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Companies’ first-quarter earnings rise as China trims industrial capacity

First-quarter profits at China’s publicly traded companies rise 21 per cent as a state campaign to eliminate excess capacity boosts prices

PUBLISHED : Wednesday, 03 May, 2017, 1:19pm
UPDATED : Wednesday, 03 May, 2017, 10:59pm

Mainland listed companies maintained fast earnings growth in the first quarter, as a government-led drive to cut excessive capacity bolstered profitability in industries from coal to commodities continued.

Profits for companies trading on the Shanghai and Shenzhen stock exchanges increased 21 per cent from a year earlier, compared with a growth of 24 per cent a quarter earlier, according to data from Industrial Securities.

Upstream industries including coal, petrochemical and commodity companies led the earnings growth with at least 300 per cent increases, while profit increases for smaller companies weakened, the data showed.

Upstream resource company earnings recovered as top policymakers succeed in their moves – also known as the “supply-side reform” – to eliminate unneeded capacity ranging from commodities to steel, ending an almost five-year deflation in industrial prices.

Industrial companies including coal and steel makers even raised prices as an economic pickup, mainly driven by a booming property market, boosted demand for their products.

“[The earnings growth] is mainly due to a remarkable improvement in fundamentals on the supply-side reform, and the effect of earlier low bases,” said analysts led by Wang Delun at Industrial Securities.

Coal producers led the earnings growth in the first three months of the year among all industries, with a jump of 566 per cent from a year ago, according to the brokerage.

The sector was followed by petrochemical companies and steelmakers, with growth rates of 458 per cent and 396 per cent respectively, it said.

Shanxi Xishan Coal and Electricity Power’s earnings for the first quarter surged 856 per cent on rising demand for coking coal used to make steel, while Hesteel’s profit jumped more than fourfold in the period on rising prices of the alloy.

Chinese publicly traded companies are required to release first-quarter earnings reports by the end of April.

Still, Citic Securities, the nation’s biggest listed brokerage, said earnings growth in Chinese listed companies may have already peaked in the first quarter, on signs of weakness in prices. Growth in producer prices slowed in March after rising at their fastest pace since 2008 a month earlier.

First-quarter earnings growth for ChiNext-listed companies, largely small-caps, slowed for a second quarter to 28 per cent, as they conducted fewer buyouts amid more stringent regulatory rules, according to Industrial Securities.

The securities regulator tightened its approval of asset purchases by ChiNext companies last year to protect small investors, as the prices of target companies or assets were often found to be overstated and the stock prices were manipulated on insider trading.

The Shanghai Composite Index of larger companies is set to beat the ChiNext measure of small-caps for a second year. The Shanghai index has advanced 1.3 per cent in 2017, compared with a 5.7 per cent loss in the small-cap gauge.