Hong Kong-listed firms’ results reflect China’s slowdown
HK-listed companies' sales increase at slower rate than last year but cost of raw materials falls, boosting margins
First-half results for Hong Kong-listed companies confirm a general downturn in mainland economic growth, with lower sales revenue and concerns about future earnings tempered by an increase in corporate profitability.
As the reporting season draws to a close, data on the constituents of the MSCI China Index collated by Nomura Securities shows first-half revenues grew 12.5 per cent on average, compared with 14.5 per cent in last year's first half and 16 per cent in its second half. In contrast, net income rose 16.9 per cent in this year's first half, 2.6 per cent in the same period last year and 7.7 per cent in last year's second half.
Two lessons can be drawn for the mainland economy, said Michael Kurtz, the head of global strategy at Nomura Securities.
"Growth does appear to have moderated, and despite China's rising wages and slowing top-line sales growth, companies at least appear to be receiving some relief on profit margins," Kurtz said, pointing to a fall in raw material prices as a positive for earnings.
The first-half results were broadly in line with corporate earnings performances across the Asia-Pacific.
Broken down by sector, real estate was the mainland's best performer, with sales revenues up 45.5 per cent and net margins of 30.4 per cent on the back of renewed buying and strong rental returns in the larger cities. Close to the bottom of the table was discretionary spending. Including non-essential consumer goods such as cars and clothing, revenue grew only 3.8 per cent, a sharp drop from the second half of last year, when it rose 12.4 per cent, and a concern for those hoping to see the economy rebalance towards domestic consumer spending.
The results have so far outperformed consensus estimates. Rather than any rebound in mainland growth, observers cite an overly pessimistic outlook going into reporting season, with recurring earnings downgrades over the last 12 months. For MSCI China firms, the biggest surprises by sector were telecommunications and insurance (outperforming the earnings consensus by 6 per cent), followed by health care (beating the consensus by 4 per cent). Discretionary spending underperformed the consensus by a substantial 13 per cent, according to Nomura data.
Describing the economy as "bottoming out", Francis Cheung of CLSA, said a tough job market, slowing wage growth and the continuing anti-corruption campaign were having an impact on consumer spending.
"The Chinese consumer appears to be struggling, which shows the difficulty that the new leadership will face in rebalancing the economy," Cheung wrote in a results summary report.
Pointing at recently positive purchasing managers index numbers, CLSA expects a mild recovery over the coming quarter.
Much will depend on support from the central government. Stimulus funding is already being channelled via banks into select projects around the country, including the construction of Disneyland and a free trade zone near Shanghai.