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Keep an eye on coal, steel, construction materials, non-ferrous metals, and TMT stocks

Analysts are expecting high profit growth from all of them, but predicting quite the opposite from the banking sector

PUBLISHED : Monday, 24 October, 2016, 2:46pm
UPDATED : Monday, 24 October, 2016, 10:16pm

As investors brace for a busy week of A-share company earnings, analysts are keeping a particularly close watch on the coal, steel, construction materials, non-ferrous metals, and technology, media and telecommunications (TMT) sectors , in which high profit growth is expected.

At the other end of the profit scale, however, is likely to be the banking sector, after slower profit growth than in the first two quarters of this year, as low interest rates continue to squeeze margins and bad loan problems persist.

A daily average of around 100 A-shares companies will report third quarter earnings this week.

Some 2,930 A-share companies expect to see their total earnings increase 0.9 per cent in the first three quarters of the year, slightly lower than a year ago, but higher than in the first half of the year, according to latest estimation by China International Capital Corp (CICC).

In the third quarter alone, its analysts predict total earnings of A-shares companies to have seen overall earnings improve 14.8 per cent year-on-year.

“The expected rebound in earnings growth (from the first half) was mainly due to low base effects and the relatively stable economy,” said Hanfeng Wang and Qiusuo Li, analysts for CICC, in a recent research note, adding that capital markets were volatile and commodity prices hit their post-financial crisis low in the third quarter of last year.

China’s economy grew 6.7 per cent between July and September, unchanged from the previous three months and in line with market expectations, according to latest government statistics.

Market consensus is that the steady growth is being fueled by excessive credit expansion in real estate and infrastructure projects, which have offset the country’s weak exports.

Traditional cyclical sectors may see the most significant pick-up in earnings, due to China’s heavy spending in bolstering the property and infrastructure construction industries. Commodity prices have also recovered some ground from their lows of last year.

“We estimate the Q3 overall earnings growth for coal, non-ferrous metals, steel and building material companies we cover at more than 100 per cent year-on-year,” said CICC analysts.

However, that trend can’t last long.

China introduced a round of substantial property tightening measures in late September, which should put pressure on property sales, new starts and investment and affect related sectors such as steel building materials, the analysts said.

“We expect the property restrictions to begin to have an impact on the earnings of related cyclical sectors over the next three to six months, ” said Wang from CICC.

In addition to those more traditional cyclical sectors, the small and medium-sized enterprises (SME) board and the startup board ChiNext could also maintain relatively high earnings growth in the third quarter, with “a significant contribution” coming from mergers and acquisitions, the CICC analysts said.

They estimate companies on the SME and ChiNext boards to see their earnings jump 38 per cent and 30 per cent respectively in the first three quarters, from the first half.

Analysts from Shenwan Hongyuan Securities held similar views.

The expected rebound in earnings growth (from the first half) was mainly due to low base effects and the relatively stable economy
Hanfeng Wang and Qiusuo Li, analysts at CICC

The upbeat views are also shares by Wang Sheng, an analyst with Shenwan Hongyuan, the Hong Kong-based investment holding company, who expects construction materials, non-ferrous metals, mining, and steel firms to have shining third quarter results, while TNT stocks will have seen significant improvement.

Shenwan Hongyuan’s estimated overall third quarter profit growth for the media industry is 79 per cent, the telecommunication industry 73 per cent, and 24 per cent for electronics sector.

Wang warns, however, that the banking sector could continue to suffer from declining profit margins due to the central bank’s rate cuts.

Wang expects bank profit growth in the first three quarters to have slowed to 2.2 per cent, down from 2.6 per cent in the first half.

The worst performers could well the country’s “big five” state-owned banks – Bank of China, Industrial and Commercial Bank of China, China Construction of Bank, Bank of Communications, and Agricultural Bank of China – with their net income ticking up a mere 0.9 per cent year-on-year, as a group, Wang said.

The People’s Bank of China cut interest rates six times from November 2014 to 2015, and those rises will have hurt the banking sector’s net interest margins, which examine how successful a company’s investment decisions are compared to its debt situations.

By the end of third quarter, the banking sector’s net interest margin has fallen by two basis points to 2.14 per cent from the first half, Wang said.

Bad loan issues also persist in the banking sector, as more risk could be exposed as China’s economy slows further, he added.

Wang predicts 2016 profit growth for listed banks to be around 1.5 per cent.

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