October 23, 2018 / 10:00 AM / a year ago

CORRECTED-RPT-This week's earnings shine spotlight on China growth risk

 (Corrects paragraph 7 and 8 to remove reference that Wynn
Resorts reports this Wednesday and add that company has not
provided a date for its quarterly report. Corrects second
paragraph and table to remove reference to Wynn.)
    By Noel Randewich
    SAN FRANCISCO, Oct 22 (Reuters) - It's not the U.S. economy,
stupid. It's China's.
    That new risk has begun rippling across Wall Street as the
effects of a sharp slowdown in the world's No. 2 economy spill
beyond its borders and cut into U.S. corporate profits.
    How large a threat a slowdown in China's economic expansion
poses could come into sharp relief as chip makers and other
companies that rely on China for growth post quarterly score
    The list of potential victims is growing and is not limited
to U.S. companies. General Motors Co has suffered from
shrinking Chinese auto sales and Volvo on Friday warned it
expects truck demand in China to fall about 13 percent as the
construction industry cools.
    "The question investors will be asking is not necessarily
what the impact is for the current quarter, but, 'if China
continues to slow, what will the impact be for the rest of 2018
and 2019?'," said Credit Suisse analyst Patrick Palfrey.
    McDonald's Corp, 3M Co, Boeing Co and
Eastman Chemical Co all depend on China for more than 10
percent of their revenue, according to Refinitiv estimates, and
will report this week. 
    Wynn Resorts earned more than three-quarters of its
operating income from Macau hotels and casinos last year, the
biggest share for an S&P 500 company, according to Refinitiv.
Its Macau operating income jumped nearly 140 percent in 2017,
far outpacing 36 percent growth at its Las Vegas businesses. 
    Wynn has not provided a date for its third-quarter report.
    Caterpillar Inc, which reports results on Tuesday,
saw its construction machine sales in Asia Pacific surge 43
percent in the first half of the year, helped by construction
and infrastructure demand in China.
    In the second quarter, 3M Co's China and Hong Kong
organic local currency sales rose 12 percent, more than in any
other region.   
    Several S&P 500 microchip companies also hand in reports
over the next week, including Texas Instruments Inc and
Intel Corp, which depend on China for more than a fifth
of their sales.
    China is trying to navigate multiple challenges after a
trade war with the United States sparked a blistering sell-off
in domestic stock markets and a steep decline in the yuan versus
the dollar. 
    Concerns grew last week after China reported its slowest
economic growth since the height of the global financial crisis
in the third quarter.
    Chinese shares have been volatile, flirting with four-year
lows last week. The benchmark blue-chip index surged more than 4
percent on Monday, its sharpest gain in almost three years,
after regulators revealed tax changes and other measures to
support the economy and companies.
    U.S. companies have been benefiting from a robust domestic
economy and deep corporate tax cuts, but a China growth slowdown
could hit multinationals that rely heavily on the country for
    Chipmakers in recent quarters have struggled with
oversupply, a problem that could worsen if demand for
automobiles in China keeps weakening, or if Trump places tariffs
on smartphones, televisions or other Chinese products
manufactured with semiconductors.
    The Philadelphia Semiconductor Index has fallen 2
percent this year, with many investors worried it could drop
further following its 38 percent rally in 2017.
    "You're looking for potential triggers," said Bernstein chip
analyst Stacy Rasgon. "The trade war with China is one." 
    Citing weak third-quarter auto sales in China, Morgan
Stanley last week cut its price targets for Ford Motor and
General Motors, sending Ford's stock to its lowest level since
2009. Ford is expected to report a decline in quarterly profit
on Wednesday. 
    China accounted for just over half of GM's vehicle sales
during the first half of 2018, and in July the automaker
highlighted record quarterly profit from its Chinese operations.
GM stock is down about 24 percent in 2018.
    Analysts on average expect a 22 percent jump in S&P 500
companies' earnings per share in the September quarter,
according to I/B/E/S data from Refinitiv.
    But slower earnings increases are expected for 2019, when
corporate tax cuts become a year old. 
    Goldman Sachs said in a report on Friday that it expects S&P
500 earnings per share to grow 7 percent next year under a
"baseline" scenario. But earnings would remain flat if the
United States applies 25 percent tariffs to all China imports,
Goldman Sachs said.

 Notable China-exposed companies reporting this week:
 Company      RIC      Industry      YTD      Est. Pct of  Report
                                     Share    Rev from     ing
                                     Price    China        date
 Kimberly-Cl           Household          -9               Oct 22
 ark                   Products                            
 Texas                 Chips              -5               Oct 23
 Corning               Electronic         -4               Oct 23
 McDonald's            Restaurants        -3               Oct 23
 3M Co                 Industrial        -15               Oct 23
 Caterpillar           Construction      -17               Oct 23
 Advanced              Chips            +159               Oct 24
 Amphenol              Electronic         -6               Oct 24
 Xilinx       <XLNX.O  Chips             +13               Oct 24
 Visa                  Data              +23               Oct 24
 Boeing                Aerospace &       +21               Oct 24
 Ford Motor            Automakers        -31               Oct 24
 Intel        <INTC.O  Chips              -3               Oct 25
 Western               Technology        -30               Oct 25
 Digital               Hardware                            
 Eastman               Diversified       -13               Oct 25
 Chemical              Chemicals                           
                                                Source: Refinitiv
 (Reporting by Noel Randewich, additional reporting by Rajesh
Singh in Chicago and Alwyn Scott in New York, and by Stephen
Nellis in San Francisco; Editing by Peter Henderson and Meredith
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