Fears are growing that China’s listed companies will announce disappointing earnings in coming weeks, adding to the downdraft facing the world’s worst-performing major equity market.
Earnings at listed firms are set to miss forecasts for a 10th straight quarter and that will push down valuations, according to Morgan Stanley. There are a plethora of negatives that will weigh particularly heavily on the profits of banks and consumer-focused companies, Forsyth Barr Asia Ltd. says.
“The upcoming 2023 annual report/4Q 2023 result season will be another miss,” Morgan Stanley strategists Laura Wang and Catherine Chen in Hong Kong wrote this week in a research note. “Major downward earnings estimates revisions are likely, which will cap valuation re-rating opportunities.”
Profits at Chinese companies are being pressured as the economic recovery sputters amid a long-time property crisis and growing signs of deflation. A slew of indicators for home prices and property-related spending have disappointed this year, even as headline gross domestic product meets the official target.
Earnings estimates for MSCI China Index members have dropped nearly 1% since the start of this year, according to data compiled by Bloomberg. That compares with a 0.2% increase for those in the S&P 500 Index.
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Citigroup trimmed profit estimates for Great Wall Motor Co. Ltd. after the carmaker flagged a 15% decline in net income for 2023. Jefferies lowered its estimates for China Resources Beer Holdings Co.’s net profit over 2023-25 on expectations of slower sales growth for both the beer and baijiu segments.
Compiling profit forecasts for China’s companies is relatively difficult given a general lack of transparency and the reluctance of the firms to provide accurate earnings guidance. The nation’s listed enterprises are expected to say earnings rose 5.8% in the fourth quarter from a year earlier when the nation was largely under a lockdown, according to an analysis by China Merchants Securities based on the CSI 300 Index.
The benchmark gauge has tumbled 4.5% in 2024 after a record three straight years of declines. The Hang Seng China Enterprises Index of mainland firms listed in Hong Kong has slumped more than 7% since the start of January, the worst-performing major global share gauge.
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Pessimism eased this week following reports the authorities are preparing a package of measures to stabilize the ailing share market. Policymakers are seeking to mobilize about 2 trillion yuan ($378.44 billion) to buy mainland shares, Bloomberg reported Tuesday, citing people familiar with the matter.
The reported size of the package of bigger than the previous one in 2015 but may not be enough on its own to revive the struggling stock market, the Morgan Stanley analysts wrote.
China will cut the reserve requirement ratio by half a percentage point on Feb 5 to add liquidity into the economy, People’s Bank of China Governor Pan Gongsheng said in a press briefing Wednesday.
Broader Scepticism
While the market-rescue plan is a positive, there are concerns it will fail to address the underlying weak economy that is hurting earnings.
There are just “too many negative reasons,” said Willer Chen, an analyst at Forsyth Barr Asia in Hong Kong.
Earnings from the financial sector are set to remain tepid given the shrinking net interest margin and weak capital market, while property will for sure be “very weak,” Chen said. Consumer companies may also underperform considering the sentiment and macro outlook, he said.
