Could a Credit Squeeze in China Impact These Companies?

Eileen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s no secret that China’s economy has been experiencing a slowdown in growth, and the latest China Beige Book survey reveals the extent of the damage. The China Beige Book is similar to the Fed’s Beige Book, which is published eight times a year to document current economic conditions.

What does the central bank's survey reveal?

There are signs of an impending credit squeeze in China's economy that could affect the liquidity and expansion of companies like PetroChina (NYSE: PTR)Lenovo Group (NASDAQOTH: LNVGY.PK), and China Mobile (NYSE: CHL).

The second quarter of 2013 has seen corporate borrowing sink to its lowest level in 18 months. Only 30% of over 2,000 Chinese firms had taken on new lending during the second quarter, a decrease of 13 percentage points from last year. Only 45% of lenders had increased their credit lending to businesses.

Central bank data revealed that overall financing was up 52%, over last year, during January through May 2013. Leland Miller, the president of CCB International, the Beige Book's publisher, explained that credit availability appeared to be concentrated on a few borrowers and new loans consisted of debt rollovers rather than funding for business expansion.

I'll take a look at PetroChina, Lenovo, and China Mobile's latest financial results for signs of a decline in cash reserves or available credit.

PetroChina’s operations steady despite weak demand for oil

PetroChina, China’s largest oil and gas company, reported in its 2013 first quarter report volatility in crude oil prices amid slowing but smooth economic conditions. The company focused on the continuing development of its oil and gas business and was able to increase crude oil output by 1.8% and natural gas by 4.8%.

PetroChina’s cash in bank increased by 141.7%, while cash flows from financing activities increased 33.2% due to new borrowings for business development. Short-term borrowings and finance expenses increased by 37.3% and 75.6% to meet production and operation needs as well as for expansion purposes. The company noted it maintains a “steady, safe and effective operation of its facilities” and construction of key projects is progressing as planned.

Lenovo has a good cash position within declining PC sector

Lenovo’s results for fiscal 2012-13 showed earnings of $635 million, up 34% year-over-year, and full year EPS of $6.16. The company had 52.4 million PC shipments and holds 15.5% global market share. Lenovo is focused on transforming itself into a “PC Plus Leader” by adding tablets and smartphones to its core PC business. As of March 31, it had net cash reserves of $3.1 billion, which decreased 25% from 2012.

The company asserts it has a very liquid position, and during the previous fiscal year drew $300 million from a five-year loan facility agreement that was entered into in July 2009. It has another $500 million loan facility agreement that hasn’t been used and short-term credit facilities of $6.9 million. Bank borrowings increased 179% to $176 million due to Lenovo’s acquisition of CCE, a consumer technology company in Brazil.

China Mobile’s stable growth and economies of scale

China Mobile is a mobile services provider to Mainland China and has the world’s largest mobile network and customer base. The company is currently focused on executing various improvements to better position itself in the market by improving network capacity and traffic allocation, strengthening its infrastructure and expanding into the mobile internet sector.

In its latest annual report for 2012, the company had a decrease in cash and cash equivalents of approximately 17%. Free cash flow increased 5.2% from increases in cash from operating activities -- 1.7% -- and cash from investing activities -- 12.9%. Meanwhile, cash from financing activities decreased 6%. Total liabilities rose by 8.2%, while finance costs decreased by more than 30% due to decreasing interest payments for bank loans, bonds, and other long-term debt. China Mobile attributes its strong cash position to stable growth, thoughtful cost control and capital expenditures, and significant economies of scale.

Conclusion

First quarter and prior year results for these companies don’t show any apparent risk to liquidity or difficulty in accessing credit. They could eventually feel the impact, however, if China’s growth slows further. As the third quarter gets underway, investors should watch for signs that show a worsening or improvement of credit availability in the Chinese economy. For now, China’s central bank has pledged to provide liquidity to “prudent” banks to maintain market stability.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Eileen Rojas has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure