China Inc on slippery earnings slope as pricey commodities, Covid-19 costs pressure operating margins, analysts say

A slowdown in earnings growth for publicly traded Chinese companies is likely to extend through the rest of the year, as elevated commodity prices erode margins and stringent measures to contain Covid-19 outbreaks suppress consumer spending, analysts said.

The 300 biggest companies on the Shanghai and Shenzhen exchanges will probably report a 17 per cent profit drop this quarter from a year earlier, the worst quarterly performance in at least two years, according to Bloomberg data. That would be a deterioration from a 1.2 per cent decrease for the previous three-month period and an 11 per cent slump in the January-to-March period, the data shows.

The trend mirrors the wider backslide among 4,000-odd companies listed on the mainland’s bourses, according to Sealand Securities. Their earnings grew by an aggregate 1.9 per cent in the second quarter, versus 3.5 per cent in the preceding three months, the Guangxi province-based brokerage said.

Analysts said this quarter’s expected earnings shock could persist until the end of the year, with China’s repeated snap lockdowns complicating business planning and demand outlook.

“This downward spiral in earnings may come to an end in the fourth quarter or the first quarter next year,” said Lin Limei, an analyst at Shenwan Hongyuan Group in Shanghai. “But the pandemic, coupled with elevated raw-material prices and the uncertainty of overseas demand, makes it more difficult to predict the earnings bottom now.”

The Bloomberg Commodity Index of raw materials from natural gas and oil to corns and soybeans has risen 17 per cent this year.

Average gross profit margins slid to 17.6 per cent in the second quarter from 20.5 per cent at the end of 2018, according to Shenwan. This still has room to fall, given all the economic headwinds are still present, the brokerage said.