Susan Weerts'  Instablog

About 1,600 out of the total 1631 listed companies will announce their third quarter results in October. The interim report showed that overall the net profit in 2Q was CNY 484.752 Billion ($70.97 Billion), down 14.58% from a year ago but up 36.27% comparing to 1Q. 

 

Analysts were upbeat on the third quarter earnings since the accelerating economics activities kept the companies buoyant on the earning growth. However, they disagreed on how much the renewed economics would be translating into the companies’ bottomlines. Many expected the 3Q earning growth above 40%.

 

The investors got some glimpses of 3Q earnings from the data released by State-owned Assets Supervision and Administration Commission of the State Council (SASAC) on September 19. Total revenue of all the State-Owned Enterprises (SOEs) in the first 8 months of 2009 reached CNY 13.68trillion, a YOY 3.5% decline and a MoM 1.2% increase. The revenue by the central government enterprises was at CNY 8.62trillion, down 2.3% while by local stated-owned enterprises was at CNY 5.06trillion, down 5.4%. Net profit stood at CNY 813.51billion, down 16.4% from a year ago but up 4.3% from the previous month. The central government enterprises were at CNY 603.14billion, down 13.8%. The local enterprises were at CNY 210.37billion, down 32.6%. Total cost of SOEs over the same periods was down 2.4% at CNY 12.87trillion. Gross margin and net margin was at 6% and 5.3%, down 1.2% and 2.1% respectively.

 

SOEs owed CNY 1.23trillion on back tax, up 1.3% and had paid CNY 1.28trillion, up 0.9%. Inventory was up by 7% from a year ago and inventory turnover at 2.8, 0.3 lower than last year. Account receivable turnover was at 6.6, down by 1.1. Asset turnover was at 0.4, the same as last year.

 

Petrochemical and Automobile showed a sign of significant earning growth in the first 8 months. Building Materials, Construction, Real Estate, Tobacco achieved stable growth. Steel, nonferrous metals, petroleum, and machinery were able to slow their earning decline. The coal industry continued its earning decline.

 

As by September 26, 621 companies revised their 3Q earning guidances. 242 companies or 38.97% raised their guidances while 271 or 43.64% revised downward. There are 7 companies reporting in next week. Bulk of them will announce the results after October 20. However, for those companies with a sharp run-up before its earning, analysts warned a possible “buy on rumors and sell on news.

 

Besides the report on the last trading day of September that CNY 14 billion worth of fund was approved to release into the market, it was rumored that CNY 8.0 billion China National social security fund was quietly working its way into A-shares. According to China time, social security fund started to unload its holdings on H shares in the past 3 months and planned to reposition the fund on A shares to take advantage of the divergence on A-H shares premium. An analyst in State Yuan Securities didn’t believe that the fund will cloud the market with some giant orders in one day. The fund managers will optimally deploy their trade execution strategies to minimize market impacts.
 

The market experienced a blowout 3Q in capital raising. The amount proposed exceed CNY 10billion in the last couple months. The data from WIND indicted that the listed companies completed CNY 211.53billion capital raising, either through private placements or second public offers, by the end of September. Corporate Bonds reached CNY 393.48billion. Additional CNY 628.06billion capital raising plans were submitted and approved to hit the market in the remaining 2009. The unprecedented capital raising activities will seriously drain the market liquidity and dilute share value.
 

Capital Raising activities mostly came from cyclical sectors, such as Real Estate, Banking, Brokerage, Coal, Iron and Steel and Nonferrous Metals. Real estates and Bank took a lion share. Banks were under pressure to raise capital to improve their capital adequacy ratio. However, many companies in the real estate sector didn’t seem lack of capital. In its 2Q report, Vanka had CNY 26.88billion in cash and cash equivalents. Yet, its latest capital raising plan was Vanka’s third filing so far this year.
 

