Profitability of A-share companies falls to lowest in five years

Return on equity slides to 8.05 per cent in the third quarter from 9.12 per cent a year ago and 12.21 per cent in 2011

PUBLISHED : Monday, 31 October, 2016, 1:09pm
UPDATED : Monday, 31 October, 2016, 11:22pm

The profitability of A-share listed firms - mainland Chinese companies traded on the Shanghai and Shenzhen stock exchanges - has slumped to the lowest in five years as China’s economy continues to stall.

As of October 31, a total of 2,954 A-share listed companies had issued third-quarter earnings reports.

Their return on equity (ROE), which measures the profitability of a company, fell to 8.05 per cent, the lowest since the third quarter of 2011 when it was 12.21 per cent, according to data provider Wind Information’s calculation. The ROE was down from 9.12 per cent in the July-September period of 2015.

By the end of the third quarter, the A-share companies had reaped total revenue of 22.44 trillion yuan (HK$25.7 trillion), up by 3.78 per cent year-on-year. But net profit increased by just 1.87 per cent to 2.08 trillion yuan.

The traditional industrial activity is declining to the profit advantage of rising, new services oriented activity
Shirley Shen, analyst, AXA IM Research

Shenzhen-listed companies, particularly those traded on the ChiNext board and the SME Board - mostly start-ups and small-and-mid sized firms - have reported better results than the state-owned big players, which are mostly listed on the Shanghai bourse. Analysts say this trend may indicate the gradual emergence of China’s “new economy”, in which service-oriented companies and technology start-ups make a larger contribution to growth.

Year-on-year net profit growth for the ChiNext board stood at 44.3 per cent for the first three quarters. For the SME Board, the increase was 21.32 per cent, while the Shanghai Composite Index saw net profit decline by 1.31 per cent.

The total net profit of ChiNext-listed companies came to 60 billion yuan, compared with 150 billion yuan on the SME board, and 1.69 trillion yuan for firms tracked by the Shanghai Composite Index.

Low commodity prices, overcapacity and rising debts are eroding industrial profits in China.

Shirley Shen, an analyst with AXA IM Research, said the equity performance and corporate earnings divergence between the new and old economies pointed to “the nascent reality of ongoing economic rebalancing”.

“The traditional industrial activity is declining to the profit advantage of rising, new services oriented activity, ” she said.

Hong Hao, chief strategist with Bocom International in Hong Kong, said the scale of China’s emerging new economy was too small to offset the downward pressure facing the traditional industries which are “under global cyclical headwinds”.

“Contribution of the new economy to GDP should be lower than 10 per cent,” Hong said.

“Industrial profit may improve from time to time, but the overall global cyclical force is hard to reverse, although structural reform could alleviate the downward pressure.”

Industrial sector profits last month rose 7.7 per cent to 577.1 billion yuan, according to official data, a dramatic slowdown from their 19.5 per cent surge in August.

China’s official GDP growth has been steady at 6.7 per cent year on year for the first three quarters.

However, most economists believe the economy is still in the process of finding its bottom.

Li Daokui, a professor of economics at Tsinghua University and former adviser to the central bank, said at a forum in Beijing on Saturday that “it is too early to predict the economy warming up, and the base is fragile for the economy to stabilise and move upward”.

By the end of the third quarter 2,596 companies, or 87.88 per cent of the total A-share listed entities, reported net profit, while 131 reported a net loss for the first time and 226 companies continued making losses.