Pessimism prevails in China as traders overlook key earnings

(Bloomberg) — Chinese corporate earnings have shown resilience under tough lockdowns, but traders are draining pockets of frustration and dumping stocks as analysts continue to trim forward estimates.

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Some market players have seen shares tumble after a good earnings presentation, as investors chose to focus on the division’s failures or simply used the event as an opportunity to profit. A striking example was battery giant Contemporary Amperex Technology Co., whose stock fell nearly 6 percent earlier last week, even as an 82 percent rise in earnings beat estimates.

Total earnings per share surprised a 9.4 percent rise for more than half of the 715 members of the MSCI China Index that reported second-quarter results, according to Bloomberg Intelligence calculations. While that might have cheered traders bracing for the worst quarter in a row when the economy barely grew, China’s index fell more than 3 percent last month, trailing the Asian benchmark’s rise of nearly 1 percent.

That underscores widespread investor pessimism as concerns ranging from the property crisis to power shortages and persistent Covid outbreaks cloud the outlook for Chinese stocks. Even interest rate cuts and fiscal stimulus measures have failed to lift sentiment.

“These are indeed tough times, and with earnings season wrapping up next week and some companies waiting until the last minute to break the bad news, it’s easy to find any kind of excuse to win,” said Wang Mingli, executive director. to Shanghai Youpu Investment Co. “For some, there don’t seem to be enough reasons to buy.”

Twelve-month forward earnings estimates for the MSCI China index are expected to decline for the third straight quarter. They are down 1.3 percent since the end of June, after falling 9 percent in the previous three months, according to data compiled by Bloomberg.

Market reaction

Shares in CATL, China’s third-largest by market value, just ended their biggest weekly drop since early July as a year-on-year decline in battery margins disappointed investors.

Gaming giant NetEase Inc. fell more than 6 percent in Hong Kong on Aug. 19, even as analysts at Citigroup called its results a “steady pace,” while WuXi Apptec Co., a health-care major, earlier lost 4.4 percent after from a higher-than-expected 73% jump in profits.

Likewise, electric vehicle makers Li Auto Inc. and XPeng Inc. fell despite strong revenue growth that beat estimates as traders stuck to conservative third-quarter delivery guidance.

Thanks to such reactions, there was not much deviation of stocks between winners and losers. Overall, the consensus-beating companies saw their shares beat the MSCI China index by an average of just one percentage point in the first day of trading after the results, according to Bloomberg Intelligence. That’s up from 1.5 percentage points in the first quarter.

“Miss Broad Base”

While gains for MSCI China have held up well so far, with the weight of technology providing a boost, a Morgan Stanley report showed the number of onshore non-consensus listed companies is on track to be the largest since 2018.

Nearly 28% of so-called A-share companies that have reported earnings so far have missed consensus, strategists including Fran Chen wrote in a report last week, adding that they see “more room for consensus earnings revisions down.” .

This “broad-based failure” is a clear sign of macroeconomic weakness, they wrote.

Share price declines were also sharper for onshore companies. The benchmark CSI 300 Index has fallen 1.5 percent so far in August, the worst performance among national benchmarks in Asia.

All this comes in the context of a worsening outlook for China’s economy. Economists polled by Bloomberg expect growth of 3.7 percent this year, well below the official target of 5.5 percent and down from 4 percent at the end of July.

The weakness in stocks “could also be because the impact of stimulus measures so far has been limited,” said Zhao Yuanyuan, fund manager at Shenzhen Qianhai JianHong Times Asset Management Co. “Macroeconomic data suggests that a sequential improvement in earnings will be difficult until the third quarter.”

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