Profit growth at China’s publicly traded companies rebounded from its worst performance in a decade in the second quarter, as policy support from the government and the successful containment of the coronavirus pandemic put economic activity back on track.
The 3,000-plus companies trading on exchanges in Shanghai and Shenzhen reported an 18 per cent earnings decline for the three-month period ended in June, according to Haitong Securities. That was narrower than a 42 per cent slump in the first quarter, when the outbreak of Covid-19 forced factories to shut down and forced people to stay at home. Smaller companies took the lead in the earnings recovery, with growth in the sector returning to positive territory in the second quarter, the brokerage said.
China’s economy expanded by 3.2 per cent in the same quarter, rebounding from a 6.8 per cent contraction during the previous three-month period, as the government cut taxes for some industries and the central bank released more liquidity to combat the economic dislocation caused by Covid-19. The Shanghai Composite Index has already gained 12 per cent this year, and is the best performing gauge among the world’s major equity benchmarks.
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“The darkest moment for … corporate earnings is already over,” said Xun Yugen, a strategist at Haitong Securities in Shanghai. “Earnings will continue to improve in the coming quarters.” He added that he expected full-year profits to grow by between 0 per cent and 5 per cent.
The turnaround in corporate earnings came as product prices halted declines amid normal economic activity, companies cut costs, investment gains increased and preferential tax policies were implemented, according to China Merchants Securities.
The biggest earnings increases were concentrated in the telecommunications and agricultural sectors, with quarterly profit at least tripling from a year earlier, as China started construction of high-speed 5G networks and pork prices stayed elevated, Haitong Securities said. Growth at food companies averaged at 42 per cent, while brokerages reported a 26 per cent increase, it said.
The start-ups on Shenzhen’s ChiNext board recorded a 13 per cent increase in profit on average in the second quarter, while the growth rate for smaller companies on the Shenzhen bourse was 6.6 per cent, according to Haitong Securities. These firms outpaced growth at the biggest companies on the main boards of the Shanghai and Shenzhen bourses.
Earnings growth also accelerated at Star Market, Shanghai’s new technology board. Profit growth quickened to 41 per cent in the second quarter from 14 per cent for the previous three-month period, with the biopharmaceutical and integrated circuit sectors posting the biggest increases, according to Shanghai exchange data.
China International Capital Corporation (CICC), meanwhile, forecast a decline of 6 per cent in full-year profits. “We expect continuing improvement in corporate earnings in the second half,” said Wang Hanfeng, an analyst at CICC, who recommended companies in the cyclical upstream sectors and with exposures to overseas demand, against the backdrop of the improving global containment of the pandemic.
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