Skip to main content

Chinese PER & Earnings Growth

At the end of August, 852 Shanghai-listed companies and 487 Shenzhen-listed firms reported their earnings for the first half of this year. The aggregate net profit of the Shanghai companies was 290.3 billion yuan (US$38 billion), up 69.2 percent year on year, while their aggregate income was 2.69 trillion yuan, up 24.9 percent. Shenzhen-listed firms reported a combined 99.23 percent increase in aggregate net profits at 47.52 billion yuan, while aggregate income was up 28 percent at 754.52 billion yuan.

Blue-chip companies reported the best performance, with their aggregate net profits accounting for 77.4 percent of the total in Shanghai. The aggregate net profit of the top 30 Shenzhen firms jumped 77.23 percent to 27.47 billion yuan, 57.8 percent of the total for all listed firms. Companies in the financial, non-ferrous metals, excavation and real estate sectors performed well. Seventeen Shanghai-listed companies in the financial sector enjoyed a combined net profit growth of 74.1 percent.

That's the often uttered fundamental factor in explaining high PERs accorded to China firms. Its the sustainability and quality of growth which are needed to be examined further. Now, a simple analysis would show a disparity in Revenue & Net Profit growth patterns. Herein lies the pandora's box.

Revenue Growth / Net Profit Growth

Shanghai 24.9% / 69.2%

Shenzhen 28% / 99%

You cannot have such disproportionate jumps - but you can I guess, if the employees all agree to have their salaries reduced by 40% every year; or you can manufacture a product 30% cheaper with every progressive year. Some disproportionate jumps can be explained via "extraordinary gains" such as asset sales, disposal of subsidiaries at a profit or even "revaluation gains" of land and buildings - all of which are one-off and non-operating, hence non-important (sic).

The magic elixir is investment income contributed most to profit jumps. The total investment income was 10.4 billion yuan on the Shenzhen exchange, 15.33 percent of the total. I believe the proportion for Shanghai listed firms could even be higher, closer to 25% of total. That may not sound like sizable but this is the actual percentage following a 70%-99% jump in base value. In other words, the investment income in 2007 as a % of 2006 total net profit should be in the region of 35%-45%!!!

Sure, the operating performance is still solid after you strip out investment income from their net profits, but it goes a long way to challenge the sustainability of earnings growth and the quality as well. Investment income is NOT recurring income, it could be huge losses (really big ones) in one of two financial years ahead though.

To be fair, what we have in China corporate profits is part earnings driven and part investment income driven. When investment income make up a sizable portion of net profits, many silly decisions get made:

a) over reliance on trading and investments
b) misallocation of capital towards trading and investment at the expense of funding organic growth, necessary capital investments and r&d expenditure

c) over-reliance on local investments will cause many to stay domestic, and not consider to go global to expand their reach

d) the exponential domino knock-on effects of a 30%-40% correction will be very severe, and could cause many companies to kill off otherwise healthy businesses

Just a reminder, just a reminder ... till then, China bull is alive and well... still. But don't paint the bull up more than what it deserves to be, just a bull, who will die someday.


Popular posts from this blog

My Master, A National Treasure

REPOST:  Its been more than two years since I posted on my sifu. This is probably the most significant posting I had done thus far that does not involve business or politics. My circle of close friends and business colleagues have benefited significantly from his treatment.

My Master, Dr. Law Chin Han (from my iPhone)

Where shall I start? OK, just based on real life experiences of those who are close to me. The entire Tong family (Bukit Kiara Properties) absolutely swear that he is the master of masters when it comes to acupuncture (and dentistry as well). To me, you can probably find many great dentists, but to find a real Master in acupuncture, thats a whole different ballgame.

I am not big aficionado of Chinese medicine or acupuncture initially. I guess you have to go through the whole shebang to appreciate the real life changing effects from a master.

My business partner and very close friend went to him after 15 years of persistent gout problem, he will get his heavy attacks at least…

PUC - An Assessment

PUC has tried to reinvent itself following the untimely passing of its founder last year. His younger brother, who was highly successful in his own right, was running Pictureworks in a number of countries in Asia.

The Shares Price Rise & Possible Catalysts

Share price has broken its all time high comfortably. The rise has been steady and not at all volatile, accompanied by steady volume, which would indicate longer term investors and some funds already accumulating nd not selling back to the market.

Potential Catalyst #1

The just launched Presto app. Tried it and went to the briefing. Its a game changer for PUC for sure. They have already indicated that the e-wallet will be launched only in 1Q2018. Now what is Presto, why Presto. Its very much like Lazada or eBay or Alibaba. Lazada is a platform for retailers to sell, full stop. eBay is more for the personal one man operations. Alibaba is more for wholesalers and distributors.

Presto links retailers/f&b/services originators with en…

How Long Will The Bull Lasts For Malaysia

Are we in a bull run? Of course we are. Not to labour the point but I highlighted the start of the bull run back in January this year... and got a lot of naysayers but never mind:

p/s: needless to say, this is Jing Tian ... beautiful face and a certain kind of freshness in her looks and acting career thus far

I would like to extend my prediction that the bull run for Bursa stocks should continue to run well till the end of the year. What we are seeing for the past 3 weeks was a general lull where volume suddenly shrunk but the general trend is still intact. My reasons for saying so:

a) the overall equity markets globally will be supported by a benign recovery complemented by a timid approach to raising rates by most central banks

b) thanks to a drastic bear run for most commodities, and to a lesser extent some oil & gas players, the undertone for "cost of materials" have been weak and has pr…