Shares of China’s state-owned enterprises have been a hot trade in a mostly lackluster equities market this year, but disappointing earnings are causing investors to reassess their bullish bets.
(Bloomberg) — Shares of China’s state-owned enterprises have been a hot trade in a mostly lackluster equities market this year, but disappointing earnings are causing investors to reassess their bullish bets.
About three-fifths of the largest constituents in a Hang Seng gauge of state-owned enterprises missed earnings-per-share estimates in the latest results season, according to data compiled by Bloomberg Intelligence. Weighted average earnings were about 4.4% lower than expected, with utilities, telecommunications and consumer staples having the biggest sectoral misses.
Low valuations coupled with expectations of reforms and a bigger role in carrying out Beijing’s policy agenda have been catalysts for shares of large state firms. But a bleak earnings picture and investors’ renewed interest in private enterprises following the overhaul of Alibaba Group Holding Ltd. signal further gains may be hard to come by.
“There are still no clear signs of earnings improvement for most of the sectors,” said Minyue Liu, investment specialist for Asian and Greater China equities at BNP Paribas Asset Management. “SOEs are more resilient in a downside market given their market cap and lower valuation. Essentially, in a growth market, POEs are likely to be more attractive.”
The SOE cohort’s weighted aggregate net income grew 6.1% in 2022, less than a quarter of the growth in 2021, according to Bloomberg Intelligence.
The latest earnings season contributed to dismal 2022 results for several companies. China Life Insurance Co. shares fell the most in five months after the nation’s largest life insurer posted a drop in full-year profit due to Covid lockdowns and a plunging stock market.
Heavyweights China Telecom Corp. and China Mobile Ltd. dropped more than 2% after their full-year net income missed estimates, with Citigroup Inc. expecting China Telecom’s margin to face pressure as it invests in new businesses such as industrial digitalization. Meanwhile, falling energy prices have prompted analysts to call a stagnation in CNOOC Ltd.’s earnings this year.
China’s state firms are known to have a mandate to support social and strategically important government policies rather than prioritize profits, and tend to be in old-economy sectors that have single-digit earnings growth. As China’s domestic growth slows to a 5% target and global earnings remain under pressure, market watchers now await reform-related announcements that may offer long-term support to profitability.
To be sure, the firms are already starting to get measured more like profit-seeking companies by the state regulator, and the securities chief’s call for new valuation methodologies means that the stocks could still rally as fundamentals take time to catch up. Essence Securities Co. analysts including Lin Rongxiong said in a note that they were more “upbeat” about the cashflow improvement for state-owned construction firms, telecom operators and machinery companies.
China Telecom Shares Set for Best Quarter Since 2019 on SOE Push
The disappointing earnings capped an overall tepid season for China, where tech was one of the few bright spots. SOE firms have been a major contributor to A-share earnings in the past, with their net profit accounting for 67% of the onshore market’s total in the first three quarters of 2022.
The Hang Seng China State-holding Enterprises Index is down about 2% from a March 6 high, underperforming the CSI 300 index of mainland shares.
“For the SOEs to continue to do well, you need some high-profile cases of equitization or asset disposals,” said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management. “They will struggle in the year ahead because the growth pick-up that we are seeing is more services and consumption-led rather than infrastructure- or industrial-driven.”
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