Chinese A share companies near to earnings trough, says Allianz GI China manager
Chinese A share companies are close to or already at trough earnings levels and most of the expected analyst downgrades of profits had already come, says Christina Chung, senior portfolio manager for China strategies at Allianz Global Investors.
Speaking at a recent press conference in Berlin, Chung (pictured) said: “We think there is a good chance we are close to the bottom for A share company earnings, if not already there in the first quarter.
“We could have a couple of quarters where the economy is trending lower, but corporate earnings last year and in the first quarter were exaggerated by high financing costs.”
She added consensus for MSCI China earnings growth was “single digits, and for China A shares companies 10% or a bit more.” However first quarter profit growth for A share companies already slowed to 4%, and excluding financials it was a 10% contraction.
Gross profit margins had shrunk to about 20%, “levels last seen in the third quarter of 2008”.
The slowing of corporate profit came as Beijing said it expected China’s economy overall to expand by 7.5% in the coming year – a move downwards though still comfortably higher than most Western economies.
Chung said it was inevitably China’s growth would slow, but investors should not expect a hard landing.
She said the slowdown was actually necessary for China to shift to a more domestic consumption economy, and to less labour intensive industries.
“We will still see pockets of growth in the economy,” Chung says.
She adds China may lose some competitiveness due to labour costs rising 10% to 15% a year, but the timeliness and reliability of delivery, were of more importance to retailers than slightly higher cost of merchandise as managing inventory to avoid heavy discounting is very crucial to retailers’ profitability.
She added China’s share in the global apparel manufacturing market had not fallen, and overall, the Chinese retail sector enjoyed spending growth of 14% to 15% in April.
Chung said the labour market for export-oriented sectors has already shrunk since 2009, and many workers returning from the eastern coast to inland homes were able to find jobs inland.
Chung added China’s fixed asset investment had fallen to a more normalised level though there could be some pick-up over the coming quarters especially in public infrastructure.
Chung said Beijing was trying to cool down the property market, and in the first four months of 2012 property prices had weakened 5% to 10% across 30 cities. “We see this happening in quite a large number of cities and we think prices will keep coming down over six to nine months partly because of oversupply. But as wages continue to increase while property prices coming down, affordability will improve over time such that we would expect the property market will resume uptrend after a period of correction.”
Loan growth would grow 11% to 12% this year, she added, “very much in line with nominal GDP growth, so we are not looking at excessive credit expansion. We believe that the decline in reserve requirement ratios will provide more leeway for banks to expand credit.”