China Inc on slippery earnings slope as pricey commodities, Covid-19 costs pressure operating margins, analysts say
- The mainland’s biggest publicly traded companies will probably report a 17 per cent year-on-year profit decrease this quarter, Bloomberg data shows
- Analysts predict the earnings decline will continue through the year, with China’s repeated lockdowns complicating the outlook
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.
Beijing has shown no signs of relaxing its gruelling zero-Covid policy, and a housing-market crisis remains unresolved. The CSI 300 Index has dropped almost 10 per cent from a July high, sending the gauge back close to a three-month low.
Companies engaged in mid and downstream industries were earnings laggards last quarter, according to Sealand Securities. On the flip side, raw-material producers thrived on strained supply and resilient demand, even as commodity prices slid from all-time highs.
In these uncertain times, Everbright Securities recommends investors focus on companies with predictable or recurrent earnings streams, such as baijiu distillers and pharmaceutical firms. It also favours those with big capital expenditure to support growth, such as makers of solar and wind power equipment.
UBS Group holds a similar view.
“The A-share market lacks new capital inflow, and the stock market may continue consolidating for a period,” said Meng Lei, a Shanghai-based strategist at the Swiss investment bank. “With a lot of uncertainty, we recommend allocation to sectors with high earnings visibility, robust pricing power and those that benefit from policy tailwinds.”