Corporate profits

Chinese company profits rise, but outlook grows gloomy

Last year, the profits of China’s largest publicly traded companies grew at their fastest pace since 2010, but don’t expect a repeat in 2018.

Earnings per share of companies in the MSCI China Index, which includes 152 large and mid-cap stocks mostly listed in China, Hong Kong and the United States, likely rose more than 26% in 2017, according to a report. Nomura study.

The main drivers were tech giants including Alibaba and Tencent, whose profits surged, as well as energy, industrial and real estate companies which benefited from the rise in oil and real estate prices. The country’s major banks also did better thanks to strong growth in interest income. Some companies with a fiscal year ending in March have yet to report.

The Chinese economy grew 6.9% last year, a rate of expansion in line with the previous two years but down from an increase of more than 10% in 2010. That year, corporate profits rose 34.3%.

Last year’s profit gains contributed to a 36.7% increase in the MSCI China Index, far outpacing the 18.8% increase in the broader MSCI Emerging Markets Index. Both benchmarks are followed by many foreign investors.

Many industrial sectors came out of weak to negative earnings in 2016, resulting in a “high” jump the following year, said Mixo Das, Asia portfolio strategist at JP Morgan.

Last year, large state-owned companies took advantage of Beijing’s strong campaign to tackle oversupply and reduce supply in sectors such as coal and steel, said Jacky Zhang, analyst at BOC International at Shanghai.

Energy companies in particular have benefited from rising oil prices: Brent crude futures prices have risen about 25% in the past year, according to Wall Street Journal data.

The earnings outlook for this year does not look so strong.

The country’s crackdown on speculative investment, off-balance sheet loans and its campaign to reduce financial system leverage could weigh on profit margins and growth opportunities for some companies.

Meanwhile, the escalating US-China trade war has weighed on stocks in recent weeks. It is too early to assess the impact on corporate profits, as it is still unclear what tariffs will be applied. But China’s planned 25% tariffs on some U.S. products would hurt 2.7% of the Asian country’s total imports, Morgan Stanley said in a recent memo.

Wendy Liu, head of China equity research at Nomura, said she expects Chinese internet company profits to rise 16% in 2018 after rising the previous year.

Profits of hardware tech companies, meanwhile, could slow to 20% after jumping 121% in 2017.

“There will likely be a moderation in revenue growth from the high base of 2017,” she said, noting that investment and spending in technology is expected to increase in the meantime.

Beijing’s efforts to reduce debt in the economy have forced some struggling or heavily indebted companies to exit the market, helping rivals gain market share and pricing power, Liu said. Overall, she expects earnings per share growth for companies in the MSCI China Index to slow to 14.6% in 2018 and 16% next year.

—Stella Yifan Xie and Gregor Stuart Hunter contributed to this article.

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