Zhongjin: Which enterprises are expected to benefit from debt restructuring?

report released by CICC stated that in recent years, the pressure of local government debt has marginally increased, causing a higher proportion of government accounts receivable in some industries among A-share listed companies. It is suggested to pay attention to the changes in the proportion of accounts receivable to operating income (ttm) of A-share listed companies from 2021 to 3Q24. The proportions of environmental protection, building materials, computers, construction decoration, and utilities sectors have increased by 14.1/10.5/5.1/2.5/1.6 ppt respectively, with a higher degree of decrease in the proportion of industry operating cash flow to operating income. The debt-to-equity swap scheme is expected to alleviate the pressure of local government debt. Recently, the central government issued the "Opinions on Resolving the Issue of Delayed Enterprise Accounts Receivable," and if the recovery period of relevant enterprise accounts receivable shortens in the future, the cash flow performance of the above-mentioned industries may improve. Key points from CICC are as follows: Recent fiscal policies are being implemented to address local government debt restructuring Since the comprehensive stable growth policies were implemented at the end of September this year, various new policies have been gradually implemented in areas such as lowering reserve requirements, lowering interest rates, establishing new monetary policy tools, and capital market reforms. On November 8th, the Standing Committee of the National People's Congress passed a resolution approving the State Council's proposal to increase the limit on local government debt and exchange existing hidden debts. Specific arrangements include: 1) Increasing the limit on local government debt by 6 trillion yuan to exchange existing hidden debts, with 2 trillion yuan each year from 2024 to 2026; 2) Starting from 2024, 8 billion yuan will be allocated from new local government special bonds annually for five years, totaling 40 billion yuan to exchange hidden debts. 3) Hidden debts for shantytown renovation due after 2029 will be repaid according to the original contract. Debt restructuring plans will significantly alleviate local debt pressure From the current financial situation: 1) General public budget revenue: From January to September 2024, national general public revenue decreased by 2.2% year-on-year, and in September, the year-on-year TTM national general public revenue decreased by 1.9%. Among them, tax revenue decreased by 5.3% year-on-year from January to September, while non-tax revenue increased by 13.5% year-on-year. Historical data shows a certain negative correlation between the growth rates of tax revenue and non-tax revenue, with the growth of non-tax revenue partially mitigating the impact of declining tax revenue. In terms of tax revenue, from January to September, corporate income tax decreased by 4.3% year-on-year, and in September, TTM corporate income tax decreased by 3.3% year-on-year. 2) Government fund revenue: From January to September, local government fund revenue decreased by 22.5% year-on-year, among which land use rights revenue decreased by 24.6% year-on-year. From 2021 to 2023, state-owned land use rights revenue declined by a cumulative 33.4%. 3) Local debt: The ratio of local debt balance to local public finance revenue in 2023 was 185.1%, an increase of 14.7 ppt from 2022, and the proportion has increased in the past few years. 4) Hidden debts: At a press conference after the Standing Committee of the National People's Congress on November 8th, the Minister of Finance mentioned that after being reported at all levels, the national hidden debt balance at the end of 2023 was 14.3 trillion yuan, and the national government debt ratio (debt balance/GDP) considering statutory government debt and hidden debt is 67.5%. The debt restructuring plan will significantly reduce the total amount of hidden debts that local governments need to absorb before 2028 from 14.3 trillion yuan to 2.3 trillion yuan, which will significantly reduce the size of local hidden debts, facilitate the smooth flow of funds at the local level, and strengthen development momentum. What is the impact on listed companies? Which sectors are expected to benefit from debt restructuring? The bank believes that the marginal increase in local government debt pressure in recent years has led to a higher proportion of government accounts receivable in some industries among A-share listed companies. It is suggested to pay attention to the changes in the proportion of accounts receivable to operating income (ttm) of A-share listed companies from 2021 to 3Q24. The proportions of environmental protection, building materials, computers, construction decoration, and utilities sectors have increased by 14.1/10.5/5.1/2.5/1.6 ppt respectively, with a higher degree of decrease in the proportion of industry operating cash flow to operating income. The debt restructuring plan is expected to improve the pressure of local government debt, and with the recent issuance of the central government's "Opinions on Resolving the Issue of Delayed Enterprise Accounts Receivable", if the recovery period of relevant enterprise accounts receivable shortens in the future, the cash flow performance of the above-mentioned industries may improve. Looking at the bad debt provision situation of A-share listed companies, the proportion of bad debt provisions to total assets in the first half of 2024 was 0.29%, showing a slight increase of 0.07 ppt in the past three years. The ratio of bad debt provisions to accounts receivable has slightly increased, from 11.1% in 1H21 to 13.5% in 1H24, which may indicate a decline in the overall quality of accounts receivable in the past few years. The current fiscal efforts in debt restructuring are also expected to improve the quality of accounts receivable for listed companies. Combining the situation in the mid-year report of 2024, the sectors of computer, media, machinery equipment, communication, environmental protection, building materials, and construction decoration have higher proportions of bad debt provisions to total asset value. Environmental protection: The environmental protection industry is still in the consolidation stage, and it is expected that new investments on the enterprise side will continue to slow down in the future; mergers and acquisitions are active, and industry concentration may increase. With increased support from the state to local government debt, disposal demand is expected to gradually increase, and industry cash flow is expected to improve. The debt restructuring is favorable for cash flow repair in the to-G business, mainly benefiting water management, waste-to-energy, and environmental sanitation. Building materials: Next year, the new construction and completion of real estate projects may still be under pressure in comparison to the previous year, but with active fiscal improvement in demand, the amount of physical work in infrastructure is expected to recover. At the same time, state-owned construction enterprises, consumer building materials, cement, and other sectors may benefit from local government debt restructuring. 1) State-owned construction enterprises, as the main executors of key projects, have a higher priority in the repayment sequence in the local building industry chain and are one of the areas that benefit more quickly and with higher certainty from the improved fundamentals under fiscal loosening. The debt restructuring is expected not only to improve repayments but also to help improve the quality of orders, promote recovery in order growth; 2) Consumer building materials may improve repayments, shorten payment periods, reduce write-offs, and promote companies to return to expansion after focusing on debt reduction due to account receivable pressures in the past; 3) Debt restructuring supports cement demand and is expected to release special bond funds to partially advance the physical workload. Computer: Government information technology companies and companies with a large proportion of to-G business have been relatively more affected by local fiscal influences in their performance over the past two years. Under policy support, the performance of the above-mentioned areas may have been relatively more impacted by local government finances.The accounts receivable are expected to improve.Bank: Debt replacement helps improve the asset quality of banks. At the same time, due to the lower risk weight of local special bonds, debt replacement will also reduce the consumption of core Tier 1 capital of banks. Although it may reduce interest differentials, it is generally beneficial to the banking sector, especially some local banks. Risk warning: Policy implementation falls short of expectations; the degree of benefit to enterprises is lower than expected.