(Bloomberg) -- The current earnings season is shaping up to be another letdown for Chinese stock investors, eroding the case for a turnaround in the slumping market.
Profit warnings issued by mainland-listed firms for the second quarter have outnumbered positive alerts, resulting in a net negative tally of 4.6%, according to Morgan Stanley’s analysis of preliminary results. That compares with a net positive 2.2% in the prior quarter.
A disappointing earnings season will test the conviction of those like UBS Group AG and Societe Generale SA which had turned bullish partly on expectations of better Chinese corporate profits. A surprise miss in second-quarter economic growth and the lack of policies to revive consumption are already driving another stock selloff.
“This earnings season probably won’t provide markets with the long-awaited boost — there has been no substantial improvement in companies’ cash flows,” said Shen Meng, a director at Beijing-based investment bank Chanson & Co. “Due to a lack of clarity on mid-to-long term economic policies, wait-and-see attitude is dominant in the market.”
Expectations that earnings have bottomed in the first quarter helped drive a rebound in Chinese stocks between February and May, with asset managers including SG Kleinwort Hambros Ltd, Vontobel Asset Management and Ariel Investments increasing their exposure. CLSA and others though have said that consensus estimates were too optimistic.
Morgan Stanley’s analysis of 1,650 preliminary results, which account for about a third of onshore-listed firms, suggests “a further delay for earnings growth re-acceleration,” strategists including Laura Wang wrote in a July 24 note. The brokerage said it’s “too early” to call a bottoming out of earnings growth.
China’s three biggest airlines all warned of a net loss for the first half. Meanwhile, analysts at HSBC Holdings Plc. said there’s a “moderate” risk that Chinese consumer companies will miss estimates due to economic headwinds.
After a brief rebound during mid-July when the Third Plenum, a key political meeting, was underway, Chinese stocks have resumed sliding as support from state funds waned. The CSI benchmark 300 Index has lost nearly 9% since this year’s peak in May. Foreigners are on track to pull money from local equities for the second straight month in July.
Stocks barely budged following Tuesday’s announcement of new support measures from the Politburo, a meeting of China’s 24-member decision-making body. Policy-driven rebounds have had little staying power in recent years as the extent of support has been too modest to revive the property market or boost consumer spending — factors that are crucial for corporate bottom lines to improve.
Lopsided Recovery
Preliminary releases have shown a growing divergence among industries, with companies that can compete on the global stage faring better than those focusing on the domestic market.
Owing to global restocking demand and a front-loading of shipments ahead of expected harsher US tariffs, many of the export-oriented companies have forecast sharp increases in their earnings, according to China Merchants Securities.
“Companies with strong overseas exposure stand a better chance of positive results this round,” said Xin-Yao Ng, director of investment at abrdn Asia Ltd. “Most sectors are likely to be softer-than-expected, especially those that are domestically focused,” he said, adding that names linked to consumption, property and domestic investment may underperform.
Shares of Shenzhen Kaizhong Precision Technology Co., an auto parts supplier to many global carmakers, said it expects net profit to expand by more than 1000% in the first half from a year earlier, partly due to growing overseas orders. Its shares have rallied about 40% since the announcement.
In contrast, Jiumaojiu International Holdings Ltd. a chain restaurant operator, slumped after forecasting a significant drop in net income due to lower average spending per customer.
The results so far also point to greater resilience among larger companies compared to smaller ones, according to Morgan Stanley. Preliminary results show a net 1.3% positive reading for large caps, while those for small and mid caps were net negative by 11.7% and 8%, respectively.
Shares of larger firms have outperformed their smaller peers, with the gap between the CSI 300 Index and the CSI 2000 Index mounting to about 24 percentage points so far this year — the widest since 2017.
“We take this as a proof that shocks to corporate earnings under the weakening macro backdrop are uneven across different sizes of companies, with smaller ones more vulnerable,” Morgan Stanley strategists said. “We continue to advise sticking to industry and category leaders for higher earnings stability.”
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