Recovery is going to be slow for China’s listed companies
Profitability will continue to be under pressure.
Chinese companies face a slow recovery and ongoing pressures on profitability.
Around 3,800 Chinese companies reported flat profit growth for the first quarter in 2016, analysts at Goldman Sachs said in a report issued on Friday.
Hong Kong listed firms have reported worse results in the first quarter with net profits declining by 2 per cent year-on-year. Mainland listed companies saw net profit unmoved while the US-listed companies saw their bottom lines rise 11 per cent, according to calculations in the report.
“With the first quarter earnings accounting for only 22 per cent of full-year Bloomberg consensus estimates, this set of results is tracking below historical average,” the report said.
The yuan currency’s depreciation remains a big concern, although its impact on Chinese firms’ earnings remains small, Goldman Sachs said in the report.
However, if stripping out companies in the financial and energy sectors, other firms have seen profit grow by 16 per cent in the first quarter, the strongest since 2013. Companies selected under the ‘new China’ theme are outperforming those under ‘old China’ category by big margins, the report said.
On the other hand, return on equity (ROE), which measures a firm’s efficiency at generating profit from shareholders’ equity, have fallen to decade lows.
“Slowing asset turnover remains a key drag on ROE, reflecting the deterioration of companies’ operating efficiency in a challenging macro environment,” the report said.
“The declines in asset turnover have been broad based, even for ‘new China’ sectors like tech and health care which generally embrace asset-light business models,” the report said.
Meanwhile, as China’s listed universe is domestically oriented from a revenue standpoint, analysts are expecting that the foreign exchange earnings sensitivity will stay low in the foreseeable future, the report said.
China’s yuan depreciated 4.7 per cent against the US dollar in 2015, translating into 50 billion yuan of accrual foreign exchange losses for listed companies and accounted for 1.4 per cent of their aggregate profit in 2015.
The currency had dropped to a five-year low against the US dollar last week, but analysts have been seeing mid-price fixing by the central bank of China more predictable and it has not triggered market panic as it did last August or in February this year.
Larry Hu and Jerry Peng, analysts with Macquarie, said in a note last week that Chinese authorities seemed ready to battle against aggressive deprecation of the yuan or outflows of the currency, as it tried to “subdue the enemy without fighting,” by their managing of market expectations “well through verbal communication and daily fixing setting”.
The Goldman report also pointed out the analysts had noticed early signs of a supply-side response at listed companies.
Falling capital expenditure growth (mainly referring to money invested in fixed assets purchase), lower leverage, labour reduction, and industry consolidation, is happening in select overcapacity industries such as coal, steel, and cement.
“However, we believe more forceful measures are required to correct the existing imbalances,” the report said.