China Faces Gloomy Earnings Season Amid Doubts Over Stimulus

Article content

(Bloomberg) — China’s stimulus campaign came too late and was too small to have a significant impact on full-year corporate earnings, according to analysts, setting investors up for a disappointing earnings season.

Article content

Article content

China Merchants Securities Co., one of the country’s largest financial brokerages, expects profits of listed companies on the mainland to show a decline for 2024. China International Capital Corp. expects profits to remain flat. UBS Securities expected earnings growth of just 1% for companies in the CSI 300 index.

Article content

These forecasts point to a worrying answer to one of the key questions facing investors in China’s stock market: When will Beijing’s stimulus measures boost corporate profits? Stock prices rebounded following the central bank’s stimulus campaign in late September, but have fallen since then. Many investors say a lasting turnaround will depend on a rebound in earnings.

“The fourth-quarter stimulus push was not enough to reverse earnings performance in 2024,” said Shen Ming, a director at Beijing-based investment bank Chansun & Co. He said that the impact is not large enough and the measures do not benefit all industries globally.

Protracted uncertainty over China’s economy has prompted analysts to frequently revise their earnings estimates. Forward earnings per share expectations for members of China’s benchmark CSI 300 index are now around their lowest level in nearly seven years. The index trades at 12.5 times forward earnings, just below the five-year average.

Article content

Article content

While the CSI 300 rose nearly 15% last year, breaking a three-year losing streak after central bank stimulus, the rally lost momentum in the fourth quarter, and investors appear to need more stimulus to keep them happy. The index is down nearly 4% this year, making it one of the worst-performing major indices in the world.

Recent economic data highlights the challenges facing investors in China. Consumer inflation weakened to near zero at the end of last year, while factory contraction extended into the twenty-seventh month. Manufacturing activity also expanded at a slower pace in December. Deflation impacts corporate profits, reducing revenues and weakening consumer confidence.

Energy companies are exposed

Chinese energy companies are among those likely to report tepid earnings over the next few weeks, hurt by lower prices for some commodities and weak demand from manufacturers. CICC analysts including Li Qiusuo wrote in a note on Monday that most upstream and upstream sectors may suffer larger year-on-year earnings declines.

Renewable energy companies are also at risk. Daiwa Capital Markets downgraded its rating on Chinese solar stocks to negative on Monday, citing its bleak outlook for the industry over the next two years.

Article content

“The capital market is very optimistic about the profitability of China’s solar industry in 2025, which may be a risk factor for solar stock prices,” Daiwa analyst Dennis Ip wrote in a note.

Shares of industry leaders, including Longi Green Energy Technology Co., jumped. and Tongwei Co., Ltd. and Flat Glass Group Co., Ltd. This week, exceeding the benchmark index.

Read: Chinese markets show increasing alarm about deflationary spiral

There will be some bright spots for investors. Financial institutions, especially non-banks, are likely to benefit significantly from the stock market rally in the fourth quarter, according to CICC, continuing the trend seen in the third quarter. But the prevailing tone is skeptical.

Stocks in the MSCI China Index are likely to miss earnings expectations, Morgan Stanley said in an investor presentation this week, and pointed to a potential deterioration in both earnings estimates and valuations in 2025.

There have been “thirteen consecutive quarters of missing profits for Chinese stocks, and that is likely to come,” according to analysts including Laura Wang.

The bank suggested investors stick to defensive names, and avoid car companies, consumer names and real estate developers.

Article content