China Inc’s profit surge comes to a screeching halt
China’s listed companies, after delivering robust earnings growth every quarter for two years, are seeing profits start to shrink as the global financial crisis hits more severely than many had expected.
Slumping demand and falling prices have hit Chinese industries from steel to automobiles to airlines, and the highly profitable financial sector, while largely insulated from the worst of the global credit crisis, will see its bottom line eroded by a slowing economy and a deflating property market.
“The impact of the global financial crisis on China’s real economy and corporate operations has just begun to make itself clear,” said Zheng Weigang, head of research at Shanghai Securities.
“Many industries, such as steel and chemicals, have seen their sales prices nearing their cost points,” he said.
“November and December will see several major sectors fall into losses, boding ill for corporate earnings growth in the fourth quarter and next year.”
In the third-quarter earnings reporting season that ended on Friday, the 1,600-plus firms listed on the Shanghai and Shenzhen stock exchanges posted a 20 percent drop in net profit from the second quarter, according to calculations by state media. Year-on-year comparisons for the quarter were not available.
For the first nine months of the year, net profit was up 7.1 percent year-on-year at 782 billion yuan ($114 billion), slowing sharply from 16 percent growth in the first half, the calculations showed.
Worse news lies ahead.
SHRINKING MARGINS
Analysts estimate that more than half of China’s listed firms have already seen their profit margins drop in the third quarter from the same period of last year creditreports.
That means the only way they could sustain earnings growth is by selling more products — a tough task as global recession crimps exports and China’s slowing economic growth dampens domestic demand.
Among 10 analysts, economists and fund managers polled by Reuters this week, all but one forecast flat to weaker earnings for listed firms in the current quarter compared with a year earlier, while for next year they projected declines ranging from 2 to 10 percent.
“Earnings growth is certain to be negative in 2009, but the extent of the decline should still be in single digits, with the first half expected to be worse than the second half,” said Wu Haijun, Shanghai principal at Power Pacific Corp of Canada, a foreign investor in Chinese stocks.
Earnings at financial firms, the primary engine of China’s profit growth accounting for some 40 percent of the total at all listed companies, slowed significantly after powering total increases of 43 percent in 2007 and 67 percent in 2006.
The country’s biggest insurer, China Life (601628.SS: Quote, Profile, Research, Stock Buzz) (2628.HK: Quote, Profile, Research, Stock Buzz), posted a drop of more than 70 percent in third-quarter net profit, as its investment income sank with the stock market. China’s benchmark Shanghai Composite Index .SSEC has dropped more than 70 percent over the past year.