CHINA'S state-owned enterprises listed in Hong Kong reported a mixed bag of interim results, underscoring their different degrees of competitiveness under the mainland's economic austerity programme. So far, 10 of the 11 H-share counters announced their first-half figures, with the results from the petrochemical sector coming ahead of expectations. But ironically, the robust interim rise for the petrochemical sector is largely because of a global shortage of cotton, which leads to rocketing prices of polyester products, more than offsetting the increasing costs of raw materials. Kunming Machine Tool and Maanshan Iron and Steel (Magang), however, have evidently fallen victim to the tight monetary policy, which squeezed credits of state-owned firms and halted capital investment expansion. The results of these two companies have again highlighted the liquidity problem that plagued the counters last year. Only Qingling Motors, which was listed on the market on August 17, has yet to release an interim result. Some of the disappointing interim figures prompted analysts to revise downwards the full-year profit forecasts for the likely victims, including Magang, Kunming Machine and Tsingtao Brewery. This was because the financial community believed the austerity programme would continue in the second half and, while the scheme would not make it more difficult for firms generally, it would not make things better either. The interim results 'give a better idea of which company is doing well in the current situation', said Bankers Trust Asia Research vice-president Lily Wu. She expected 'switching among investors' portfolios from weaker ones to better ones'. W I Carr analyst Brian Leung said there would be more selective buying for the mainland shares, when investors began to assess risk exposure and prospects of different sectors after reading the mixed interim results. He said gone would be the days when investors were blinded by the China concept of buying and selling H shares across the board, without taking into consideration the prospects for individual industries. Analysts generally favoured Shanghai Petrochemical and Yizheng, which would continue to be beneficiaries of a poor cotton harvest, but advised investors to shy away from the machinery and steel sectors. Ms Wu said most H-share companies - except for Tianjin Bohai Chemical - would benefit from improved availability of credit, if that happened. Tianjin Bohai - which makes soda ash, caustic soda and polyvinyl chloride (PVC) - would suffer from an oversupply in the market, she said, and a rise in raw material costs because of the government's price deregulation of sea salt. Tianjin Bohai also produces marine chemicals and uses sea salt in their manufacture. As a result of China's price reforms and the soaring domestic inflation rate, most H-share companies had, not surprisingly, posted increases in raw material costs in the first six months. SBCI Finance Asia associate director Lawrence Ang said: 'The difference @in their performance: is that some can pass on their rising raw material costs to customers because there is greater demand for their products. 'Actually, all the companies operate in the same economy, they are subject to the same impact of the austerity programme. But the question is which company can raise product prices more to offset losses.' Even Shanghai Petrochemical, which announced a 35 per cent rise in interim profit to 772.78 million yuan (about HK$697 million), suffered a 12 per cent jump in the cost of its crude oil in the interim period, after China increased the price of crude oil, under the state allocation plan, by 25 per cent in May. The impact will be even greater in the second half as the rise in crude oil prices will cover six months. Crude accounts for about half of Shanghai Petrochemical's production costs. Raw material costs for Yizheng also soared 27 per cent in the first half, but the rise was more than compensated for by the 30 per cent increase in prices of its polyester products. 'Even Shanghai Petrochemical and Yizheng will face the same problems as other H-share companies, if their increases to product prices slow down,' said Mr Ang. Nothing illustrates this point more than the lower-than-expected earnings growth of Tsingtao Brewery, which was besieged by a flood of domestic and foreign breweries that vied for a slice of China's potentially significant beer market. Tsingtao saw its operating profit margin squeezed as it failed to transfer the increased burden of rising costs of rice and packaging materials to end-users in a competitive domestic market. Another worrying feature of the interim results is that the financial health of state-owned enterprises is exacerbated by the tight grip on credit, although some earnings figures were skewed by non-operating income. Credit Lyonnais Securities analyst Ann Shih said the interim results 'did confirm our view that the austerity programme is ongoing'. She said the financial position of some enterprises was worsening, going by rising account receivables, a pile-up of inventory and shrinking turnover. Kunming Machine and Magang are typical examples. Ms Shih said: 'I don't expect major improvement in Kunming and Maanshan in the second half.' Kunming's turnover plunged 56 per cent on increased inventory. because the machine tool maker insisted on a cash-on-delivery policy. The company was particularly hurt by the austerity programme because more than 75 per cent of its clients were state-owned enterprises which relied heavily on state-funding. Credit Lyonnais revised downwards Kunming's 1994 profit forecast by 30 per cent. But for Magang, Ms Shih said she would maintain the initial projection, because her forecasts had already been at the low end of market expectations.