CITIC (Part 2): Conglomerate Financials and Future

Previously, we introduced the history and business portfolio of the CITIC Group conglomerate (中信集团)(HKEX: 0267) in Part 1 of our CITIC series. This article is the second installment of the series, which provides a financial analysis and discussion of the Group's future.


Note: the official name of the listed entity under discussion is CITIC Limited, although we refer to CITIC Group and CITIC Limited interchangeably in the series (see Part 1).

 

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Financial Overview

We present a financial overview of the CITIC conglomerate starting in 2014, when the Group indirectly went public on the Hong Kong Stock Exchange through a shell company acquisition (see Part 1).


#1: CITIC's Total Revenue And Net Income Grew At A CAGR of 7% From 2014 To 2021

CITIC's total revenue grew at a CAGR of 7.3% from HKD402.1 billion in 2014 to HKD708.9 billion in 2021, while net income grew at a CAGR of 6.7% from HKD59.8 billion to HKD100.3 billion over the same time period.


CITIC Group Revenue and Income
Data Sources: CITIC Limited Annual Reports

Management does not report an operating income metric (and we also don't calculate one), given that this figure is not very well-defined for a diverse conglomerate with different monetization channels.


We next break down CITIC's revenue contribution by operating segment. We recommend referring back to Part 1 for detailed information about each segment.


Prior to 2020, the Group had six operating segments:

  • Financial Services

  • Manufacturing - later renamed Advanced Intelligent Manufacturing

  • Resources and Energy - later renamed Advanced Materials

  • Engineering Contracting - includes CITIC Construction and CITIC Engineering

  • Real Estate - includes CITIC Pacific Properties and CITIC Urban Development and Operation

  • Others - includes CITIC Telecom International, Dah Chong Hong, CITIC Industrial Environment, CITIC Environment, and CITIC Press


In 2020, the Group restructured its operating segments to the five-segment structure described in Part 1. As part of the restructuring, the Financial Services segment remained unchanged, the Manufacturing segment was renamed Advanced Intelligent Manufacturing, the Resources and Energy segment was renamed Advanced Materials, the Engineering Contracting and Real Estate segments were merged to form the New-Type Urbanization segment along with the CITIC Industrial Environment and CITIC Environment sub-segments from the Others segment, while the remaining sub-segments of the Others segment (namely CITIC Telecom International, Dah Chong Hong, and CITIC Press) became known as the New Consumption segment.


CITIC's current operating structure comprises of the following segments:

  • Financial Services

  • Advanced Intelligent Manufacturing

  • Advanced Materials

  • New Consumption

  • New-Type Urbanization


#2: Financial Services and Advanced Materials Account For 75% Of CITIC's Revenues In Recent Years

The Financial Services segment comprised 40% to 50% of CITIC's revenues over the past eight years, while the Advanced Intelligent Manufacturing (previously Manufacturing) segment declined in terms of revenue contribution from the 15% to 23% range to the single-digit range and the Advanced Materials (previously Resources and Energy) segment more than doubled in terms of revenue contribution from the single-teens range to 40% over the same time period. Moreover, the New Consumption segment contributed a declining 16% to 9% of total revenue in 2019 to 2021, while the New-Type Urbanization segment accounted for a steady 7% to 8% of total revenue over this time period.


We note that some of the year-to-year variation in segment revenue is attributed to changes in the conglomerate's structure and not necessarily to significant improvements or declines in the segment's performance. For example, the drop in Financial Services revenue in 2016 is largely due to a drop in CITIC Limited's holding of subsidiary CITIC Bank, while the substantial drop in Advanced Intelligent Manufacturing revenue in 2019 is due to CITIC's divestiture of 58% of the CITIC Dicastal subsidiary (see Part 1) to strategic investors.


CITIC Group Revenue Breakdown By Segment
Data Sources: CITIC Limited Annual Reports (click image to enlarge)

Note: the sum of each segment's revenue almost but does not completely add up to the total revenue generated by CITIC each year. The minor difference is attributable to revenue from "Operation Management", which we omit from the graph as this is not a key operating segment of the Group. Percentages may not add up to exactly 100% due to rounding.



