China Inc. earnings rise on resource rebound, public spending
Net profit rises 16% on previous year but sustainability concerns remain
KENJI KAWASE, Nikkei deputy editor, and YUSHO CHO, Nikkei staff writer
HONG KONG/ SHANGHAI -- All of a sudden, corporate China is making a lot more money again. Net profit for listed companies in the first half grew by 16% on the previous year, thanks to rising resource and property prices along with state-supported infrastructure spending.
Companies for which comparable 2016 figures are available logged a total of 1.674 trillion yuan ($251 billion) in black ink for the January-June period, data from research firm Shanghai DZH shows, recovering from a 4% drop a year earlier. The firm surveyed 3,357 companies, covering virtually all of those listed in Shanghai and Shenzhen bourses, many of which have a dual listing in Hong Kong. Revenues climbed almost 20% over the same period to 18.166 trillion yuan.
One of the major driving forces was a rise in resource prices.
PetroChina, the country's largest oil and gas producer, recorded 12.68 billion yuan of net profit in the first-half, a 24-fold jump from the same period last year. Lifted by a rebound in crude prices, the latest results beat its own 9 billion yuan projection to 11 billion yuan.
The company is paying out the full figure as an interim dividend to shareholders. The announcement, however, sparked speculation about its timing, when the government is pushing for "mixed-ownership" reforms -- an attempt to bring private investors into large state-owned companies -- as the top beneficiary of a heavy dividend will be its state-owned parent firm China National Petroleum Corporation, or CNPC, which has an 86% stake in the listed company.
Wang Dongjin, vice-chairman and president at PetroChina, justified the hefty payout, stressing that it was the result of "improving business operations and cash positions." Wang is also the vice president of CNPC.
Combined net profit of the three state-owned oil companies including PetroChina jumped 350% on the year to 56.7 billion yuan. China Petroleum & Chemical (Sinopec) rose 40% to 27.9 billion yuan, while offshore driller CNOOC swung to a 16.2 billion yuan profit from a 7.7 billion yuan loss. During the period, Brent oil prices, the international crude benchmark, soared 30% on the year to about $51.80 per barrel.
The resource price bonanza also benefited coal producers. China Shenhua Energy, the largest by volume in the country, recorded a 142.9% year-on-year jump in its net profit for the first six months to 26.3 billion yuan, on the backdrop of rising coal prices.
The company expects coal prices to be range bound at around 550 yuan per ton throughout the year, suggesting a year-long rally to go on.
On the same day, the country's state-owned assets supervisor announced a merger between its parent, Shenhua Group, and electricity supplier China Guodian to form the new entity National Energy Investment. Shenhua Energy, like PetroChina, surprised the market in March by announcing a special cash dividend totaling 49.92 billion yuan, far exceeding the company's full-year net profit for 2016. Observers widely speculated the move was aimed at funneling cash to its wholly state-owned parent, which has a 73% stake in the listed company, before the merger.
Metal miners were also winners. Zijin Mining Group saw its first-half net profit nearly tripled on the year to 1.5 billion yuan. For this period, the country's largest gold miner benefited from copper and zinc, and the company intends to take further advantage of rising prices through enhanced production.
The Fujian-based miner expects full-year zinc output to rise to 280,000 tons from 250,000 tons in 2016, which could make it "the largest zinc producer in China," according to its Chairman Chen Jinghe.
As state-directed cuts to production capacity tightened the steel market, Baoshan Iron & Steel logged a 65% increase in net profit to 6.17 billion yuan, while revenue soared 59% to 169.93 billion yuan.
Four sectors - resources and mining, chemicals, nonferrous metals and steel - saw combined net profits of 115 billion yuan, or about 60% of the improvement among nonfinancial listings, which came to 196.8 billion yuan in all.
The global recovery in cargo transport saw a windfall for Chinese players. State-owned Cosco Shipping Holdings recorded a net profit of 1.86 billion yuan, a sharp turnaround from a net loss of 7.17 billion yuan in the same period last year, while revenue jumped 45.6% to 43.45 billion yuan on the year.
The shipping liner is aiming to complete by December a $6.3 billion takeover of Hong Kong-based Orient Overseas Container Line, a 50 year-old company founded by the Tung family. After completion of the deal, Cosco will become the world's third-largest container liner with an estimated capacity of more than 2.9 million TEU (20-foot equivalent units), just behind Maersk and Switzerland's Mediterranean Shipping Company.
State-owned logistics peer Sinotrans also benefitted from a "warming market," according to its Chairman Zhao Huxiang. In the first half, the company recorded a 2.1% increase in net profit at 988 million yuan on a 27% jump in revenue from a year ago.
The positive cycle spilled over to port operators, including state-owned China Merchants Port Holdings. First-half sales rose 5% to 4.05 billion Hong Kong dollars ($518 million), while net profit soared 86% to HK$3.14 billion, helped by higher sales at group unit China International Marine Containers.
Apart from windfalls from rising resources prices and global economic recovery, some sectors owed much of their growth to supportive policies from Beijing. State-owned contractor China State Construction Engineering enjoyed double-digit growth in both revenue and net profit to 525.25 billion yuan and 18.03 billion yuan respectively, thanks to a growing number of government-backed infrastructure orders.
Sany Heavy Industry, which makes shovels and cranes, saw its net profit skyrocketed by over eightfold to 1.16 billion yuan, helping machinery sector's overall net profit to climb by about 40%.
