Profit margins are becoming thinner due to increased costs and higher raw materials. Many US-listed China companies are reporting lower net income because they are experiencing higher labor costs. Looking at the most recent Five Year Plan published last year, rising labor costs will not go away in China: it is an explicit target of the central government to raise minimum salaries by 13% each year.
Compounded over 5 years, this makes 84%, almost a doubling of minimum wages from 2011 to 2015!
|Minimum Salaries & Increases for Selected Locations in China|
|Location 2011||Minimum Salary||Increase 2011 over 2010|
|[RMB per month]||[%]|
|Chongqing||710 to 870||27.9 on average|
|Zhejiang||950 to 1,310||19.0 on average|
|Jiangsu||800 to1,140||16.2 to 18.7|
|Hubei||600 to 900||20.3|
|Anhui||680 to 1,010||27.1 on average|
Even though the minimum wage increases already announced for 2012 have been more moderate, they will most probably be implemented: Beijing 8.6%, Shanghai 13% (to RMB 1,450 per month), Shenzhen 13.6% (to RMB 1,500/month), Sichuan 23.4% on average (to RMB 800 - 1,050/month). This is part of a concerted effort to reduce income gaps between the coast and the interior (minimum wages increase faster where they are lowest), as well as to reduce differences between the richest and the poorest in one location (average salary increases for 2012 are around 10% in Shanghai). Additionally, minimum wage increases intend to turn the domestic market into a bigger contributor to growth and reduce China's economic dependence on exports.
Despite the mixed results at some US-listed China companies, some companies have been hit too hard. Guanwei Recycling (NASDAQ:GPRC) went from levels above $1.40 to $0.89, despite the results not being bad at all. Only, the expectations were too high. The company announced a quarterly profit of $0.10, lower than expected, but still a nice profit in a slowing down Chinese economy.
Other US-listed companies have not been that lucky and are facing other problems. China Marine Food (OTCPK:CMFO) for example. First quarter results reflect depressed demand for the company's products and rising marketing costs. The effects of the radiation leaks in Japan and a clouding agent concern from Taiwan and China continuously affects both the company's food and beverage sales.
The clear downtrend in economic activity in China and the slow recovery in the West has impacted Chinese companies as well. Despite cost inflation, there are plenty of trading opportunities.
Guanwei Recycling could go back to levels of $1.70 or higher if investor sentiment improves and American Lorain could be snapped up by a domestic or foreign food company.
More and more institutional investors are willing to take a bet on US-listed China companies that have proven to be legitimate. The conference call of Guanwei for example was crowded with investors, a bullish sign for a company that will not disappoint us the coming quarters.