50 companies will be allowed to unlock their restricted stocks in October. The Chinese Security Law stipulates that certain percentage of shares have to be restricted from trading at a company’s IPO. These restricted shares can only be released into the circulations after certain stipulated time horizon. The market value of these unrestricted shares in October is estimated at CNY 1.9 trillion, 20% of the current market value of Chinese stock market. Analysts differed on how the unrestricted shares will affect the market. The Chief Economist at XiangCai Securities sees no major impact on the market since these unrestricted shares are mostly held by the central government entities that are less likely to dump the shares into the market quickly. However, several analysts pointed out the psychological effect caused by allowing 20% of market value of the entire Chinese stock market free-floating.
 

Sinopec (SNP) will be allowed to float CNY 646.8billion worth of stocks on Oct. 12. That is, it will increase its current A-share Outstanding by 444.81%. China National Petroleum, the largest shareholder of Sinopec that holds 75.84% of Sinopec’s Market values, will be allowed to trade these unrestricted shares freely.
 

China Industrial and Commercial Bank(ICBC) will have 236.012billion-unrestricted shares with market value of CNY 1.16trillion on October 27, which will increase its current A-shares outstanding by 1578.68%. Bulk of these unrestricted shares were owned by the Ministry of Finance and Central Huiji Investment Ltd, the local arm of China International Capital Corp. (CICC) - the largest sovereign fund in the world. In its press release on October 11, HuiJi indicted that in order to boost the market confidence, it had increased its holding on ICBC from 35.41% to 35.42% and would continue purchasing more shares as needed within a year. Many believed that the action by Huiji signaled that it had no intention to dump the shares in a short term, which might establish a short term policy bottom around 2700. However, many also pointed out that merely 0.01% increase was not very convincing.

 

The Chinese stock market experienced a roller-coast ride in 3Q. After reaching its new high at 3478 in July, it dived 20% in August. The market in September was lackluster and trading volume has been sluggish.
 

Chinese stock opened strongly on the first trading day of October. Strong global rally and the higher-than expected retail sales during the long National holiday propelled the market up by 4.76%. All the stocks traded on Shanghai exchanges, except the halted ones, advanced more than 1%. The trading volume was only up slightly however stayed below the average. The low trading volume indicted that the investos were lack of convictions and continued remaining on sideline. Since the major economics news will be out only after mid-October, the market will likely remain in a tight trading range until then. The market is likely to retests its near-term bottom 2639 set on September 1. A bounce back from 2639 might push the market over 3300 and possibly set up a stage to retest the new high set in July. However, a break below 2639 might mean a drop to the 2229 level.
 

The people who hold the pessimistic views believed that the current rally was largely a liquidity-driven rally, fueled by the CNY 4trillion government stimulus plan and CNY 8trillion bank loans. Even though the central bank of China emphasized on moderately loose monetary policy, there are no doubts that the liquidity provisions start tightened. During the International Monetary Fund conference on October 5, Mr. MingKang Liu, the Chairman of CBRC, pointed out that the new bank loans in September were between CNY 300-400billion, lower than CNY 410.4billion in August. The market expected a much higher figure. Aggressive Capital raisings and various IPOs will severely drain the market liquidity and erode the share values. Many believed that the market expectations on economics and company earning might be overly rosy, which leaves little room for errors. 
 

On the other sides, many analysts, such as JP Morgan Chase, believed that A shares were relatively cheap. As of September 28, the price-earning ratio of Shanghai Composite was 20.5, below the average 2006 price-earning ratio 21.2. A-H share premium hit a new low as well.
 

Retail and Auto sectors will continue outperforming the general market. The retail sales during the long National holidays reached CNY 570billion, up 18% from a year ago. The auto sales in September remained strong. The auto sales by GM were up by 55.6% in September.
 

It is interesting to see how the recent price reductions on Chinese fuels and pharmaceutical products by National Development and Reform Commission (NDRC) will affect the company performance in the long run. NDRC reduced Chinese fuels’ price by CNY 200 per ton at the end of September. The demands on Chinese fuels started trending up in August. NDRC mandated more than 2,000 drugs to low their retail prices effectively after October 1, 2009.