BCA Research has published the following analysis on the strong general corporate earnings recovery in China, May 8, 2009:
Overall Chinese corporate profits will likely recover strongly from deeply depressed levels in the coming months as the broader Chinese economy stabilizes. Rising earnings expectations for listed firms should sustain the rally in the stock market.
Chinese corporate profit cycles have historically been highly sensitive to volume expansion. The reason is that China's highly competitive business environment has long kept pricing power weak and profit margins trim.
This means that volume expansion, which is highly sensitive to China's business cycle, has long been the determining factor in corporate profit growth. As various leading economic indicators have all been turning up strongly in recent months, volume expansion has begun to reaccelerate. In addition, input costs have dropped more deeply than output prices.This means that the severe profit margin squeeze for the Chinese corporate sector in 2008 may have also eased.
Thus, a sharp recovery in the corporate profits from currently deeply depressed levels is likely in the coming months. Longer term, we expect the overall macro environment will likely remain challenging for the corporate sector and it is unrealistic to expect an across-the-board profit boom. Investors should focus on equity sectors that are able to capitalize on the economy's top-line growth.
