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Listed firms to feel first quarter pain

(China Daily)
Updated: 2009-04-20 07:58

China's listed companies may report better results from the second quarter of this year. [Hu Weiming]

China's listed companies are poised to report their biggest earnings fall in at least two years, but that could be the beginning of an end for bad news as the economy starts to bottom out.

Signs are mounting that, after a bleak first quarter, the tumble in earnings will begin easing in the current quarter with the rates of decline beginning to shrink, as Beijing's $586 billion two-year economic stimulus plan kicks in.

"Historically speaking, China's economic stimulus plans typically take six months to bear fruit because they largely focus on infrastructure projects," said Ren Chengde, senior stock analyst at Galaxy Securities in Shanghai.

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"This time, the signs are clear that most parts of the economy will hit bottom in the first quarter and will recover in the second," he said. "So will corporate earnings."

Chinese economic data for March released over the past few days has been particularly strong, including a rise in industrial output growth to 8.3 percent from a record low of 3.8 percent in the first two months of the year.

New loans extended by Chinese banks reached a record 1.89 trillion yuan ($277 billion) in March, as Beijing pushed banks to lend more to support corporate activity, and much of that will fuel sales and earnings in coming quarters, analysts said.

And the official Purchasing Managers' Index (PMI) for March rose to 52.4 from 49.0 in February, marking its first time above the boom-or-bust 50 mark since September - another indicator that the economy is bottoming out.

Eight analysts, fund mangers and economists polled by Reuters estimated that combined net profit at China's 1,600-plus listed companies in the first quarter fell 40 percent from a year ago. Companies are required to post quarterly results in April, with most expected to do so in the second half of the month.

But they forecast the slide would slow to an average of around 10 percent for the remaining three quarters of the year, bringing the decline for all of 2009 to around 15 percent.

Analysts, however, warned that China's economy would not return to annual double-digit growth rates, seen from 2003 to 2007, for at least another two to three years, thus capping the potential for corporate earnings growth in the medium term.

"An adjustment of the industrial structure and a destocking process to work off overcapacity, built up in the economic boom years, will take several years," said Galaxy Securities' Ren.

Analysts said the auto and oil refining sectors would be first to show signs of recovery. Vehicle sales in China, which surpassed the United States to become the world's largest auto market this year, rose to a record in March, buoyed by official steps to boost demand.

Analysts expect that would lift overall auto sector earnings in the second half by 20-30 percent year-on-year after the companies digested the lagging effect of a high base in the first quarter of last year.

"China's auto industry performed very poorly in January and February, but the government's policy support means that sales will rise sharply for the rest of this year," said Yi Junfeng, auto industry analyst at Changjiang Securities in Shanghai.

"While full-year earnings for 2009 for the industry may be just flat, profits for leading companies will surely outperform and be on an upward trend," he said, forecasting a 10 percent profit rise for all of 2009 for SAIC Motor Corp, China's biggest carmaker. He gave no quarterly forecasts.

Oil refiners' earnings will likely rebound ahead of the curve after an industry reform last year ensured their earnings would remain steady regardless of oil price volatility.

Sector leader Sinopec Corp forecast its net profit will rise at least 50 percent in the first quarter while Shanghai Petrochemical said it would reverse its 2008 loss in the first quarter.

Dealers said bank stocks such as China Construction Bank and Industrial and Commercial Bank of China might be unexpected winners despite wariness toward the sector in the global financial crisis.

"Major Chinese banks have put aside huge bad loan provisions in their 2008 balance sheets due to the dire situation in the global banking sector," said a trader at Guotai Junan Securities in Shenzhen. "We believe the provisions have been excessive, and a large part may be recovered into 2009 earnings."

Chinese banks posted a combined 30 percent earnings rise for 2008, and analysts expect they could still see 10-20 percent earnings growth for all 2009, buoyed by government steps to push them to do more business to boost the economy.

Reuters