Investment Management

Worst yet to come for mainland firms

PUBLISHED : Tuesday, 01 November, 2011, 12:00am
UPDATED : Tuesday, 01 November, 2011, 12:00am

Mainland-listed companies that have reported a quarter-on-quarter profit decline will have to brace for an even worse earnings environment in the coming months.

The more than 2,300 firms on the Shanghai and Shenzhen exchanges earned a combined 477.4 billion yuan (HK$583.5 billion) in the three months to September, down 6.1 per cent from the previous quarter, the Shanghai Securities News reported.

It was the first quarter-on-quarter profit slide for the mainland's listed companies since September 2008 when the economy took a hammering from the global financial crisis.

But they are expected to show a further drop of 10 to 20 per cent in earnings in the October-December period because of the economic slowdown, fund managers and analysts said.

The pessimistic prediction could deal a heavy blow to millions of retail investors who have heightened expectations of a strong rally following a five-day winning streak last week.

The benchmark Shanghai Composite Index jumped 6.7 per cent to 2,473.41 points in a five-day rally before nudging down 0.21 per cent to 2,468.25 yesterday.

'It was not a surprise that the rally ran out of steam,' said Huatai Securities analyst Zhou Lin. 'The fundamentals are set to worsen since the economy will slow down.'

The mainland stock market, the world's third-worst performing last year, continued its downward trend this year as Beijing introduced cooling measures to avoid a hard landing.

As of yesterday, the benchmark was 12.1 per cent off last year's close.

Worsening corporate performances could lead to a further market downturn and the market could probably fall to the lowest level since 2008 when the Shanghai indicator hit 1,664.93 on October 28 that year, according to UBS Securities.

'The government orchestrated a rebound then with a stimulus package,' UBS said. 'But it was an artificial rally that could not be sustained.'

Beijing unveiled a infrastructure-focused stimulus package in late 2008 to combat a global slowdown. Easy credit spurred hefty gains on the stock market with the key benchmark climbing 80 per cent in 2009.

When Beijing started to tighten monetary policies to stem soaring inflation, the stock market was among the main victims.

The mainland's gross domestic product expanded 9.1 per cent in the third quarter of this year, against 9.5 per cent in the previous quarter.

In the third quarter, listed companies' year-on-year profit growth stood at 19 per cent. For the first half, their profits grew 22.7 per cent from a year earlier.

Institutional investors are becoming increasingly bearish about the market outlook, battered by worries of a further slide in corporate earnings. A Ping An Insurance Group fund manager told the South China Morning Post last week the cash-rich insurer would dump shares if the key index broke through the 2,600-point level.

Analysts also pointed out that Beijing could implement policy changes soon to bolster the slowing economy now that a capital crunch had been seen in some sectors, particularly small and medium-sized firms.

'With growth slowing and liquidity getting tighter, policy easing is more likely to be adopted before year-end,' China International Capital Corp wrote in a report.

But boosting measures have never really helped small investors over the past years.

According to China Central Television, 70 per cent of retail investors lost money in 2007 even as the market soared 96 per cent that year. And a China National Radio survey showed that 70 per cent of retail investors were stuck with paper losses in this year's first half.