China's top public companies struggle for profits

Shanghai (CNS) -- Top public companies in China are finding the rapid expansion of their size and revenue haul is not yet translating into profits. The discrepancy was revealed last Monday in the results of a recent survey conducted by the Shanghai base of the global consulting firm McKinsey.

The fact that profit margins are set low in the first place, coupled with drooping growth prospects, is the main cause for the decline of Chinese companies' appraised value over the past few years, commented Thomas Luedi, a global director at McKinsey's Shanghai branch.

Luedi thinks Chinese firms have to expand at an unprecedented rate to maintain their current value, but in reality appraisals of Chinese firms have tended to sharp devaluations recently, placing them below their American counterparts; he chalks it up to the comparative lack of stimuli for profit growth.

The current adversity, Leudi points out, can be relieved if Chinese firms adopt business patterns catering to their own practice mode, and set up vision and targets of their prospective value based on the experiences of well organized European and American companies.

Transparency and a highly-qualified management team are also crucial, stresses Leudi. Struggling companies must keep themselves transparent to investors, and devote more of their resources to cultivating middle-level managers. Size is not the only factor in a company's viability and profitability, and thus mergers are not the best way to realize increased future value.

McKinsey's probe included mostly non-financial companies listed on the Shanghai Stock Exchange (SSE) with an annual income exceeding US$ 500 million. Half of the top companies that went public in 2010 on the SSE failed to balance costs and revenues.