Half of top 500 high-growth Chinese firms 'post low profit'
By Louise Ho |
February 7, 2012, Tuesday
|
Print Edition
Print Edition
HALF of the top 500 Chinese companies posted low profitability despite their high growth, McKinsey & Company has said.
In a recent research on the top 500 Chinese companies listed in Shanghai, the management consultant firm found that while they enjoyed a 30-40 percent growth between 2001 and 2010, their investment returns were weaker than US companies.
McKinsey said 50 percent of the top Chinese companies had earned returns that were lower than the cost of capital while the figure was 30 percent for S&P 500 companies in the US, according to its research.
It said if the key Shanghai Composite Index is compared with the S&P 500 from 2006 to 2011, the valuations of Chinese companies have fallen significantly and are now below the valuations of US businesses.
For example, in 2007 the estimated price to earnings ratio (PE) of Chinese companies was 30, double that of US companies. But last year, Chinese companies' estimated PE ratio dropped to nine, lower than US companies' 12.
''Chinese executives must manage their businesses to generate higher margins and asset productivity by using their capital more efficiently,'' said Thomas Leudi, leader of McKinsey's Corporate Finance Practice in Asia.
But Bill Huyett, a director in McKinsey's Corporate Finance Practice and co-author of "Value: The Four Cornerstones of Corporate Finance," available in Chinese, cautioned that simply copying from US firms is ''risky'' and Chinese companies should form their own business model.
Leudi added that to make their business more sustainable, ''Chinese companies need to have a transparent management system, groom talent in middle management and have an ability to balance growth and profitability.''
In a recent research on the top 500 Chinese companies listed in Shanghai, the management consultant firm found that while they enjoyed a 30-40 percent growth between 2001 and 2010, their investment returns were weaker than US companies.
McKinsey said 50 percent of the top Chinese companies had earned returns that were lower than the cost of capital while the figure was 30 percent for S&P 500 companies in the US, according to its research.
It said if the key Shanghai Composite Index is compared with the S&P 500 from 2006 to 2011, the valuations of Chinese companies have fallen significantly and are now below the valuations of US businesses.
For example, in 2007 the estimated price to earnings ratio (PE) of Chinese companies was 30, double that of US companies. But last year, Chinese companies' estimated PE ratio dropped to nine, lower than US companies' 12.
''Chinese executives must manage their businesses to generate higher margins and asset productivity by using their capital more efficiently,'' said Thomas Leudi, leader of McKinsey's Corporate Finance Practice in Asia.
But Bill Huyett, a director in McKinsey's Corporate Finance Practice and co-author of "Value: The Four Cornerstones of Corporate Finance," available in Chinese, cautioned that simply copying from US firms is ''risky'' and Chinese companies should form their own business model.
Leudi added that to make their business more sustainable, ''Chinese companies need to have a transparent management system, groom talent in middle management and have an ability to balance growth and profitability.''
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