The outlook for Chinese companies’ profitability looks bright, according to UBS which predicted that earnings will rise as the economy stabilises.
Corporate profits fell in the first three months of the year after two back to back quarters of growth as a lingering property market downturn and weak domestic demand weighed on earnings.
“From a macro perspective, recent property sales and new starts have yet to hit bottom, while overall earnings remained pressured amid subdued demand in the first quarter,” said Meng Lei, a strategist at UBS in Shanghai. “Looking ahead, earnings are set to pick up as property activity stabilises and inflation recovery fuels household income and consumer spending growth.”
Mainland-listed companies are required to release annual and first-quarter results before the end of April, with the next earnings season commencing in July.
One major reason UBS is upbeat about the earnings prospect is the data on industrial profits, which it says historically is highly correlated to earnings. Industrial companies’ profits grew 4.3 per cent in the first quarter from a year earlier, according to the statistics bureau.
While domestic demand remained sluggish, export-oriented sectors recorded the fastest earnings growth in the first quarter, according to UBS. Among them, carmakers posted 16 per cent growth and home-appliance manufacturers reported an 11 per cent increase. The other bright spots were food and beverages makers and non-banking, which averaged 16 per cent and 14 per cent profit growth, respectively.
On the flip side, profitability at mid and upstream industries eroded, proving a drag on the overall earnings because of falling producer prices, UBS said.
Corporate earnings will be up high on traders’ radar next week, when Tencent Holdings, Alibaba Group Holding and Meituan, China’s biggest tech companies trading in Hong Kong, release their first-quarter results. Earnings probably rose at an annual pace of 33 per cent at Tencent and 7.6 per cent at Metuan, according to consensus estimates of analysts tracked by Bloomberg. They are forecast to slump 39 per cent at Alibaba.
“Developments on the policy front will lend support to a recovery in the economy,” said Wei Wei, an analyst at Ping An Securities.
“The tone struck on the property market at the Politburo meeting is expected to drive an improvement in corporate earnings.”