China’s latest earnings season is proving to be another disappointment for investors, intensifying skepticism about a potential rebound in the struggling market. A review of preliminary results by Morgan Stanley reveals that mainland-listed firms have issued more profit warnings than positive alerts for the second quarter, resulting in a net negative figure of 4.6%. This contrasts sharply with a net positive of 2.2% in the previous quarter.
This underwhelming performance could challenge the optimism of institutions such as UBS Group AG and Societe Generale SA, which had grown bullish partly based on expectations of improved corporate profits in China. Recent economic data showing unexpected growth shortfalls, coupled with ineffective policies to boost consumption, have already triggered a fresh wave of stock sell-offs.
Shen Meng, director at Beijing-based Chanson & Co., commented, “This earnings season is unlikely to offer the long-awaited market boost, as there has been no significant improvement in company cash flows. The market is dominated by a wait-and-see attitude due to the lack of clear mid-to-long-term economic policies.”
Expectations that earnings had bottomed out in the first quarter had spurred a rebound in Chinese stocks between February and May, with asset managers like SG Kleinwort Hambros Ltd, Vontobel Asset Management, and Ariel Investments increasing their positions. However, firms such as CLSA have suggested that these consensus estimates were overly optimistic.
Morgan Stanley’s analysis of 1,650 preliminary results, representing roughly a third of onshore-listed companies, indicates a likely delay in earnings growth re-acceleration. The brokerage noted in a July 24 report that it is “premature” to declare a bottoming out of earnings growth.
China’s top three airlines have all reported expected net losses for the first half of the year. Additionally, HSBC Holdings Plc analysts have warned of a “moderate” risk that Chinese consumer companies could fall short of estimates due to economic challenges.
Following a brief rebound in mid-July during the Third Plenary Session, Chinese stocks have resumed their decline as support from state funds diminished. The CSI 300 Index has dropped nearly 9% from its peak in May, with foreign investors likely to withdraw from local equities for the second consecutive month in July.
The Politburo’s recent announcement of new support measures had little impact on stock performance, reflecting the limited effectiveness of policy-driven rebounds in recent years. The support provided has often been insufficient to revive the property market or boost consumer spending—key factors needed for corporate profits to improve.
Uneven Recovery
Preliminary results show a growing disparity among industries, with export-oriented companies performing better than those focused on the domestic market. According to China Merchants Securities, global demand and preemptive shipments ahead of anticipated US tariffs have led many export-driven companies to forecast substantial earnings increases.
“Companies with significant overseas exposure are better positioned for positive results this round,” noted Xin-Yao Ng, director of investment at abrdn Asia Ltd. “Sectors reliant on domestic consumption, property, and investment are likely to underperform,” he added.
For instance, Shenzhen Kaizhong Precision Technology Co., a supplier of auto parts to global carmakers, anticipates a more than 1000% increase in net profit for the first half of the year due to rising overseas orders. Its shares have surged approximately 40% following this announcement.
Conversely, Jiumaojiu International Holdings Ltd., a restaurant chain, saw its stock fall after forecasting a significant decline in net income due to reduced customer spending.
Morgan Stanley’s results also indicate greater resilience among larger companies compared to smaller ones. Preliminary figures show a net positive reading of 1.3% for large caps, whereas small and mid caps reported net negative readings of 11.7% and 8%, respectively.
Larger firms have outperformed their smaller counterparts, with the disparity between the CSI 300 Index and the CSI 2000 Index widening to about 24 percentage points this year—the largest gap since 2017.
Morgan Stanley strategists interpreted this as evidence of uneven impacts on corporate earnings due to a weakening macroeconomic backdrop, with smaller companies being more vulnerable. They recommend focusing on industry and category leaders for greater earnings stability.
