Chinese listed companies to delivery strong earnings in third quarter

Profits for Chinese listed companies are likely to have rebounded in the third quarter, as the government’s campaign to support growth worked its way into corporate earnings and as higher commodity prices boosted profitability at raw-material producers, analysts said as the earnings season gathers steam.

The 5,000-plus companies trading on the Shanghai and Shenzhen exchanges probably recorded an average 3.1 per cent profit increase from a year earlier for the three-month period that ended September, according to Zheshang Securities. That compared with a 9.6 per cent decline in the second quarter. Earnings growth will probably accelerate to 7.3 per cent this quarter, given the lower base last year, the brokerage said.

China International Capital Corp (CICC) is even more sanguine, predicting that profits for the 948 companies covered by the investment bank may have risen by 12 per cent in the third quarter, compared with a 2 per cent increase in the previous quarter.

This earnings season, which will see most of the companies releasing the quarterly results in the coming two weeks, could provide balm for the nation’s troubled US$9.4 trillion onshore stock markets. Stocks have been struggling even after the securities regulator took a slew of measures to bolster sentiment. Steps such as tightening of new share supply and restrictions on short selling failed to dispel the gloom, with the CSI 300 Index hitting an 11-month low on Wednesday after posting a decline of more than 6 per cent this year.

“The second quarter may be a bottom for both revenue and earnings,” said Wang Yang, an analyst at Zheshang Securities. “Corporate earnings are expected to improve further after the implementation of growth-stabilising policies in the second half.”

As of last week, about 6 per cent of onshore listed companies had disclosed preliminary quarterly results or earnings forecasts, with three quarters of these entities expecting profit increases, according to Topsperity Securities.

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There could be further tailwind from improved economic performance after China’s gross domestic product expanded by a faster-than-expected 4.9 per cent in the third quarter and after both industrial production and retail sales exceeded consensus forecasts in September. The official data reinforces the view that the recovery in the world’s second largest economy is under way after cuts in borrowing costs and banks’ reserve requirement ratio, as well as the removal of home-purchase restrictions.

Companies in the upstream and middle-stream industries, ranging from oil and metal producers to steelmakers and power generators, were probably the major drivers for third-quarter earnings, according to CICC. Crude oil futures jumped almost 30 per cent and aluminium prices rallied 10 per cent in the past quarter on the London Metal Exchange.

Downstream industries such as consumer goods, duty-free shopping and home appliances were sluggish due to weak domestic demand, said CICC. The brokerage also remained cautious about artificial intelligence (AI) companies, saying that they would not be able to deliver on earnings growth in the short term.

The sectors that have received analysts’ biggest earnings upgrades so far are retailers, utilities, petrochemicals, social services, and food and beverages, according to Zheshang Securities.

Earnings for Chinese offshore stocks are likely to rise by 11.6 per cent next year, from the estimated 9.2 per cent growth for 2023, according to HSBC analysts. The forecast trails a 21 per cent increase for the Asian region, it said. The main contributors will come from the consumer discretionary and financial sectors, while the real estate market will provide the main drag, HSBC said.