#3: CITIC's Revenue Is Predominantly Generated By Sales of Goods and Net Interest Income

Management also reports a breakdown of the Group's revenues based on revenue type, including Net Interest Income and Net Fee and Commission Income generated by the Financial Services segment, Revenue From Construction Contracts from the Group's construction-related businesses, Sales of Goods and Revenue From Other Services generated by CITIC's non-financial businesses, and Other Revenue which mostly comprises of net trading gains and net gains on investments in financial assets from the Financial Services segment.


Approximately half of CITIC's revenues are generated by Sales of Goods, followed by Net Interest Income at 25% to 30%, Net Fee and Commission Income at 5% to 15%, and Revenue From Construction Contracts, Revenue From Other Services, and Other Revenue each contributing a low- to mid-single digit share of total revenue.


CITIC Group Revenue Breakdown By Revenue Type
Data Sources: CITIC Limited Annual Reports (click image to enlarge)

#4: Financial Services Account For The Majority of CITIC's Net Income

Whereas the Group's total revenue is driven by multiple key segments, CITIC's net income is, by and large, dominated by the Financial Services segment. Notably, although the Advanced Intelligent Manufacturing (formerly Manufacturing) and Others segments were the second and third largest contributors to total revenue from 2014 to 2018, both segments have relative low net income contributions. Moreover, net income from the Advanced Materials (formerly Resources and Energy) segment only turned positive in 2018, and still remains far below the level of net income from Financial Services in spite of the Advanced Materials segment's increasingly dominant position as a key driver of revenue.


CITIC Group Net Income Breakdown By Segment
Data Sources: CITIC Limited Annual Reports (click image to enlarge)


Future

Management does not highlight any particular themes or strategies for the conglomerate going forward, which is rather understandable given the size and complexity of CITIC. However, we do discuss several key factors that may influence the future of the Group in this section, with a particular emphasis on how CITIC's nature as a state-owned company could shape its future direction.


First, with regards to the Financial Services segment, state-owned Chinese banks (including CITIC Bank) tend to follow very traditional retail and commercial banking models relying mostly on interest, fee and commission income, as opposed to similarly large private banks that tend to generate a significant proportion of income from trading and other non-traditional banking activities. Moreover, Chinese financial institutions as a whole, including securities companies engaged in investment banking and trading, are generally more conservative than their western counterparts largely due to more stringent regulatory requirements (e.g. higher non-performing loan coverage ratio requirements, stricter lending standards, and more restrictions on derivatives market participation). Consequently, we don't anticipate CITIC's Financial Services segment changing significantly going forward in this regard.


Turning to the conglomerate's other segments, we don't see the Advanced Intelligent Manufacturing and Advanced Materials segments becoming significant contributors to CITIC's bottom line (in spite of the latter's increasingly important role as a revenue driver), primarily because these two segments focus on traditional heavy industries that have relatively low profit margins. Additionally, we think it would be difficult for growth to pick up for the New-Type Urbanization and New Consumption segments, given that infrastructure and real estate investment is slowing in China with regards to the former, and CITIC's consumption subsidiaries are not very strong performers with regards to the latter (i.e. CITIC Press is in a sunset industry, CITIC Agriculture is in an industry with low profit margins, Dah Chong Hong is a mature company that operates in several industries without a dominant market share, while CITIC Telecom International and AsiaSat are also small players in their respective industries - see Part 1 for further details).


Lastly, we note that Chinese state-owned companies do not necessarily prioritize profit maximization as the ultimate goal. This is not to say that state-owned companies do not care about profit, but rather such companies are relatively less aggressive in the pursuit of profit than privately owned companies, and may also have supplementary goals to pursue (e.g. taking on infrastructure projects as part of the Belt and Road initiative or implementing other projects in line with the government's mandated national strategies). For this reason, it is possible that CITIC may not necessarily make the most efficient business decisions when viewed from a private sector perspective, such as divesting CITIC Press, the Group's subsidiary in the declining printing industry.

 

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CITIC (Part 2): Conglomerate Financials and Future


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