China’s slowing economy is beginning to hit the corporate bottom line at a number of foreign and domestic companies, as warnings of lower profitability set the stage for discouraging results in coming weeks.
Since late Friday, major Chinese companies including electronic equipment maker ZTE Corp., China Eastern Airlines Corp., 600115.SH +0.45 percent retailer Suning Appliance Co. 002024.SZ -10.01 percent and electronics maker TCL Communication Technology Holdings Ltd 2618.HK -12.07 percent warned that results would be lower than expected. The reports helped send Shanghai’s benchmark stock index down 1.7 percent on Monday despite a generally positive day in Asian markets.
The reports followed similar ones in recent days from sportswear maker Li Ning Co. 2331.HK -4.99 percent and Dongfeng Automobile Co. 600006.SH -1.32 percent A number of foreign companies, including engine maker Cummins Inc. CMI -2.34 percent and shoemaker Nike Inc. NKE -1.01 percent of the US as well as Burberry Group BRBY.LN -1.79 percent PLC of the UK, have also indicated softening growth in demand in China.
China’s dulled shine is bad news for companies at home and abroad looking for growth. The country has been a reliable profit machine in times when the US grappled with slow growth and Europe contends with its sovereign debt crisis.
Relief could be a while in coming. China has taken steps in recent weeks to reinvigorate growth, including two cuts in lending rates since the beginning of June. But those moves will take a while to trickle down and won’t likely benefit companies until near the end of the year, said Sean Darby, chief global equity strategist for Jefferies & Co.
“People have been expecting the economy to rebound in the second half, so people have positions in these companies,” he said. “But the slowdown in the economy has run far further and far faster than they anticipated.”
The Chinese economy slowed in the second quarter to 7.6 percent growth compared with a year ago from 8.1 percent growth in the first quarter, an envious pace for many economies but the slowest rate of growth for the world’s No. 2 economy since the global financial crisis.
On Monday, the International Monetary Fund lowered its estimates for China’s economic growth this year and next, and warned of the possibility of a hard landing there in the medium term. The IMF dropped its forecast for this year’s gross domestic product growth in China to 8 percent from its previous forecast of 8.2 percent in April. It also lowered its estimate of next year’s growth rate, to 8.5 percent from 8.8 percent previously.
Industrial profits, a measure that includes industrial companies with annual income above 20 million yuan ($3.1 million), have fallen 2.4 percent in the first five months of this year compared with a year earlier, according to the National Bureau of Statistics.
“There could be downside surprises to the earnings season that is coming up,” said Herald van der Linde, head of equity strategy, Asia-Pacific for HSBC HBC -0.30%. “If we look at [second-quarter] earnings, growth was quite weak.”
van der Linde cited China’s stimulus efforts and said Beijing has still more options if growth remains weak. Still, stimulus efforts “will only be reflected at the end of the year.”
Some companies have become wary about hiring and spending. “Everyone is taking a cautious approach,” said Willy Lin, managing director of Milo’s Knitwear International Ltd, a Hong Kong manufacturer that has factories in South China. He said that workers that can be trained to handle automated machinery will continue to get wage increases, adding “those who can’t change will be let go.”
ZTE’s shares fell 16 percent on Monday in Hong Kong. It said on Friday it expects first-half net profit to drop 60 percent to 80 percent from the same period a year earlier, although it expects earnings to improve in the second-half of 2012. Analysts cited in part a slow rollout of capital spending by China’s state-controlled telecommunications companies. ZTE also cited foreign-exchange losses and investment gains in the year-ago period.
Suning, which sells cellphones, televisions and other consumer electronics, said profit for the first six months of the year may have fallen by 20 percent to 30%. It cited a microblog post by Li Bin, the company’s executive vice president, which said its results were hurt in part by discounts to consumers as well as by heavy investments, and said the result “is in accordance with the company’s long-term strategy.” On Monday its shares, which trade in the southern Chinese city of Shenzhen, fell 10%. -By Carlos Tejada and Paul Mozur