China Inc's profit surge comes to a screeching halt

SHANGHAI (Reuters) - China's listed companies, after delivering robust earnings growth every quarter for two years, are seeing profits start to shrink as the global financial crisis hits more severely than many had expected.

Slumping demand and falling prices have hit Chinese industries from steel to automobiles to airlines, and the highly profitable financial sector, while largely insulated from the worst of the global credit crisis, will see its bottom line eroded by a slowing economy and a deflating property market.

"The impact of the global financial crisis on China's real economy and corporate operations has just begun to make itself clear," said Zheng Weigang, head of research at Shanghai Securities.

"Many industries, such as steel and chemicals, have seen their sales prices nearing their cost points," he said.

"November and December will see several major sectors fall into losses, boding ill for corporate earnings growth in the fourth quarter and next year."

In the third-quarter earnings reporting season that ended on Friday, the 1,600-plus firms listed on the Shanghai and Shenzhen stock exchanges posted a 20 percent drop in net profit from the second quarter, according to calculations by state media. Year-on-year comparisons for the quarter were not available.

For the first nine months of the year, net profit was up 7.1 percent year-on-year at 782 billion yuan ($114 billion), slowing sharply from 16 percent growth in the first half, the calculations showed.

Worse news lies ahead.

SHRINKING MARGINS

Analysts estimate that more than half of China's listed firms have already seen their profit margins drop in the third quarter from the same period of last year.

That means the only way they could sustain earnings growth is by selling more products -- a tough task as global recession crimps exports and China's slowing economic growth dampens domestic demand.

Among 10 analysts, economists and fund managers polled by Reuters this week, all but one forecast flat to weaker earnings for listed firms in the current quarter compared with a year earlier, while for next year they projected declines ranging from 2 to 10 percent.

"Earnings growth is certain to be negative in 2009, but the extent of the decline should still be in single digits, with the first half expected to be worse than the second half," said Wu Haijun, Shanghai principal at Power Pacific Corp of Canada, a foreign investor in Chinese stocks.

Earnings at financial firms, the primary engine of China's profit growth accounting for some 40 percent of the total at all listed companies, slowed significantly after powering total increases of 43 percent in 2007 and 67 percent in 2006.

The country's biggest insurer, China Life (601628.SS) (2628.HK), posted a drop of more than 70 percent in third-quarter net profit, as its investment income sank with the stock market. China's benchmark Shanghai Composite Index .SSEC has dropped more than 70 percent over the past year.

Growth in the combined net profit of 14 listed banks slowed to 50 percent year-on-year in the third quarter from more than 70 percent in the first half.

"Weak markets are pushing savers to put their money in longer-term deposits, raising banks' costs," said Wu Yonggang, senior banking analyst at Guotai Junan Securities in Shanghai.

"Also, banks' ability to secure profitable lending rates has been weakened greatly as poor profits at industrial companies has hurt demand for loans."

SILVER LINING

Airlines and metals, which once accounted for more than 10 percent of total corporate earnings, are faring even worse.

China's top three airlines all posted losses for the third quarter while analysts said the steel and aluminum sectors would fall into the red in the fourth quarter.

There are some silver linings, however, amid the gloom.

Refining giants PetroChina (601857.SS) (0857.HK) and Sinopec Corp (600028.SS) (0386.HK), which account for 20 percent of all of China's corporate earnings, posted better-than-expected third-quarter results and analysts are upbeat about their prospects, as a retreat in oil prices bolsters their refining margins.

"We are surely not saying the stock market is bottoming out right now, given the poor global financial conditions," said senior analyst Ren Chengde at Galaxy Securities in Shanghai.

"But China's policy shift to focus on growth may prevent a meltdown in key sectors such as property."

China's central bank cut interest rates this week for the third time in just six weeks, while regulators have taken a series of steps to bolster asset prices, including lowering minimum payments for housing mortgages and raising export tax rebates for sectors such as textiles.

In addition, the stock market is now valued at a record low of 14 times historical earnings, so even panic selling should be limited in the near term, analysts said.

($1=6.84 Yuan)

(Editing by Edmund Klamann and Lincoln Feast)