Hottest China trade may unravel as earnings disappoint investors

BLOOMBERG

Shares of China’s state-owned enterprises (SOEs) have been a hot trade in a mostly lackluster equities market this year, but disappointing earnings are causing investors to reassess their bullish bets.
About three-fifths of the largest constituents in a Hang Seng gauge of state-owned enterprises missed earnings-per-share estimates in the latest results season, according to data compiled by Bloomberg Intelligence. Weighted average earnings were about 4.4% lower than expected, with utilities, telecommunications and consumer staples having the biggest sectoral misses.
Low valuations coupled with expectations of reforms and a bigger role in carrying out Beijing’s policy agenda have been catalysts for shares of large state firms. But a bleak earnings picture and investors’ renewed interest in private enterprises following the overhaul of Alibaba Group Holding Ltd signal further gains may be hard to come by.
The SOE cohort’s weighted aggregate net income grew 6.1% in 2022, less than a quarter of the growth in 2021, according to Bloomberg Intelligence.
The latest earnings season contributed to dismal 2022 results for several companies. China Life Insurance Co shares fell the most in five months after the nation’s largest life insurer posted a drop in full-year profit due to Covid lockdowns and a plunging stock market.
Heavyweights China Telecom Corp and China Mobile Ltd dropped more than 2% after their full-year net income missed estimates, with Citigroup Inc expecting China Telecom’s margin to face pressure as it invests in new businesses such as industrial digitalisation.
China’s state firms are known to have a mandate to support social and strategically important government policies rather than prioritise profits, and tend to be in old-economy sectors that have single-digit earnings growth. As China’s domestic growth slows to a 5% target and global earnings remain under pressure, market watchers now await reform-related announcements that may offer long-term support to profitability.
To be sure, the firms are already starting to get measured more like profit-seeking companies by the state regulator.