen a near-constant stream of write-downs. In 2018, the big four state-owned lenders -- Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), and Bank of China (BOC) -- saw total write-offs of 548.5 billion yuan, a 24% leap on the year before.

    Despite such hefty losses, aggregate net profit of the four banks still increased by 4.6% to 935.2 billion yuan -- thanks to the interest rate environment, which guarantees a certain level of profit -- while total nonperforming loans stood at 792.9 billion yuan, up 3.5% from a year ago.

    David Li Kwok-po, Chairman and Chief Executive at Bank of East Asia, said his bank has "remained cautious on extending credit and continued to actively manage the impaired loan portfolio" in China. The bank, which has the largest mainland presence among its Hong Kong-based peers, has "put particular emphasis on de-risking its corporate portfolio [and] reduced its reliance on the real estate sector."

    Ray Heung, a Moody's Investors Service analyst in Hong Kong, warned that "asset distress remained elevated in the system," visible in higher formation rates of new nonperforming and 90-day overdue loans from a year ago.

    For the six largest banks -- including the Bank of Communications and Postal Savings Bank of China -- Heung observed that the "more accommodative monetary policy stance will alleviate asset quality pressure, but we do not expect to see a significant decline in impairment charges."

    "Blank spaces on the map"

    Another reason for caution -- at least for some Chinese companies -- is trade tension between the U.S. and China. Some port operators are starting to prepare for the worst: subdued global trade. CK Hutchison Holdings, the Hong Kong conglomerate formerly run by tycoon Li Ka-shing, recognized HK$4.7 billion of impairment write-offs in goodwill for its Singapore-listed Hutchison Port Holdings Trust.

    "The impact of uncertainty surrounding trade disputes was marginal in 2018," said Victor Li Tzar-kuoi, chairman and successor to the elder Li, in a statement. But he cautioned that "the outlook for 2019 is unclear, particularly as regards to the Mainland ports." Last year, the company sold its entire stake in the international container terminal in the southern Chinese port city of Shantou, said Li.

    Cosco Shipping is among those companies that remain bullish on expansion: "Globalization is our core strategy," said Zhang Wei, vice chairman and managing director of the Chinese company's Hong Kong-listed subsidiary.   © Reuters

    Despite the rising impairment charges, many Chinese companies remain bullish as they expand rapidly at home and overseas.

    "Globalization is our core strategy," Zhang Wei, vice chairman and managing director of Cosco Shipping Ports, a Hong Kong-listed subsidiary of Cosco Shipping Holdings, told reporters on March 28. The state-owned port operator announced in January it would pour $225 million into a 60% stake in the port terminal of Chancay, 58 km north of the Peruvian capital of Lima.

    When finalized, the deal would mark Cosco Ports' first footprint in South America, adding to a global portfolio that now includes Southeast Asia, the Middle East, Europe and the Mediterranean. Zhang stressed that "there are lots of chances and blank spaces [on the map], and opportunities are extremely large."

    Tencent is also boldly pushing ahead.

    "Many people ask me whether we are going to shrink our investment this year," Lau said in February. "I am telling everyone: We are not going to do that. ... After every major crisis and bursting of a bubble, the companies that rise from the ashes will be the most outstanding and visionary of all."

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