Mainland firms get stock play warning
Watchdog cautions on share speculation
Mainland companies are risking long-term earnings by relying on short-term investment gains made from speculating on the stock market while ignoring their core business, the securities regulator said yesterday.
The warning came after several listed blue-chips, led by the large state-owned insurance companies and banks, posted profit surges for the first half of the year.
'If a lot of companies are focused on stock speculation rather than their core businesses, long-run earnings and business growth will be hurt and so will the stock market,' Qi Bin, head of research at the China Securities Regulatory Commission, said in an interview with Bloomberg.
According to a survey by Morgan Stanley of the 1,286 A-share listed companies that had reported their first-half results by August 28, earnings per share had grown by an average of 76 per cent year on year. However, after stripping out equity investments and other non-core operations, that figure fell to 41 per cent.
'Nearly half of companies' profit growth in the first half came from non-core operations,' said Jerry Lou, equity strategist at Morgan Stanley.
Companies in the telecoms, energy and material sectors were heavily reliant on core operations for earnings, whereas profits at financial, health care and consumer product companies surged largely on the back of investment returns and other non-operational income, according to the report.
Soaring share prices and a willingness by many companies to invest in equities have created a situation whereby corporate earnings feed stock market performance and vice versa.
The danger is that a major source of company earnings could suddenly dry up if prices plunge.
The system was akin to a Ponzi scheme - an investment scam in which high profits are promised from fictitious sources and early investors paid off with funds raised from later ones - said Fraser Howie, an independent China stock market analyst.
'No one buys stock in a widget company on the strength of that company's stock-investing ability. They assume earnings reflect core operations,' he added.
Some of the biggest gains from equity investments were made by insurance companies.
China Life, the mainland's largest insurer, reported a net investment income of 24 billion yuan, of which half came from equities. PICC Property and Casualty, the country's largest non-life insurer, netted 1.65 billion yuan from its investments, an 111 percent increase year on year.
However, analysts said that insurance companies were right to reap investment gains from the booming stock markets, which have nearly doubled in value this year.
'This is a core business for them. Investing in a range of assets is part of being an insurance company, although an excessive reliance on the stock markets is not necessarily positive,' said Chris Esson, an insurance analyst at Macquarie Group.
Even if equity returns dropped to normal levels of around 15 per cent for the next five years or so, insurance companies could still expect to see strong profit growth, he said.
Beijing is unlikely to stop companies speculating in stocks.
'Companies need to know the risks involved in stock speculation, but we also want to let boards make their own investment decisions,' the CSRC's Mr Qi said.