The benefits of government's outbound policy were also felt at state-owned companies. China Communications Construction's first-half revenue rose 3.8% to 189.29 billion yuan from a year ago and net profit was up 8.7% at 7.87 billion yuan, lifted by a 52% jump in new contracts, including from abroad initiated by President Xi Jinping's Belt and Road Initiative.
"We saw a big jump in overseas contracts thanks to the Belt and Road Initiative," said Fu Junyuan, executive director and chief financial officer, at the Aug. 30 press conference in Hong Kong. Last year alone, the company signed 100 Belt and Road-related contracts worth $10 billion, bringing the total to $37 billion to date.
Mixed outlook for real estate
Real estate in general remains a lucrative sector. Riding on a property boom, Guangdong-based Country Garden saw its net profit jump 39.2% on the year to reach 7.5 billion yuan in the six months ended June. First-half revenue rose 35.5% to 77.74 billion yuan, lifted by a 131% jump in contracted sales from a year ago.
The country's largest developer by sales in the first half said it now expected 2017 sales to reach 500 billion yuan, 25% more than its previous forecast, despite the government's tightening measures to curb soaring property prices.
"I don't know why I always get questions asking whether our target is too conservative," President Mo Bin told reporters on Aug. 22. He said the upward adjustment in its sales target was to "comply with government policies," which aimed to "ensure the healthy development of the market." Such polices, including curbs on land and home purchases, have been rolled out in major cities across China.
State-owned China Overseas Land & Investment also raised its HK$210 billion sales target by 10% for 2017, after posting a 25.2% increase in first-half core profits at HK$21.65 billion, buoyed by revaluation gains and a property boom.
"Our sales are not really slowing," said chairman and chief executive Yan Jianguo. Despite soaring land prices, Yan said the company had ramped up efforts in land acquisition, adding nine sites in July alone to the 27 sites it bought in mainland China and Hong Kong in the first half.
However, some major real estate players have also sounded a cautionary note. China Evergrande, one of the country's most indebted developers, is to prioritize the reduction in its net debt ratio to 140% by next June and subsequently to 70% by June 2020, down from 240% currently.
"As a developer with the largest land reserve of 276 million square meters in 233 cities, we have a solid basis for a transformation," said Vice Chairman and Chief Executive Xia Haijun, stressing the developer would prioritize profitability over business scale for now.
Evergrande's smaller rival, the Hangzhou-based Greentown China, predicts home prices will fall from early next year, following the latest government measures. According to chief executive Cao Zhounan, China's property market has reached a "critical juncture," as if "enemies are at the city walls." Speaking to Hong Kong reporters on Aug. 28, Cao said "the bigger you are and the more you are chasing after scale, the sooner you'll die."
Cao's bearish remarks came even though the country's ninth-largest homebuilder saw an 8% increase in first-half revenue at 10.45 billion yuan on record contracted sales of 59.5 billion yuan, while its net profit nearly doubled to 1.23 billion yuan, largely bloated by a 1.6 billion yuan gain from disposing a serviced apartment project in Beijing and two plots of land.
Automotive sector sluggish
The automotive sector was one of the sluggish ones, profit growth below average at 9%. China's auto sales increased by less than 4% for the half year -- a crawl compared with the first six months of 2016, when tax breaks for compact cars helped drive sales up 14%.
BYD, China's biggest manufacturer of environment-friendly cars, logged a net profit of 1.72 billion yuan in the first six months of 2017, down 23.8% from a year earlier. It also forecast a decline of 20-25.2% in its net profit to 2.74 billion yuan to 2.93 billion yuan for the January-September period. Sales for the half year edged up merely 0.2% on the year to 43.82 billion yuan, less than the average market forecast for 45.32 billion yuan.
Beijing's current efforts to bolster its economy are designed largely to put on a show of prosperity ahead of the Communist Party's five-yearly National Congress in October, when the country's next generation of leaders will be chosen. The government could slacken its all-out approach after that critical event concludes.
Authorities already are preparing for such a turn. The Chinese Academy of Social Sciences forecasts gross domestic product growth of 6.8% on the year in the July-September quarter. Mao Shengyong, a spokesman for China's National Bureau of Statistics, has said it would be normal for growth to decline by 0.1 or 0.2 percentage points in the second half. With the country on track to hit its target of around 6.5% growth this year, Beijing seems eager to take its massive stimulus efforts down a notch.
Potential downside risks may come from robust sectors themselves. State-owned Anhui Conch Cement on Aug. 21 announced net profit for the first six months of 2017 had doubled from the same period last year to 6.738 billion yuan, beating the 5.205 billion yuan median forecast by analysts compiled by QUICK-FactSet, thanks to a significant push-up in cement prices under the government-led supply side reform.
However, some market players remain skeptical. Patrick Xu, an analyst at Nomura International, maintained a "reduce" rating for the cement maker and kept his target price at HK$20, about 30% lower than the closing price on Sept. 1. Xu expects cement price rises to moderate in the second half of the year, "as stagnant demand is outstripped by capacity growth." Anticipating the main engine of profit growth to wear down, he forecasts earnings growth to decelerate to 11% in the second half of the year and sees "no growth" for the following two years.
Nikkei staff writers Jennifer Lo and Joyce Ho in Hong Kong contributed to this story.