Monday 1 September 2008

Disappointing growth for Chinese companies

SHANGHAI: Disappointing first-half earnings growth at Chinese companies is a harbinger of gloomier news for the country’s stock market, which is already the world’s weakest performer this year.

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Disappointing growth for Chinese companies

By Lu Jianxin
Reuters
Monday, September 1, 2008

SHANGHAI: Disappointing first-half earnings growth at Chinese companies is a harbinger of gloomier news for the country’s stock market, which is already the world’s weakest performer this year.

Six-month earnings growth of 16 percent was below the 25 percent analysts had forecast at the end of the first quarter, and it relied heavily on tax cuts and currency appreciation rather than more sustainable sources of support.

Government monetary tightening, soaring raw material prices and a slumping stock market eroded corporate China’s bottom line in the first half, with 1,618 listed firms posting a combined net profit of 540 billion yuan, or $79 billion, state media said.

“The main forces driving first-half earnings growth are really not a good omen, with yuan appreciation slowing since July and tax cuts ceasing to be a factor next year,” said Qian Qimin, senior stock analyst at Shenyin & Wanguo Securities in Shanghai. “With monetary tightening steps adopted over the past year continuing to bite into earnings, commodity prices at high levels and China’s economy slowing in line with the global trend, there’s no doubt that profit growth will have more room to fall.”

Six analysts polled by Reuters late last week gave an average forecast of 10 percent second-half net profit growth, down from 25 percent forecast in April.

Growth for 2009 is now estimated at a maximum 10 percent, with the potential for a slight decline, according to the poll. That would mark a major pullback from a 23 percent rise in the first quarter, 43 percent in 2007 and 67 percent in 2006.

Flagging earnings growth has been a key factor weighing on the stock market, which late last month hit its lowest point since 2006 and has struggled to recover. The benchmark Shanghai Composite Index closed down 3 percent on Monday, taking losses from the past year to 55 percent and making it the poorest-performing major benchmark index in the world.

Analysts estimate that half of the first-half profit growth was due to a new unified corporate income tax rate for domestic and foreign companies starting this year, which cut the rate for local firms to 25 percent from 33 percent.

Banks were among the primary beneficiaries. More than a dozen listed banks posted average earnings growth above 70 percent, and their weight among all listed firms’ profits doubled to 40 percent as earnings plunged at the energy giants PetroChina and Sinopec .

Industrial and Commercial Bank of China’s first-half net profit jumped 57 percent, to $9.4 billion, exceeding $7.7 billion at HSBC Holdings, which is based in London, to make it the biggest-earning bank globally.

Air China, China Eastern Airlines and China Southern Airlines would have posted losses if the stronger yuan had not eased huge dollar debts from aircraft purchases. The big three earned a combined net profit of 2.16 billion yuan, far below their exchange rate gains of 6.41 billion yuan.

Although hundreds of smaller companies, mainly exporters, posted exchange rate losses in the first half, the roughly 10 billion yuan in gains recorded by big companies were about five times those losses, the official Shanghai Securities News said.

But the yuan’s rise against the dollar has virtually ground to a halt since the end of June as a global dollar rebound and China’s slowing economy push Beijing to slow the rate of appreciation.

Producer price inflation is also a threat after surging to double digits in July for the first time since the mid-1990s, while fierce competition prevents producers from passing on costs to consumers.

The meltdown in the Chinese stock market left listed firms with a combined loss on the book value of their investments of more than 40 billion yuan in the first half, analysts estimate, about equal to their gain in the same period last year.

Investors can take heart, however, from regulators’ insistence that companies pay more generous dividends as part of official efforts to bolster the stock market.

More than 40 companies have announced plans for cash dividends totaling 35 billion yuan based on first-half earnings, up from just 16 firms offering 7.7 billion yuan in the first half of 2007, according to a tally by state media.

And a tumble in stock valuations has made Chinese shares more attractive. Assuming profits remain flat next year, the market is now valued at only 18 times 2009 earnings, near the record low of 16 times in 2005, when shares were ending a four-year slump.

But this will have to be weighed against lingering negatives, including worries that large amounts of stock could hit the market as lock-up periods expire under a reform of state-held shares.