Mainland firms face profit slump as disruptions bite

Pandemic measures and rising cost of raw materials are eating into margins, brokers say

Companies listed in Shanghai and Shenzhen are facing a slump in earnings capacity this year as the war in Ukraine and Covid-19 disruptions sent prices of commodities from crude oil to lithium skywards, pressuring manufacturing costs and margins.

Profits rose by 4.1 per cent last quarter from a year earlier, according to data by China International Capital Corporation (CICC). They are poised to grow by 6 per cent to 10 per cent this year, according to Citic Securities. That would be the slowest growth in three years and represents a significant cooling from 18.4 per cent in 2021.

Soaring prices for raw materials benefited upstream industries, which generated a 58 per cent jump in average profit in the last quarter, the CICC data showed. Midstream industries grew their earnings by 7 per cent, while downstream players suffered a 7 per cent drop, it added.

Brokerages including Ping An Securities and Essence Securities warned earnings were likely to worsen this quarter amid curbs in Shanghai and 40 other mainland cities since late March. These regions account for about 35 per cent of China’s national output, according to Saxo Markets.

Growth might bottom out in the third quarter as policymakers rolled out more supportive measures, the brokerages said.

Slower earnings reflect dislocations in the economy as Russia’s invasion of Ukraine ramped up commodity prices while Covid-19 outbreaks disrupted supply chains and forced factories to shut down.

Even some of the nation’s biggest companies could not withstand the repercussions. Contemporary Amperex Technology, the world’s biggest maker of lithium batteries for electric cars, reported a 24 per cent slide in first-quarter profit due to rising raw materials costs.

The rally in energy and raw materials stocks, the only winning sectors among the CSI 300 Index’s industry groups this year, will probably continue, according to Citic Securities, China’s biggest brokerage.

“Earnings are expected to shift to the upstream companies this quarter,” said Qiu Xiang, an analyst at the Beijing-based brokerage. “Looking to the midstream manufacturing industry, they will continue to face the double whammy of shrinking demand amid the pandemic and cost pressure.”

Citic Securities predicted fullyear profit growth would recover to between 6 per cent and 10 per cent this year as Beijing took more steps to boost growth.

The Shanghai Composite Index rose by 0.7 per cent yesterday as China’s onshore markets resumed trading after a three-day holiday. Still, it is the worst performer among the stock benchmarks in Asia this year with a 16 per cent decline.

A Politburo meeting chaired by Communist Party chief Xi Jinping on April 29 signalled China might ease a year-long crackdown on the tech industry in a bid to revive growth.