Earnings season for China A-shares
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    Earnings season for China A-shares

    Alice Shen, Senior Associate - Investments & Capital Markets
    23 July 2021

    Earnings season is well underway for Chinese companies. As of close on 15 July 2021, 38% of A-share companies have released their pre-announcement. Out of 1,600 disclosed companies 69% are reporting positive 1H21 guidance.

    imagej4kr6.png
    Source: CITIC

    The market has been responding well to the earnings signals for the past few earnings cycles. The graph below illustrates the earnings estimate revision breadth, that is, the difference between the number of upward revisions and downward revisions as a percentage of total number of consensus estimates.

    imagerbh6.png

    Source: Morgan Stanley, Bloomberg as of 9 July 2021. Earnings revision breadth is by 3-month moving average. New Economy Index is the CSI MarketGrader China New Economy Index.

    Looking forward, companies with strong earnings expectations could also outperform in 2H21; investors are likely will switch focus from valuation to earnings and fundamentals. Sector wise, industrial and technology, media and telecom (TMT) are leading the pack with cumulative profit growth of 139% and 132% respectively this fiscal year, followed by consumer staples/discretionary at 110% and healthcare at 91%.

    As earnings continue to be released, we’ve identified two sectors where the profit/growth might not be fully priced in:

    • Healthcare – increasing R&D expenditure in pharma. Morgan Stanley estimates that Chinese pharma will have 16.4% CAGR from 2019-2024, significantly higher than its global peers at 4%.
    • Technology – the increasing adoption of cloud computing. Investment in cloud vendors in the business-to-business field could accelerate the ‘cloudification’ process and the penetration of cloud computing in the enterprise market, resulting in improved long-term profitability for SME cloud vendors.


    RRR cut
    Effective from 15 July, a reserve requirement ratio (RRR) cut of 50bps for all banks is poised to release around 1 trillion yuan ($154.43 billion). This means that banks are allowed to hold less deposits as reserves and to provide liquidity to businesses and individuals. China’s central bank PBoC reiterates its monetary policy will remain prudent after the cut. The dovish stance might boost positive sentiment in the local equity market in 2H21.

    Since 2018 there has been 10 RRR cuts, half being broad-based and half targeted. Historically the China A-share market has generally responded more positively to broad based cuts. This can be seen in the chart below which shows the performance of a range of Chinese equities indices and the response to broad based cuts (shown as solid lines) and the targeted measures (shown as dotted lines).

    imagetools0.png
    Source: Bloomberg as of 19 July 2021. New Economy Index is the CSI MarketGrader China New Economy Index.

    The following table shows the performance of these indices six months since a rate cut announcement. In particular, the New Economy Index has reacted most positively in both categories among peers. It indicates that small and medium-sized enterprises (SMEs) are the major beneficiaries from a rate cut, as the New Economy Index portfolio has a small-cap bias. The data also suggests that from a shorter term perspective (1 day, 5 days and 1 month after the announcement) total average returns are within +/- 2% for all indices.

    RRR cut announcement date

    Category

    CSI300

    CSI500

    New Economy Index

    FTSE China A50  Index

    17/01/2018

    Targeted

    -18.8%

    -17.1%

    1.7%

    -17.3%

    17/04/2018

    Broad

    -16.8%

    -29.8%

    -25.5%

    -7.6%

    20/06/2018

    Targeted

    -15.6%

    -18.1%

    -23.4%

    -13.8%

    4/01/2019

    Broad

    27.6%

    19.3%

    32.1%

    32.9%

    7/05/2019

    Targeted

    7.3%

    0.7%

    9.6%

    10.8%

    6/09/2019

    Broad

    4.8%

    11.8%

    25.6%

    5.8%

    1/01/2020

    Broad

    3.7%

    11.7%

    29.1%

    0.9%

    13/03/2020

    Targeted

    18.8%

    15.7%

    16.9%

    5.1%

    3/04/2020

    Targeted

    23.5%

    21.3%

    17.1%

    8.7%

    Total average

     

    3.8%

    1.7%

    9.2%

    2.8%

    Broad average

     

    4.8%

    3.2%

    15.3%

    8.0%

    Target average

     

    3.0%

    0.5%

    4.4%

    -1.3%

    Source: PBOC, Bloomberg as of 19 July 2021. 7 October 2018 broad-based RRR cut excluded as it falls on a week-long holiday. New Economy Index is the CSI MarketGrader China New Economy Index.



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