BEIJING: A slowdown in earnings growth for publicly traded Chinese companies is likely to last for the rest of the year as higher commodity prices reduce margins and tighter controls on consumer spending to contain the Covid-19 outbreak, according to analysts. reduce the.
Profits of the 300 largest companies listed on the Shanghai and Shenzhen exchanges are expected to drop 17% this quarter from a year ago, according to data from Bloomberg, the worst quarterly performance in at least two years. According to the data, this will be worse than the 1.2% drop in the last three months and 11% growth from January to March.
According to Sealand Securities, the trend reflects a more general decline experienced by the 4,000 or more companies listed on mainland markets. The Guangxi province-based brokerage reported that their earnings grew 1.9% overall in the second quarter, compared to a 3.5% increase in the previous three months.
With China's repeated snap lockdowns with complex business plans and demand forecasts, analysts predicted that the expected earnings shock this quarter could last through the end of the year.
According to Lin Limei, an analyst at Shanghai-based Shenwan Hongyuan Group, the fourth quarter or the first quarter of next year could mark the end of this decline in earnings.
But due to the pandemic, high raw material prices and uncertainty over global demand, it is difficult to predict the bottom line of earnings right now.
The Bloomberg Commodity Index is up 17% this year and includes a wide range of raw materials, including corn, soybeans, natural gas and oil.
According to Shenwan, average gross profit margin declined from 20.5 percent at the end of 2018 to 17.6 percent in the second quarter. Given that there are still several economic headwinds, there is still room for downside, according to the brokerage.
Beijing's strict zero-Covid policy is still in place, and the housing market crisis is still unresolved. The CSI 300 index is down almost 10% since its peak in July, bringing it back to a nearly three-month low.
Recent lockdowns have soured the outlook for the economy in Chengdu, capital of southwest Sichuan province, and Guiyang, capital of southern Guizhou province, both home to plants for Geely Automobiles and contemporary Amperex Technology.
According to reports this month, China's manufacturing shrank in August.
According to Sealand Securities, businesses operating in the middle and downstream industries reported weak earnings in the most recent quarter. On the other hand, even though commodity prices declined from all-time highs, raw material producers prospered from limited supply and firm demand.
Everbright Securities advises investors to focus on businesses with consistent or predictable income streams, such as Baijie Distilleries and pharmaceutical companies, in these uncertain times.
Additionally, it benefits businesses that must invest heavily to support growth, such as manufacturers of solar and wind power equipment.
UBS Group has a similar opinion.
According to Meng Lei, a Shanghai-based strategist at the Swiss Investment Bank, the stock market could be strong for some time. “There is a dearth of new capital inflows into the A-share market,” he said. Given the high degree of uncertainty, we recommend allocation to industries with strong pricing power, high earnings visibility and favorable policy development.
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