Changing Profit Trends in China’s Economy

While there are concerns about China’s macro policy, certain sectors are experiencing favorable shifts in their fundamentals. HSBC’s analysis of approximately 1,700 mainland China-listed companies reveals that profits are moving towards industrials, consumer discretionary, and staples, while materials and energy sectors are seeing a decline. One reason for this shift is the falling producer prices and the widening gap with consumer prices in China. As a result, upstream businesses are earning less while mid- and downstream companies benefit from cost reductions. HSBC analysts have identified sub-sectors such as home appliances, media, and software that have low inventory levels and strong demand momentum.

Concerns about Deflation and Policy Changes

China has been facing worries of deflation as the Producer Price Index has fallen for nine consecutive months and the Consumer Price Index slowed to 0% in June. However, experts believe that the worst may soon be over. Chinese leaders are expected to gather for a Politburo meeting at the end of July, which is eagerly anticipated for potential policy decisions and details. Beijing has recently started showing signals of providing more economic support, particularly for the private, non-state-owned sector. However, markets remain cautious due to recent regulatory tightening impacting companies like Ant Group and Didi.

The Role of Internet Platform Companies and Overseas Markets

One important indicator to watch is whether internet platform companies can list their subsidiaries in public markets. This potential move could have significant implications for companies like Alibaba and JD.com. Additionally, overseas markets are expected to be an area of profit growth for Chinese companies, while the domestic recovery may require more time. The economy has only reopened for six months, but there has already been a surge in domestic travel, indicating potential improvements in consumption. Goldman Sachs analysts predict an increase in implied oil demand from scheduled domestic flights in July, surpassing the 2019 level.

Winning Sectors and Stocks

Looking ahead, UBS Securities China Equity Strategist Lei Meng expects moderate policy stimulus and identifies sectors such as appliances, food and beverage, computer software, and insurance as favorable. Meng anticipates that the first quarter was the low point for earnings this year and foresees gradual improvement for the rest of the year, resulting in a 10% earnings per share growth in the A-share CSI300 index for the full year. When it comes to individual stocks, HSBC highlights companies like 360 Security, Baosight, and Sanhua as top performers. However, not all software stocks have performed well, with iFlytek falling below expectations.

The HSBC study focuses on companies with a market cap greater than $10 billion and a three-month average daily trading volume of more than $10 million.