China has claimed a victory of inflation control with tight credit, but the costs will be reflected in the dismal results of Chinese companies reporting from today. More than half of the 18 H-share companies are expected to record profit falls for last year, with Shanghai Hai Xing Shipping and Maanshan Iron and Steel (Magang) chalking up the biggest drops. Petrochemical stocks are the strong performers due to higher product prices, although the prices had peaked out in the first half of last year. Jing Ulrich, head of China research at Credit Lyonnais Securities (Asia), said: 'In general, we expect the 1995 results to be weak and the current valuation has discounted the weakness of 1995.' Squeezed profit margins will be a dominant feature of the results, due to soaring raw materials costs and cut-throat competition. China's credit crunch which has suppressed market demand, coupled with the companies' efforts to cut inventories, will be translated into lower sales. Analysts say unpleasant surprises are possible. William Lo, head of China research of Kleinwort Benson Securities (Asia), said: 'The stocks will face more selling pressure, if their results are worse than expected which are much likely to happen, however.' While analysts had used the companies' interim results as a yardstick for full-year projection, the earnings growth could be dampened in the second half when the companies made provisions at the year's end, he said. Last year, Hai Xing bore the brunt of the belt-tightening policy which slashed the domestic demand for crude oil and coal transportation. Increase in interest expenses and soaring depreciation charges on new vessels were also major drags on Hai Xing's profits. But analysts expect the counter to be saved from plunging into the red with its sales of vessels. Magang is another firm badly hit by the tight credit. Ann Shih, head of China research at W.I. Carr (Far East), said the company would report an even poorer than expected result for last year and there would be no earnings recovery this year due to the weakening product prices. 'Its structural problem is that its products are not in demand,' she said. Its new product, H-bean, would only be in operation at the end of this year. Some analysts contend that the worst could be over for H shares which have been battered by the credit crunch for almost three years. 'We've seen the accounts receivables problem stabilising and stocks deteriorating,' Ms Ulrich said. 'There are signs of recovery in very selective sectors,' she said. She expected the earnings recovery to come in the second half of this year. 'The first half will be mediocre and it takes some time for a general improvement in economy to translate into stronger corporate results.' But there were also concerns such as the impact of China's reduction of import tariffs and the possible standardisation of corporate income tax rates, Ms Ulrich said. Credit Lyonnais favours Jilin Chemical and Shanghai Petrochemical which are able to absorb rising crude oil prices with their fully integrated production and production expansion programmes. Some see the dismal 1995 results as a buying opportunity for quality stocks when share prices are pushed down. 'Underweight before the result and overweight the good fundamental ones after the result,' Mr Lo said. He said Chengdu Cable and Hai Xing were the recovery plays, whose earnings would rebound in the second half of this year. Lower copper prices and the beginning of production of optical fibre cables would be Chengdu Cable's earnings kicker, while Hai Xing would benefit from a revival of economic activities. But W.I. Carr is more cautious. Ms Shih said: 'Our view is that most of the counters will not make much earnings improvement this year. If you are buying on earnings recovery, you will be disappointed.' Although there might be credit easing, the brokerage believed that it would be very selective and the relaxation would only benefit the H shares next year. Instead of recommending H shares, Ms Shih said the firm favoured red chip stocks. Analysts are pinning their hopes on China's relaxation of credit to catapult them back to the growing track. But when it will do so is still anybody's guess.