Shrinking margins hurt China firms, but not all is glum
Four weeks into China's second-quarter earnings season, the red ink is flowing thick and fast.
On Tuesday, China's biggest television maker, TCL Multimedia, reported first-half losses of $96 million, while Ningbo Bird, the mainland's largest mobile phone manufacturer, announced a 133 million yuan loss. On the same day, both China Eastern Airlines and Hainan Airlines unveiled second-quarter losses, coming hard on the heels of China Southern Airlines last week.
These are just the latest in a series of Chinese companies spanning sectors from oil refining to semiconductor manufacturing that have slid into the red, while a host of others from carmakers to power generators have reported sharply reduced profits for the second quarter.
The problem is shrinking margins. A recent survey of mainland-listed company results shows that even though revenues were up an impressive 24 per cent in the first half, profits rose a more meagre 5 per cent, implying margins contracted to 5.3 per cent from 6.3 per cent last year.
Broader National Bureau of Statistics data covering all industrial companies show a similar trend, with profit margins declining to 4 per cent from a peak of 5 per cent last year.
Firms across the board have been hammered by higher input costs, with manufacturers hit by higher raw material prices and airlines suffering from sky-high fuel costs. Oil refiners have been squeezed by rising crude prices, while prices of their products are subject to official controls. Power generators have faced a similar problem, as coal price rises have not been offset by higher electricity tariffs.
Manufacturers of everything from semiconductors to cars have been battered by fierce competition in the domestic market, with many industries suffering from overcapacity after several years of frenzied investment.
Even so, the outlook is not uniformly glum. In a report published on Tuesday, UBS chief economist Jonathan Anderson points out that although profit margins at mainland companies are undoubtedly falling, they are way above the 1 per cent that state enterprises made in 1998 and are still higher on average than during the period of rapid economic expansion in 2000 and 2001.
'Industrial margins may not be expanding any more, but for the economy as a whole, they don't look to be a big concern,' Mr Anderson writes.
He examined the results of 82 prominent A-share companies and argued that although 34 reported declining profits in the second quarter, the number was not drastically greater than the 25 which saw profits fall last year at the height of China's earnings growth.
Moreover, he pointed out that the margin squeeze was concentrated in a handful of over-invested, overheated heavy industries with high energy consumption, such as the chemical and vehicle sectors. Lighter industries catering to export and consumer markets have been much less affected.
The food processing sector, for example, continues to enjoy relatively high margins around 8 per cent. Light manufacturing margins are steady at a shade over 4 per cent, while the textile sector earns slim but stable profit margins of about 3.5 per cent.
In contrast, margins in the electronics sector have been halved from a high of 6 per cent in 2000 to just 3 per cent today.
Machinery and equipment makers' margins have dropped from about 6 per cent two years ago to 4 per cent now, while chemical companies have seen margins dive from 5.5 per cent last year to 3 per cent now.