OREANDA-NEWS. Eighty-Six of China's top 100 listed non-financial corporates by revenue (China100) are projected by Bloomberg consensus estimates (BEst) to be in the positive credit change zones of cash flow growth exceeding net debt growth over 2015 to 2017. This is a dramatic shift from actual outcomes in 2013-2015, where there was an even balance of 48 companies in the negative credit-change zones and 52 in the positive credit-change zones. Fitch Ratings explains in a new report how the agency believes it is reasonable to expect that the credit profiles of most Chinese corporates will improve by 2017, although we are not as optimistic as consensus.

When comparing Fitch's own projections with BEst projections for the 31 companies that Fitch rates publicly, Fitch's projected case has a higher proportion of companies in the negative credit-change zones where leverage is forecast to rise, albeit a 65% majority of companies remain in the credit-positive zones where leverage is forecast to fall. The report identifies 11 Chinese corporates where Fitch's projections place them in opposite credit-change zones compared with BEst projections.

Fitch is specifically forecasting Sinopec, CNOOC, PetroChina, Evergrande, Longfor Properties, Dalian Wanda, China Railway, Alibaba, Tencent, to be in the Negative Credit Change Zones (leverage to rise), whereas BEst is forecasting these to be in the Positive Credit Change Zones (leverage to fall). Sinopec in particular stands out, as it is in Fitch's projected Red Zone but in the Blue Zone for BEst-projections. Conversely, Fitch is forecasting China Telecom and China Communications Construction to be in the Positive Credit Change Zones (leverage to fall), whereas BEst is forecasting the same companies to be in the Negative Credit Change Zones (leverage to rise).

In order to gauge the credit trends, we reviewed and ranked these 100 corporates based on changes in EBITDA as a proxy for cash flow and changes in net debt over 2015 to 2017 using BEst projections, and then compared this to the historical period over 2013 to 2015.

We then grouped each of the 100 companies into one of the following four credit-change zones: 1) the positive Blue "Joy" Zone of higher cash flow and falling net debt; 2) the positive Purple Zone of cash flow growth exceeding net debt growth; 3) the negative Orange Zone of debt growth exceeding cash flow growth; and 4) the negative Red "Pain" Zone of cash flow decline and rising net debt. The report contains a number of scatter charts illustrating the particular credit zone for each company in both projected and historical periods.

With SOEs representing 68 of the 100 corporates, the shift towards positive credit zones could also be attributed to efforts by the Chinese government to drive down corporate debt, with the impact most visible in sectors that are highly leveraged and face severe overcapacity. Consistent with this, real estate and metals & mining are the top two sectors forecast by BEst to transition from the negative to positive credit zones.

The report includes a number of Venn diagrams illustrating the overlapping areas of our Top 10 lists based on BEst projections, particularly the "Blue Joy Zone" of strong cash-flow increases and debt paydown, and the "Red Pain Zone" of cash flow decline and rising net debt.

In contrast to the projected estimates in the 2015 version of this report, the number of companies in the credit-positive zone fell from 92 to 86, while that of those in the credit-negative zone increased from 8 to 14.

The report contains explanatory notes and rating sensitivities for the 31 listed Chinese corporates rated by Fitch.