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Business trends

China's corporations report weak first-half earnings

Economic stimulus lifts construction industry but ignores retail

A worker installs steel rebars at a highway construction project in Hami, China. Infrastructure investment grew during the first half of the year.   © Reuters

SHANGHAI -- Chinese corporations have struggled to improve earnings despite government efforts to juice the economy that have boosted the construction sector while industries dependent on consumer spending flounder.

Compared with the previous year, the net profit estimate for the January to June period inched up only 2% among roughly 1,700 companies that revealed earnings figures through Wednesday. Although that indicates a marked improvement from the nearly 30% profit decline in the last half of 2018, the recent growth is barely visible.

Nearly half of the companies analyzed by Nikkei performed poorly. Almost 340 businesses were in the red, while more than 450 suffered a decrease in the bottom line.

The enterprises analyzed in this report comprise almost half of the approximately 3,600 listed nonfinancial companies in China.

Corporate income growth started cooling in 2017, the same year the Communist Party selected its top leaders during the twice-a-decade party congress. Aggregate profit then shrunk on the year during the six months through December 2018.

Some of the downturn in earnings can be traced to a campaign against excessive debt, led by President Xi Jinping's administration. In addition, several Chinese companies booked goodwill impairments stemming from acquisitions in the past.

The slight improvement in the first half this year is almost entirely attributed to the public works programs. Infrastructure investment rose 4.1% during that period from a year earlier. Although the gain is minor compared with past initiatives, the positive impact on a select group of companies was substantial.

The construction machinery sector boosted its profits. Sany Heavy Industry, a major player, earned an estimated net profit between 6.5 billion yuan and 7 billion yuan ($944 million to $1.01 billion) for the first half, or about double the 3.3 billion yuan posted the same time last year.

"Investments in transportation infrastructure and environmental projects are stable," said Wang Xin, an analyst at Shanghai-based Essence Securities.

At the end of May, a team from Sany visited Hubei Province in central China to land orders for projects, which included wind power generators and a rubble disposal site. A subsidiary, Sany Construction Industry, would handle some of the projects.

"We will continue to be in communications," said a deputy mayor in the province.

Zoomlion Heavy Industry Science and Technology, another construction machinery maker, appears to have tripled its six-month profit. XCMG Construction Machinery looks to have more or less doubled its take.

Both the machinery and cement industries raised net profits by more than 60%. Huaxin Cement and Shangfeng Cement are highly anticipated to grow profits between 50% and 100%. The real estate sector was profitable as well.

On the other hand, sectors dependent on consumer spending sputtered. The automobile market shrank by double digits in the first half, squeezing many automakers outside of the top tier. Chongqing Changan Automobile's sales tanked by over 30% to 820,000 vehicles.

The company ended up between 1.9 billion yuan and 2.6 billion yuan in the red, down from the 1.6 billion yuan profit a year earlier. The joint venture with Ford Motor delayed new model rollouts, which undercut unit sales.

Tianjin FAW Xiali Automobile also reported a first-half loss. Profit in the auto industry truncated 76%, as the afflictions affecting automakers spilled over to parts suppliers.

The black ink in retail and commerce sector retreated 40%. Profit at consumer electronics seller Suning.com reportedly dropped by more than 60%. The group runs a chain of 6,000 Suning Xiaodian shops, which resemble convenience stores, but the rapid expansion required heavy investments.

A Suning Xiaodian store in Xi'an: Suning.com has been opening more of these convenience stores, and heavy investment expenses weigh on earnings.

Bricks-and-mortar retailers have no choice but to keep adding stores due to stiff competition from online rivals. E-tailers Alibaba Group Holding and Pinduoduo are busy extending their client networks in rural areas and small cities. Supermarket operators like Zhongbai Holdings and Beijing Hualian experienced profit decreases between 80% and 90%.

The yearlong trade war with the U.S. has not greatly impacted corporate earnings as of now. ZTE, the telecommunications equipment supplier sanctioned by the U.S. last year, turned a profit in the first half. Hikvision, the surveillance equipment maker under the threat of sanctions, secured growth in black ink.

However, many more companies that export to the U.S. are poised to exit China. Capital expenditure within these borders will likely remain quiet. If dynamic risks echo to jobs and wages, this would further depress consumer spending. There are no signs that earnings in the second half will recover significantly.

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