[I’m not going to present a detailed analysis here just my impression of releases to date from companies I care about (and quite a lot I don’t)]
Summary conclusion
A dull H114 earnings’ season is drawing to a close and prospects for H2 seem no more thrilling. The market in aggregate remains ‘cheap’ but without a step-change in earnings’ prospects investors hoping for higher stock prices will have to rely on multiple expansion to provide the justification for any such move.
H1 Scorecard
In a word? Meh! A drill of HKEX news releases from the beginning of July to last night highlights the problem. Over the period there were 307 announcements with the words ‘profit’ and ‘warning’ in them versus 167 which contained the words ‘profit’ and ‘alert’. This isn’t the same as the number of companies indicating downward or upward surprises as some of the initial announcements are followed up with clarifications; but it’s a good guide to the general trend.
Anti-extravagance and anti-corruption campaigns still in full swing
Unlike previous purges of Party and other miscreants the ones instituted by Mr. Xi Jin Ping’s administration appear wide ranging and sincere. Having seen such initiatives in the past I thought we’d be getting to the end of this process by, well, about now. In fact the campaigns appear to remain in full swing. Perhaps an important reason for their durability is their widespread popularity and what that’s doing for the Xi administration, and by implication the CCP’s, approval ratings? The bottom line for the economy and business in general though is retardation, and the prospect this will continue.
Global economy sputtering; not yet humming
Even if China weren’t in the process of trying to pivot more towards a stressed domestic economy the global environment isn’t helping the export-manufacturing and trading complex which still impacts somewhere north of 25% of GDP. This is what one of China’s most accomplished export facilitators (Li & Fung 494) had to say about prospects in their half year release “The outlook of our key markets, US and Europe, continues to be uncertain and we expect market conditions to remain challenging.” Sure, trends are improving, but neither robustly nor evenly.
Dull? Yes. Disaster? No
China’s H1 industrial profits, in aggregate, were up 11.4% and optimists were quick to point out Q1 progress of 10.1% was followed by a Q2 gain of 12.5% suggesting this acceleration may in part have resulted from a government mini-stimulus in May? Moreover, macro numbers do seem to be supported by company releases with a majority reporting some measure of growth. Markets are rate-of-change junkies though and on that score there was little to get excited about (that I could see).
H2 Prospects
In a word? Most likely again, meh! Experience teaches us when no change to the existing state of affairs can be imagined that’s the time we should be on our guard for change; but I can’t see it? Mr. Xi and his friends will most likely continue their tiger and fly extirpation campaign. Cadres will probably continue to cut their Sprite with, er, more Sprite and the world economy, whilst progressing with its broad recovery, is still a long way off rude good health. We’re on an improving trend, no doubt; but the momentum of this trend seems unlikely to change much in the next six months.
So?
For China stocks in general crushed valuations, despite price flurries here and there recently, remain the norm. There’s little optimism about future growth expressed in current multiples and so the risk seems limited if the somnambulant earnings trajectory of the first half persists into the second.
The HSCEI consensus earnings integer for 2015 is presently 1, 570 implying a forward P/E of 7.1x (at last night’s 11, 074 close. Almost unchanged YTD BTW, despite recent strength). Multiple expansion therefore could take stock prices significantly higher; but that would occur in the absence of a step-change in earnings growth prospects which may to some appear initially baffling.
I can’t yet write the last word on 2014; but it’s increasingly likely that word is going to be? Meh?