A-share company earnings growth to slow sharply in next three quarters: analysts

China’s corporate earnings growth has already peaked, and will slow sharply in the next few quarters, as economic stimulus wanes and the government’s monetary tightening starts to bite, analysts say.

During the second quarter, non-financial A-share companies saw their earnings grow an average 27 per cent year on year, down sharply from the first quarter’s 54 per cent, according to statistics compiled by Bank of America Merrill Lynch (BofAML).

Core earnings growth also nearly halved to 46 per cent from 80 per cent in the first quarter, while revenue growth decelerated to 25 per cent from the previous quarter’s 28 per cent.

Banks’ earnings have ticked higher, but still remain at a subdued level, as bad loan formation may have rebounded.

The data appears to confirm corporate earnings growth could have peaked by the first quarter, analysts say.

“Strong earnings growth over the past four quarters have largely been driven by upstream sectors, which were in turn powered by economic stimulus measures,” said David Cui and Tracy Tian, strategists at BofAML in a latest research report.

However, as the stimulus fades and credit tightens, the analysts expect earnings growth to “decelerate sharply”.

In addition, “the base effect should be a significant drag over the next three quarters – warnings over growth rates accelerated sharply between the third quarter of 2016 and the first quarter of 2017, largely fuelled by stimulus, in our view”, Cui and Tian said.

The main underperformers were new economy and defensive stocks, as utilities, diversified financials, and consumer staples all recorded earnings declines.

The mainland’s start-up board, the Growth Enterprise Market in Shenzhen, made up of mostly new-economy companies, saw its components’ corporate earnings increase an average of just 2.7 per cent year on year in the second quarter, down from 11 per cent in the first quarter.

That pales in comparison with the main board’s earnings growth of 28.5 per cent in the second quarter and 61.1 per cent in the first quarter.

Zhang Xia, an analyst for China Merchants Securities, adds that China’s accelerated IPO approvals have made so-called shell companies – the targets of many a mainland raider looking for a back-door listing – “less valuable than before”.

“Shell companies are no longer a scare resource and pursued by investors. Instead, investors prefer blue chips with bigger market caps and solid performance.”

Several corporate heavyweights listed on GEM have also posted disappointing results, dragging on average earnings growth.

Leshi internet and Information Technology lost 640 million yuan (US$96.85 million) in the first half. while Guangdong Wen’s Foodstuff and East Money Information recorded 76 per cent and 12 per cent declines, respectively, in net profit during the same period.

In the banking sector, earnings performance was also lacklustre.

“The second quarter saw a mild recovery in both revenue and net profit growth, but key earnings drivers appear to be weakening, “said Cui and Tian from BofAML.

Specifically, bad loans may have rebounded, while fees and commission income have fallen on slower wealth management products (WMPs) business.

At the end of June, the total balance of WMPs at Chinese banks was 28.4 trillion yuan, down 1.9 trillion yuan from two months earlier.

Compared with the start of this year, it had shrunk by 0.67 trillion yuan.

On a yearly basis, WMPs grew 8 per cent in the first half, sharply lower from the 35 per cent growth in the same period of last year.

Analysts at BofAML, meanwhile, say leverage is also beginning to creep back up.

Following three years of moderate deleveraging, non-financial companies have increased borrowing this year. In the second quarter, the net debt to equity ratio was up for a second straight quarter to 46.4 per cent, versus 43.4 per cent in the first quarter and 45.3 per cent in the second quarter of last year.

“Higher capital expenditure (capex) spending has been driven by better sentiment,” they said, adding that companies have issued more positive outlooks, given resilient macroeconomic data for the first half of this year.

In the second quarter, the Chinese economy expanded 6.9 per cent year on year, unchanged from the first quarter.

During the same period, corporate capex growth accelerated to 15 per cent year on year, compared with 4.9 per cent in the first quarter and 5.5 per cent in the second quarter of last year.

The private sector led the spending, with 26 per cent year on year growth, with IT, industrials, consumer discretionary, and materials among the major spenders.