Warning: Most Chinese Companies Reporting Losses, Profit Declines

Chinese companies are warning they will be reporting either losses or declining profits for the first half.? Corporate results are forcing stock markets down and pointing to a contraction in the country?s economy.

China Rongsheng Heavy Industries, China?s largest private shipbuilder, lost 19% of its value when it issued a profit warning at the end of last month.? Yards in the country are in a terrible state?the industry?s orders for new vessels in May were half of what they were a year earlier?yet Rongsheng?s poor prospects had largely been discounted.? The company?s shares tumbled not only because it hadn?t announced any shipbuilding orders this year but also because the U.S. Securities and Exchange Commission implicated Zhang Zhirong, its chairman and founder, in an insider trading scheme relating to the acquisition of Canada?s Nexen by CNOOC, a unit of one of China?s state oil giants.

We can perhaps dismiss Rongsheng as an aberration, but poor results at other companies are indicative of the state of the country?s increasingly troubled economy.? Take China Cosco, for instance.? The Hong Kong-listed subsidiary of China?s largest shipping company warned that its loss in the first six months of this year would widen to at least 4.14 billion yuan ($648.8 million).? In the same period last year, the company was 2.76 billion yuan in the red.? China Cosco posted a loss of 2.69 billion yuan in Q1.

Other enterprises, such as China Rare Earth, are also forecasting red ink. ?Data provider CapitalVue says that almost 900 China-listed firms are expecting losses or lower profits for the first six months of the year.? Only 600 companies predict profit increases.

The list of companies forecasting profit declines is impressive.? Air China, the nation?s flag carrier and the world?s second-largest airline by market value, has said profits will fall by more than 50%.

Huawei Technologies, China?s largest manufacturer of phone equipment, reported a 22% drop in H1 operating profit.? The profits of Huawei?s rival, ZTE, fell by 12%.? ZTE?s result appears suspicious because just two weeks before it had warned profits might fall as much as 80%.? The company, when issuing its warning in the middle of last month, blamed ?postponement of tenders? by Chinese network carriers and other reasons for a precipitous fall.? Also not helping ZTE is China Telecom paying bills slowly.

Sany Heavy Industry, China?s biggest maker of excavators, lowered its annual unit-sales forecast to 10% growth from 40%.? The company is apparently postponing a $2 billion share sale in the Hong Kong market due to a poor reception.? ?Many people think our industry will see a substantial decline, which I think is reasonable,? said Vice Chairman Xiang Wenbo in the middle of last month.

And for all the talk of China?s increasing consumption, profits are falling in the retail sector.? Suning Appliance, the country?s largest electronics retailer, reported H1 profits were down 29.5%.? Not surprisingly, Gome Electrical Appliances, the country?s second-largest, forecasts profits dropping by as much as 30%.

Problems are showing up across the board, even in Beijing?s favored businesses.? The State-owned Assets Supervision and Administration Commission announced last month that profits dropped 16.4% in H1 for China?s biggest state-owned enterprises.? The Commission said profits declined only 13.6% in Q1, so the falloff accelerated in Q2.

?We have seen more profit warnings than expected in the first half and there might be more than there were in 2008,? says Mao Sheng of Huawei Securities of Chengdu, the capital of southwestern Sichuan province.

Why are there so many profit warnings now?? There is, according to the Wall Street Journal?s Tom Orlik, a ?hypercyclicality? in profits caused by government-mandated ?breakneck investment,? which resulted in ?excess supply.?? As Sany?s Xiang Wenbo noted, Beijing?s past stimulus efforts were ?abnormal? and ?irrational.?

China is coming off its stimulus sugar high, and so margins are under pressure.? Profits, however, are just wonderful for companies in a few regulated industries, where Beijing essentially determines corporate results.? One company reporting an outstanding number is Huaneng Power International.? Profits were up 87.7% in the first half because the government raised tariffs 6.5% on December 1.? Nonetheless, optimists should not take too much comfort from Huaneng?s H1 achievement.? Why? ?The company announced that in the first half its output of electricity fell 1.46%.

Source: http://www.forbes.com/sites/gordonchang/2012/08/05/warning-most-chinese-companies-reporting-losses-profit-declines/

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