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Earnings per share revisions in China, last 3 months

Source: Kepler Partners

  • Our Chart of the Month examines how 2024 EPS estimates have evolved over the last three months for the 50-odd most important stocks in China.
  • Share prices tend to lead earnings at cyclical turning points, but ultimately stockmarket bounces – such as the one lately seen in China – need to be validated by improved earnings expectations if they are to be sustained.
  • Yet within our sample as a whole, there are still far more companies (62%, to be precise) that have seen their current year profit forecasts lowered, compared to those that have been raised (38%). The net difference amounts to -24%, as shown by the red bar.
  • Earnings downgrades have been especially broad-based in sectors that are closely related to China’s ongoing property and construction meltdown. That policymakers are growing more concerned about this problem is illustrated by this month’s proposal for state companies to acquire finished inventory from stressed developers. It remains doubtful, however, that this will fix the fundamental lack of buyer confidence in the pre-sales model.
  • Earnings downgrades have also proliferated in areas the government has actively been promoting, such as renewables and technology. Here the problem is often one of supply running ahead of demand, as well as global pushbacks in the form of tariffs and technology constraints.
  • In contrast, earnings expectations have been rising across much of the internet space. Competitive pressures have constrained the upside in domestic e-commerce, but upgrades have been much more widespread within online services, where lower starting levels of penetration have permitted more robust top-line growth, whilst good cost control has generated margin improvements.
  • Thus Tencent, for example, has revived revenue momentum by beginning to increase advertising load, with AI helping to improve click-through rates, and Q1 24 results prompted another round of EPS upgrades. Similarly, online recruitment platform Kanzhun reported strong user growth and better than expected cash billings in Q1, whilst operating leverage made for a substantial profits beat.
  • We see such companies as offering structural growth potential even amidst ongoing macro sluggishness and see better risk:reward here than hoping for a broader-based earnings upturn at this juncture.
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