Firms bracing for a haircut

PUBLISHED : Wednesday, 28 December, 2011, 12:00am
UPDATED : Wednesday, 28 December, 2011, 12:00am


Mainland-listed firms have taken a beating from the stock market downturn, with the value of their equity investments dropped, adding to fears of worsening corporate performance.

About 850 firms, or 27 per cent of those traded on the Shanghai and Shenzhen stock exchanges, invested in other listed companies, according to data provider Wind Information.

About 70 per cent of the companies have run up paper losses this year as a result of a 22 per cent market decline, Wind said.

The preliminary finding is in line with predictions by analysts that mainland-listed companies would face rough weather in the coming quarters amid a global slowdown. Firms that have reported a quarter-on-quarter profit decline will have to brace for an even worse earnings environment in the coming months.

In the third quarter, listed A-share companies reported their first quarter-on-quarter profit drop since September 2008. Combined earnings fell 6.1 per cent in the second quarterto 477.4 billion yuan (HK$583 billion).

'The worst is yet to come,' said Citic Securities analyst Cheng Weiqing. 'The market outlook looks awfully pessimistic now that the fundamentals are set to worsen.'

The Shanghai Composite Index has lost 22.9 per cent this year, following a 14.3 per cent drop in 2010. Those companies investing in other A-share counterparts will naturally see their earnings dented further, owing to equity investment losses.

Mainland companies use stock market returns to boost earnings. In the first half of 2007, for example, more than one-third of their profits came from equity investments. The key index soared 96 per cent that year, driven by excess liquidity.

In the first six months of 2007, mainland-listed firms earned 115 billion yuan from equity investments, compared to their total profits of 300.8 billion yuan. That hefty gain was followed by a 65.4 per cent slump the next year - the largest annual drop on record.

Brokerages have been the biggest victims of a market downturn this year as 17 listed securities firms lost a combined 3 billion yuan during the first three quarters in proprietary trading. Among them, Changjiang Securities lost about 230 million yuan from their investments in China Railway Construction.

When the Shanghai index fell to the 2,400-point level in September, mainland brokerages said the market would bottom out soon since the stocks were already undervalued based on their fundamentals.

But UBS Securities disagreed at the time, seeing a further drop as risks of global double-dip recession would weigh down the A-share market.

The key gauge yesterday closed at 2,166.21, 10 per cent down from the 2,400-point level.

'The downward trend will continue now that fundamental problems turn out more severe than expected,' said Dazhong Insurance fund manager Wu Kan. 'The more the index loses, the worse the corporate earnings will be.'