Chinese companies’ profit warnings indicate it could be the worst third quarter since 2015 as economic growth slows down

Forty-three per cent of the 1,309 companies that have issued earnings guidance for the third quarter expect a decline in net profit
Contemporary Amperex, China’s biggest maker of lithium batteries for new-energy vehicles among companies that has forecast a drop in profit

China stock market

Zhang Shidongin Shanghai

Published: 9:30am, 21 Oct 2019

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Traders are braced for a bleak earnings season as Chinese companies release third-quarter results amid increasing pressure on the economy.

Out of the 1,309 mainland-traded companies that have already issued earnings guidance, 43 per cent said net profit for the three-month period ended September probably declined from a year ago, making it the worst third-quarter period since 2015 according to Bloomberg data.

In the last reporting period ended June, 42 per cent of the companies had forecast lower profit compared to a year earlier.

The worsening earnings outlook falls in line with moderating expansion in the world’s second-largest economy. China’s growth slipped to 6 per cent in the third quarter, the weakest pace since at least 1992 and trailing economists’ estimate of a 6.1 per cent increase, the National Bureau of Statistics said on Friday morning.

Policymakers are cautious about easing policies to prop up growth, as inflation already accelerated to the maximum annual target set by the government in September.

“The poor macroeconomic environment is mainly to blame for the gloomy earnings outlook,” said Wu Kan, an investment manager at Soochow Securities in Shanghai. “It’s not looking optimistic going forward. Inflation is there and that will push up corporate costs. The fallout will probably last until the first half of next year.”

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Companies’ earnings resilience is crucial to retain the bulls on Asia’s largest stock market. Though the Shanghai Composite Index has risen 18 per cent this year, most of the gains came in the first quarter. The momentum has since weakened amid a slowdown in growth and the trade war has weighed on profits.

The biggest companies have already felt the effects of the slowdown. Kweichow Moutai, the world’s most valuable liquor distiller, last week reported the slowest profit growth in a year in the third quarter, as weaker growth is likely to have filtered through consumer spending.

Among the 557 companies that issued profit warnings were Contemporary Amperex Technology, Jinke Properties Group and Hunan Valin Steel.

Contemporary Amperex, China’s biggest maker of lithium batteries for electric cars, said last week net profit for the third quarter may have fallen by as much as 20 per cent from a year earlier because of falling product prices and increasing research expenditure and management fees.

A view of Chongqing city in southwest China. Jinke Properties, based in Chongqing, has forecast an up to 34 per cent drop in net profit for the third quarter ended September. Photo: Simon Song

Jinke Properties, a developer in the southwest city of Chongqing, forecast an up to 34 per cent drop in net profit for the three-month period.

Publicly traded Chinese companies are required to release third-quarter reports by the end of October.

It is mandatory for smaller companies traded on the Shenzhen exchange including those on the ChiNext board to issue earnings guidance for every reporting period, while those on the main board are required to do so only when increases or decreases in earnings exceed 50 per cent.

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