Cash in from within 2016 Working Capital Management China & Hong Kong Market Study December 2016

Transcription

1 Cash in from within 2016 Working Capital Management China & Hong Kong Market Study December 2016

2 2 PwC

3 Foreword In this 2016 Annual Working Capital Survey, we analysed 5-year data (from ) of companies listed in the China/Hong Kong market. We are of a view that the current economic reforms in China have unmasked some structural weaknesses within the economy, which have being eventually cascaded down to liquidity crises faced by corporates, putting pressure on their growth and expansion. The need for working capital management is urgent and is driven by both macro-economic factors such as continuous devaluation of Asian currencies, the relatively higher interest rates in the Asian markets, together with companies internal factors such as the lack of cash awareness and targets. Undeniably, cash is becoming an increasingly pressured resource; however many companies have underutilised the cash potential in their balance sheets and instead relied excessively on external financing which inevitably erodes margin. Working capital is the cheapest yet sustainable source of funding. There is a surging focus for corporates to monitor working capital as evidenced by the increasingly popular linkage of management incentives to working capital performance. In particular in China, working capital management is vital for regenerating cash to fund the need of Chinese companies to carry out active outbound investments. By implementing working capital management which is about change in culture and behaviour and core processes, we help our clients to create visibility of cash performance across the whole organisation and establish a sustainable cash culture. The deployment of various working capital management methodologies and protocols helps to free up and regenerate high levels of cash tied up internally within organisations. Working capital management programs deliver key benefits and generate measurable gains from the areas of Payables and Procurement, Inventories, Revenue Management, and Accounts Receivables Management. These programs also help to streamline service levels, reducing wastage and rework. In short, tighter working capital management processes can ensure revenues and profits grow without destroying value. In times of low or no growth times of economic downturn and liquidity crises organisations with a strong cash culture will be able to focus on their core businesses, and emerge stronger and leaner, being the first to expand and leverage their enhanced market positioning. Cash in from within 2016 Working Capital Management China & Hong Kong Market Study 3

4 China & Hong Kong industry analysis Macro-economics trends - China Liquidity crisis in China is evident Economic shortage has been replaced by large scale overcapacity Fixed investments and exports two growth pillars have faltered Change in SOE administration and less government intervention have enabled more market economics There is a debt problem (in both corporate and local government) China is going through a re-adjustment The time of high GDP growth rate is over, and China has entered into a period of the New Normal, which requires rebalancing of its economic competitiveness Chinese companies urgently need cash for outbound investments 4 PwC

5 What is happening - China Cash in from within 2016 Working Capital Management China & Hong Kong Market Study 5

6 Median net working capital days - China 154 Pharmaceuticals & life sciences Industrial manufacturing Engineering & construction 121 Aerospace, defence & security 115 Pharmaceuticals & life science, Industrial manufacturing and are the sectors having the highest median net working capital days (>130days) Forest, paper & packaging Energy, utilities & mining 17 9 Hospitality & leisure 6 PwC

7 Most sectors show a significant spread in performance between top and bottom performers Net Working Capital Days (NWC days) Pharmaceuticals & life sciences and Industrial manufacturing are the sectors having the longest median NWC days Top Performers Median Bottom Performers Pharmaceuticals & life sciences Engineering & construction Industrial manufacturing Forest, paper & packaging Aerospace, defence & security Energy, utilities & mining Hospitality &leisure Cash in from within 2016 Working Capital Management China & Hong Kong Market Study 7

8 Analysis on working capital elements by sector - China Days Sales Outstanding (DSO) Industrial manufacturing is the sector with the longest median DSO Top Performers Median Bottom Performers Pharmaceuticals & life sciences Engineering & construction Industrial manufacturing Forest, paper & packaging Aerospace, defence & security Energy, utilities & mining Hospitality &leisure 8 PwC

9 Days Inventory Outstanding (DIO) Aerospace, defence & security is the sector with the longest median DIO Top Performers Median Bottom Performers Pharmaceuticals & life sciences Engineering & construction Industrial manufacturing Forest, paper & packaging Aerospace, defence & security Energy, utilities & mining Hospitality &leisure Days Payables Outstanding (DPO) Hospitality & leisure is the sector with the shortest median DPO Top Performers Median Bottom Performers Pharmaceuticals & life sciences Engineering & construction Industrial manufacturing Forest, paper & packaging Aerospace, defence & security Energy, utilities & mining Hospitality &leisure Cash in from within 2016 Working Capital Management China & Hong Kong Market Study 9

10 In China, only 2 out of 16 sectors managed to improve working capital since 2011 Working capital improvement in percentage points Improvers Non-improvers -4% -1% 14% 17% 19% 23% 30% 32% 35% 36% 39% 43% 46% 48% 54% 3% Transportation & logistics Aerospace, defence & security Pharmaceuticals & life sciences Hospitality & leisure Forest, paper & packaging Engineering & construction Energy, utilities & mining Retail & consumer Industrial manufacturing Entertainment & media Overall, only 2 sectors have shown an improvement in working capital since 2011, with 14 showing a deterioration. The only companies that have achieved a marked improvement since 2011 are companies within the and sectors. Of the companies that have failed to show an improvement over this period, those in the sector have shown the most significant deterioration. If the net working capital of all sampled listed companies in China can be improved by 5%, RMB 264 billion of cash can be released 10 PwC

