“…A major boost came from China’s economy growing at an annual rate of 10.6 percent in the first quarter, achieved despite the worst snow storms of the decade in many areas of the country and slower export growth as the U.S. credit crisis hit the global economy…”

By Lu Jianxin
Source: Reuters

Earnings prospects for China’s 1,500-plus listed companies have brightened after they posted better-than-forecast profits in the first quarter, bolstered by unexpectedly brisk economic growth.

Six fund managers and securities analysts surveyed by Reuters on Wednesday predicted median profit growth for listed Chinese firms of 25 percent in 2008, up from a forecast of 20 percent about a month ago.

A pick-up in the stock market and a likely slowing in yuan appreciation were among other supportive factors they cited for the earnings outlook.

The forecast suggests China Inc will maintain the first-quarter pace of year-on-year earnings growth, calculated at more than 23 percent by the official Shanghai Securities News, for the rest of the year.

While impressive on a global scale — U.S. first quarter earnings, for example, are down by about a fifth — the growth is still less than half the gains made during 2007.

A major boost came from China’s economy growing at an annual rate of 10.6 percent in the first quarter, achieved despite the worst snow storms of the decade in many areas of the country and slower export growth as the U.S. credit crisis hit the global economy.

“We raise our forecast for 2008 corporate earnings (to 25 percent) from 15-20 percent a month ago, partly due to a stronger-than-expected economy in the first quarter,” said senior stock analyst Cao Xuefeng at West China Securities in Chengdu.

But first-quarter earnings growth slowed sharply after growing by about half in 2007, according to the Shanghai Securities News.

That in turn was below analysts’ forecasts late last year of a 50 to 60 percent rise for 2007. Earnings rose by about two-thirds in the first three quarters of 2007 alone.

SHARES SLIDE

First quarter earnings were hit particularly hard by the plunge of more than a third in the benchmark Shanghai Composite Index’s .SSEC. That eroded the investment income of index heavyweights such as top insurer China Life Insurance (601628.SS: Quote, Profile, Research)(2628.HK: Quote, Profile, Research), which posted a 61 percent drop in first-quarter profit.

The bottom line of export-oriented companies was also hurt by faster appreciation of the yuan , which gained 4.2 percent in value against the dollar in the first quarter — its quickest quarterly appreciation since 1993.

“The first-quarter earnings indicated a strong polarisation of listed companies’ performance, with banks outperforming the overall market while refineries were hit by surging oil prices,” said Yan Zhenghua, chief strategist at China Asset Management.

“The trend is likely to continue for all of 2008,” he added.

Among 15 listed Chinese banks, most reported a more than doubling of first-quarter profit, partly due to an income tax cut for Chinese companies to 25 percent from 33 percent this year.

The reduction will boost overall corporate earnings by an estimated 10 percent this year and will benefit banks the most, partly because of their huge turnover.

Banks, which account for about 30 percent of all listed firms’ earnings, are under pressure from official economic cooling steps such as a new loan quota system, but analysts now believe their total profits will grow at least 40 to 50 percent for in 2008, an upgrade from a forecast about a month ago for a 30 percent rise.

Oil giant PetroChina (601857.SS: Quote, Profile, Research)(0857.HK: Quote, Profile, Research), however, posted a disappointing 32 percent fall in net profit for the first quarter and Sinopec Corp (600028.SS: Quote, Profile, Research)(0386.HK: Quote, Profile, Research), Asia’s largest oil refiner, suffered a 69 percent dive, as soaring crude oil prices pushed their refining business into a deep loss.

The two account for about 20 percent of domestically listed firms’ total earnings.

RESILIENT ECONOMY

But a resilient economy is likely to keep earnings buoyant.

For 2008, analysts forecast economic growth around 10 percent. An easing in consumer price inflation, which reached an 11 year high of 8.7 percent in February before falling back to 8.3 percent in March, would also help companies facing higher input costs.

China has also slowed the appreciation of the yuan, which is nearly unchanged against the dollar in April, as the government, which guides the market through the central bank’s daily mid-points, appears to be responding to exporters’ complaints.

That could combine with a possible stabilising in the U.S. economy to boost business for small exporters such as toy maker Haixin Group (600851.SS: Quote, Profile, Research), which posted a loss of 5.88 million yuan ($840,000) in the first quarter.

Earnings will also get a boost from a steadier stock market. The main index has rebounded 23 percent from a 13 month low last week after the government stepped in with supportive measures, including a cut in the stock trading duty.

Stock investments accounted for about 15 percent of listed firms’ net profit in 2007.

The average price-to-earnings (PE) ratio of China’s listed firms has dropped to about 27 times 2007 profit, from a peak of 46 times late last year. Many analysts said that was unsustainably high but profit growth around 25 percent this year should bring PE ratios down further, to about 22 times.