Earnings season for China A-sharesAlice Shen, Senior Associate - Investments & Capital Markets23 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.
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.
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.
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).
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
New Economy Index
FTSE China A50 Index
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.VanEck Investments Limited ACN 146 596 116 AFSL 416755 (‘VanEck’) is the responsible entity and issuer of units in the VanEck China New Economy ETF (CNEW) and the VanEck FTSE China A50 ETF (CETF). This is general advice only, not personal financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Read the PDS and speak with a financial adviser to determine if the fund is appropriate for your circumstances. The PDS is available here.
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