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Goldman Sachs Cuts Chinese Earnings Forecasts

September 04, 2012

Goldman Sachs Cuts Chinese Earnings Forecasts

TAL Apparel Ltd. workers assemble shirts at the company's factory in Hong Kong, China. Photographer: Daniel J. Groshong/Bloomberg

Goldman Sachs Group Inc. lowered earnings growth forecasts for China’s companies and Credit Suisse Group AG cut the nation’s stock index targets as the economy slows.

Profits for companies in the MSCI China Index (MXCN) may increase 1.8 percent this year and 8.6 percent in 2013, compared with previous growth estimates of 6 percent and 12.3 percent, Helen Zhu and Timothy Moe, analysts at the U.S. bank, wrote in a report dated yesterday. Credit Suisse lowered its 12-month target for the index to 60 from 70, analysts Vincent Chan and Peggy Chan said in a report today.

Third-quarter “earnings growth may not yet show a clear inflection point,” Goldman’s Zhu and Moe wrote. “We expect further earnings cuts in the coming months, albeit at a slower rate, as current revision sentiment is very weak already.”

The Shanghai Composite Index (SHCOMP) has retreated 6.8 percent this year on concern two reductions in borrowing costs and bank reserve ratios this year will fail to halt a decline in economic growth. China’s economy grew 7.6 percent in the three months through June, the slowest pace since 2009, as Europe’s debt crisis hurt exports and a crackdown on property speculation damped domestic demand.

Manufacturing shrank for the first time in nine months in August as new orders contracted and output rose at a slower pace, according to the Purchasing Managers’ Index released by the statistics bureau on Sept. 1.

Growth Target

Earnings per share for companies in the MSCI China Index of mainly Hong Kong-listed Chinese companies rose 2 percent in the first six months of 2012, slowing from 28 percent growth in the same period a year earlier, according to the Goldman Sach report. China’s economy may risk missing the government’s 2012 growth target of 7.5 percent, according to Lu Ting, head of Greater China economics at Bank of America Corp.

The MSCI China lost 0.4 percent to 52.65 as of 1:49 p.m. in Hong Kong, taking its drop this year to 0.7 percent. The Shanghai Composite Index dropped 0.5 percent to 2,049.86.

The Hang Seng China Enterprises Index, which tracks so- called H shares traded in Hong Kong, has slumped 7 percent this year. It fell 0.5 percent to 9,238.53. The Credit Suisse analysts lowered their target for the Hang Seng gauge to 12,000 from 13,000, based on an assumption of “flat” earnings growth in the next three years.

Lower Valuations

For stocks to rise, “we will need either a stabilized global economy or the Chinese government’s macro policy addressing stimulus or structural reform,” the analysts said. They downgraded China’s banking stocks to market weight from overweight.

The Shanghai Composite trades at 9.3 times estimated profit, near the lowest level since January, while the Hang Seng China Enterprises Index (HSCEI) is valued at 7.7 times, 41 percent lower than its seven-year average, according to data compiled by Bloomberg. The Hang Seng gauge trades for 1.25 times book value, compared with its seven-year average of 2.28.

Stocks may rebound in the next three-to-six months on valuations, according to Credit Suisse’s analysts. Current earnings forecasts have already factored in weak economic conditions, Minggao Shen and Ben Wei, analysts at Citigroup Inc., wrote in a report dated yesterday.

“Further policy easing looks inevitable after weak August data, cost pressure will be lessened and restocking before year- end is possible, all contributing to a better earnings outlook,” Shen and Wei said.

--Zhang Shidong. With assistance from Jan Dahinten and Weiyi Lim in Singapore. Editors: Darren Boey, Richard Frost

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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