Quarterly earnings growth augurs well for A-share firms

Aggregate profit in Q1 grows by 9.4% to $147.6b, underlining economic vitality

Improved earnings of companies listed on mainland bourses during the first quarter of the year augur well for the full-year financial results and are an indication of the vitality the Chinese economy, analysts said.

During the January to March period, aggregate profits of A-share companies topped 1 trillion yuan ($147.6 billion) and grew 9.4 percent year-on-year, reversing a full-year decline of 1.9 percent last year, data from Shanghai-based information provider Wind Info showed.

Meanwhile, aggregate return on equity (ROE)－a major gauge of profitability－stood at 9.8 percent, intact from the whole-year of 2018.

"Given that the downtrend in economic growth had largely eased by the end of the first quarter, the aggregate ROE of A-share companies has probably hit the bottom," said Xu Gao, chief economist at Everbright Securities Asset Management Co Ltd.

"Earnings growth may sustain at a rather high speed in the next few quarters," Xu said.

Wang Yang, an analyst with Soochow Securities based in Suzhou, Jiangsu province, said that apart from the economic recovery underpinned by supportive policies, cyclical factors also imply that earnings growth will continue to recover in the rest of the year.

According to Wang, the current profit cycle of A-share companies started from 2016 and should end with recovery this year, as the cycles usually last for 12 to 14 quarters.

This year's gradual recovery in earnings growth could help the A-share market to withstand external uncertainties, said Yan Xiang, an analyst with Shenzhen-based Guosen Securities.

"It is quite different from 2018 when earnings growth of most companies deteriorated. Earnings growth, a determinant of the market trend, is likely to be on the recovery path," Yan said in a note.

Some analysts held a more prudent opinion that a sustainable recovery in earnings growth may come later, as a large portion of the recovery in the first quarter is attributable to financial stocks, and notable improvements in revenue growth have not emerged.

During the first quarter, the aggregate revenue of A-share companies grew by 10.9 percent year-on-year, compared with 11.5 percent for the whole of 2018, according to Wind Info.

Analysts from Huatai Securities pointed that liquidity condition of listed companies has improved in the first quarter, with nonfinancial companies' cash flow generated from business operations having begun to cover the cash flow needed by investments.

This positive change could mean that capital expenditure of listed companies may accelerate in the second half of this year, spurring fixed-asset investment from a macro perspective.

Other signs of a more vigorous Chinese economy were also visible in the quarterly financial results, including an accelerated transition to innovation-based growth.

According to Wind Info, sectors like communication, non-banking financials and computers topped the earnings growth of all sectors of the A-share market in the first quarter.

"The communication sector registered a 310-percent growth in profits in the first quarter, bolstered by the acceleration of 5G infrastructure construction and the recovery of industry giant ZTE Corp," said Wang Yi, chief strategist at Shenzhen-based Great Wall Securities.

In the future, as large-scale commercial uses of 5G are poised to take place, profitability of related companies will continue to see improvements, he said.

Listed companies have also stepped up innovation capabilities. In 2018, Shenzhen-listed companies increased their aggregate research and development expenditure by 22.3 percent, with 11.4 percent of them having R&D expenditure in excess of 10 percent of their revenue, data released by the Shenzhen Stock Exchange showed.