Chinese companies’ earnings set to rise amid a pickup in the economy after first decline in 3 quarters, UBS says

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.

More than 5,000 companies on the mainland’s three exchanges posted an average 4 per cent decline in earnings year-on-year, according to the Swiss bank. Excluding the financial sector, the drop widened to 5 per cent because of its large market weighting, it said. That compared with a 1 per cent increase in the fourth quarter and a 0.5 per cent rise in the preceding three-month period.

“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.”

Tencent and Alibaba will announce their quarterly earnings next week. Photo: Bloomberg
Improved corporate earnings are crucial to the upwards momentum in Chinese stocks. The benchmark CSI 300 Index has risen 14 per cent from a February low after a slew of state measures such as direct stock purchases and restrictions on short selling. Overseas investors snapped up yuan-traded stocks for a third consecutive month in March largely because of improving sentiment and recalibration of portfolios by global money managers.

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.

UBS’s call on earnings bottoming out has been echoed by other brokerages, after a Politburo meeting last month pledged to tackle the housing-market crisis and the agenda was finalised for a high-stakes Communist Party plenum that will map out long-term reform plans.

“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.”

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