Warning shot from China’s earnings season for stock bulls as UBS, JPMorgan see bumpy second-half ride

  • Of the listed companies that have published their guidance so far, only 42 per cent have forecast positive interim earnings
  • Stock recovery from a two-year low in April at risk from downside surprises, on top of a housing market crisis and a host of macro worries

The corporate reporting season in mainland China is firing an early warning to investors: results so far suggest it may be worth waiting for signs of stronger recovery before playing the economic reopening theme. The second-half recovery is not a given, JPMorgan Private Bank said.

Only 42 per cent of 1,766 companies have provided positive guidance on their first-half earnings, while 58 per cent warned of weaker results from a year earlier, according to data compiled by Wind Information based on exchange filings.

The ratio is the second lowest only to the interim period in 2020 during the onset of Covid-19 pandemic, according to HSBC Qianhai Securities. The average ratio of positive guidance is 63 per cent for interim earnings between 2017 and 2021. The other 3,067 listed companies are expected to provide their earnings guidance in coming weeks and all the publicly traded companies on the mainland must publish interim results by end-August under stock exchange rules.

The scorecard puts investors with bullish bets at risk, having enjoyed an 11 per cent rebound since the CSI 300 Index clawed its way up from a two-year low in April. It comes as a test for the market trying to shake off a housing market crisis, a lack of forceful policy stimulus and wariness associated with the nation’s zero-Covid policy.

“The market is likely to enter a consolidation stage near term,” said Meng Lei, a strategist at UBS in Shanghai. “We expect broad-based earnings downgrades in the earnings season” into the third quarter, before a significant re-rating could follow, he added.

Investment banks including UBS and Morgan Stanley said the stock rebound may be exhausted in the short term as investors digest weak corporate earnings stemming from the impact of lockdowns in Shanghai and elsewhere, as well as the spikes in commodity prices.

The CSI 300 Index members are likely to post a 15 per cent decline in first-half profit from a year earlier, according to Bloomberg data. That is comparable to the 17 per cent drop recorded in the first six months of 2020 and during the first sting of Covid-19 pandemic.

Guoyuan Securities believes the second-quarter earnings will be the turning point for the market. Prices of raw-material prices have peaked and a recovery in consumer demand heralds faster earnings growth ahead. Investors should pick companies engaged in the mid- and downstream industries, the brokerage added in a report last week.

HSBC Qianhai Securities prefers potential winners among energy producers and healthcare companies. Property developers and consumer-staples companies may disappoint investors with weaker earnings.

Carmaker BYD, Proya Cosmetics and Wuxi Lead Intelligence Equipment, an equipment maker for lithium-ion batteries, are among its top picks. It prefers to avoid Foshan Haitian Flavouring and Beijing Oriental Yuhong Waterproof Technology for potential downside earnings shock.

“Given the continued earnings polarisation in [onshore-traded] A shares, we believe interim results could be the key to stock price performance,” said Steven Sun, head of research at the brokerage in Shenzhen.

China’s stock market has other issues to keep market optimism in check, including the impact on earnings from a deepening housing market slump. The spillover effect prompted Goldman Sachs to trim its earnings growth for MSCI China Index to zero from 4 per cent last month.

The second-half recovery may not be easy, according to JPMorgan Private Bank. Constraints on policy easing and lingering Covid impact would weigh on growth, while weakness in the property sector seems to be a persistent drag.

“For equities, negative earnings impact and media coverage is likely to continue to drag on trading sentiment for both [property and banking] sectors in the near term,” strategists including Alex Wof and Yuxuan Tang wrote in a report to clients on July 22.

Authors: Zhang Shidong, Yaling Jiang, SCMP

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