11 Analysis on working capital performance of companies within the same sector - China Improvers Non-improvers 32% 68% 36% 38% 39% 39% 39% 40% 42% 43% 45% 47% 47% Pharmaceuticals & life sciences Industrial manufacturing Engineering & construction Forest, paper & packaging Energy, utilities & mining 64% 62% 61% 61% 61% 60% 58% 57% 55% 53% 53% 49% 51% 50% Hospitality & leisure 50% 52% 53% 41% Aerospace, defence & security Transportation & logistics Total 48% 47% 59% 2 out of 16 sectors have seen more companies improving their working capital performance than deteriorating. The and Pharmaceutical & life science sectors are the notable exceptions, as 64% or more of companies did not manage to improve their working capital performance. If the net working capital of all sampled listed companies in China continues to grow at the existing rate, the aggregate net working capital level will reach RMB 6,534 billion in 2018 Cash in from within 2016 Working Capital Management China & Hong Kong Market Study 11

12 What is happening - Hong Kong 12 PwC

13 Median net working capital days - Hong Kong Pharmaceuticals & life sciences 117 Industrial manufacturing Engineering & construction Forest, paper & packaging and Pharmaceuticals & life science are the sectors having the highest median net working capital days (>130days) Aerospace, defence & security 24 Energy, utilities & mining Hospitality & leisure Cash in from within 2016 Working Capital Management China & Hong Kong Market Study 13

14 Most sectors show a significant spread in performance between top and bottom performers Net Working Capital Days (NWC days) and Pharmaceuticals & life sciences are the sectors having the longest median NWC days Top Performers Median Bottom Performers Pharmaceuticals & life sciences Engineering & construction Industrial manufacturing Forest, paper & packaging Aerospace, defence & security Energy, utilities & mining Hospitality & leisure 14 PwC

15 Analysis on working capital elements by sector - Hong Kong Days Sales Outstanding (DSO) Industrial manufacturing is the sector with the longest median DSO Top Performers Median Bottom Performers Pharmaceuticals & life sciences Engineering & construction Industrial manufacturing Forest, paper & packaging Aerospace, defence & security Energy, utilities & mining Hospitality & leisure Cash in from within 2016 Working Capital Management China & Hong Kong Market Study 15

16 Days Inventory Outstanding (DIO) is the sector with the longest median DIO Top Performers Median Bottom Performers Pharmaceuticals & life sciences Engineering & construction Industrial manufacturing Forest, paper & packaging Aerospace, defence & security Energy, utilities & mining Hospitality & leisure Days Payables Outstanding (DPO) Hospitality & leisure is the sector with the shortest median DPO Top Performers Median Bottom Performers Pharmaceuticals & life sciences Engineering & construction Industrial manufacturing Forest, paper & packaging Aerospace, defence & security Energy, utilities & mining Hospitality & leisure 16 PwC

17 In Hong Kong, only 1 out of 16 sectors managed to improve working capital since 2011 Working capital improvement in percentage points Improvers Non-improvers 7% 14% 16% 19% 21% 25% 28% 33% 35% 35% 39% 41% 43% 49% -10% 1% Forest, paper & packaging Aerospace, defence & security Pharmaceuticals & life sciences Transportation & logistics Hospitality & leisure Retail & consumer Industrial manufacturing Engineering & construction Entertainment & media Energy, utilities & mining Overall, only 1 sector has shown an improvement in working capital since 2011, with 15 showing a deterioration. The only companies that have achieved a marked improvement since 2011 are companies within the sector. Of the companies that have failed to show an improvement over this period, those in the Energy, utilities & mining sector have shown the most significant deterioration. If the net working capital of all sampled listed companies in Hong Kong can be improved by 5%, RMB 97 billion (i.e. HKD 111 billion) of cash can be released Cash in from within 2016 Working Capital Management China & Hong Kong Market Study 17

18 Analysis on working capital performance of companies within the same sector Hong Kong Improvers 27% 27% 33% 33% 38% 38% 41% 43% 44% 47% 47% 50% 50% 56% 57% 63% 43% Engineering & construction Pharmaceuticals & life sciences Industrial manufacturing Energy, utilities & mining Hospitality & leisure Forest, paper & packaging Aerospace, defence & security Total Non-improvers 73% 73% 67% 67% 62% 62% 59% 57% 56% 53% 53% 50% 50% 44% 43% 37% 57% 3 out of 16 sectors have seen more companies improving their working capital performance than deteriorating. The Engineering & construction and sectors are the notable exceptions, as 73% of companies did not manage to improve their working capital performance. If the net working capital of all sampled listed companies in Hong Kong continues to grow at the existing rate, the aggregate net working capital level will reach RMB 1,977 billion (i.e. HKD 2,263 billion) in PwC

19 Basis of calculations and limitations Basis of calculations This study provides an overview of the working capital performance of companies listed in China/Hong Kong market. The Financial Services, Real Estate and Insurance sectors are excluded. Metric Definition Basis of calculation NWC days DSO (Days Sales Outstanding) DIO (Days Inventory Outstanding) DPO (Days Payables Outstanding) NWC days is a measure of how long it takes for a company to convert its working capital into cash DSO is a measure of the average number of days that a company takes to collect cash after the sale of goods or services have been delivered. DIO gives an idea of how long it takes for a company to convert its inventory into sales. DPO is an indicator of how long a company takes to pay its trade creditors. DSO + DIO - DPO Accounts Receivables x 365 Sales Inventories x 365 Cost of Goods Sold Accounts Payables x 365 Cost of Goods Sold Limitations The research is based on publicly available information and all figures are financial year end figures. Due to the disproportionate efforts to improve working capital performance towards year end, the real underlying working capital requirement within reporting periods might be higher. Also, off balance sheet financing or the effect of asset securitisation have not been taken into account. Cash in from within 2016 Working Capital Management China & Hong Kong Market Study 19

20 Our team Michael Gildea Partner, PwC Hong Kong Raymond Kwong Manager, PwC Hong Kong This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. HK C1