Mainland industry set for profit recovery

After slowing last year, mainland industrial profits are expected to stage a resurgence, helped by lower cost growth and higher output

PUBLISHED : Monday, 28 January, 2013, 12:00am
UPDATED : Monday, 28 January, 2013, 4:37am


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Mainland industrial companies' profits are likely to improve this year, according to analysts, after seeing growth taper off to 5.3 per cent in 2012.

A pickup in output and lower inflation in raw material costs were expected to help industrial firms' bottom line this year, analysts said. Last year, profits of industrial companies with annual core revenue above 20 million yuan (HK$24.63 million) grew to 5.6 trillion yuan, the National Bureau of Statistics said yesterday. Core revenues at these companies climbed 11 per cent.

Last year's 5.3 per cent profit growth was sharply down from 25.4 per cent in 2011, as the mainland's economy expanded by 7.8 per cent in 2012, the slowest rate since 1999.

But the momentum has been picking up. December earnings rose 17.3 per cent from a year earlier, marking the fourth straight month of gains. In November, profits rose 22.8 per cent.

"Corporate earnings are highly correlated with economic recovery," Citigroup economists said in a research report. "We expect general restocking will start soon in [the first quarter of] 2013, further supporting a cyclical rebound of the Chinese economy in the near term."

The HSBC flash purchasing managers' index, released last week, indicated that the manufacturing sector grew this month at its fastest rate for two years.

Of the 41 sectors tracked by the statistics bureau, 29 industries recorded profit growth, including agricultural products and food processing, car manufacturing, and power production.

Crude and natural gas exploration, chemical production, and ferrous metal processing industries did relatively badly with lower profits.

Standard Chartered Bank expects a bigger rise in infrastructure and real estate investments in the past few months will fuel profit growth before peaking in the third quarter.

The power generation and food-processing sectors would continue to expand while earnings at laggard industries such as ferrous metal smelting and chemical production would improve, the bank said. The machinery equipment and construction material sectors would benefit from an acceleration in investment, it said.

Industrial sector profits will likely jump 30 per cent on average this year, the bank predicts.

However, economists remain split over the growth model that China's new leaders will likely pursue.

Beijing's new leadership has pledged to fight corruption and improve social equality. Premier-in-waiting Li Keqiang is also aiming to greatly boost urbanisation in a bid to help millions of migrant workers move to cities.

"Some believe that [the] new leaders will likely follow the old model so that the investment boom will lead the GDP growth higher," Citigroup said.

"Others, including us, expect some incremental reforms this year and beyond, which may result in some de-leveraging and thus economic moderation" in the second half, the bank said.