(OCT 23): Investors counting on corporate results to give China’s stock rally a fresh leg up may have to look beyond the current quarter for clues, given an ailing economy and constraints on stimulus efforts.

While forward earnings per share projections for members of China’s benchmark CSI 300 Index have seen an upward revision of about 1.5% since a September trough, they remain close to a six-year low, Bloomberg-compiled data show. The gauge has pared some gains from a 35% surge since the September low as traders await further fiscal measures.

Any benefit to corporate profits from Beijing’s stimulus blitz may come as early as next year with the potency of new measures in question. The nation’s entrenched deflationary problems and sluggish domestic demand suggest earnings may continue to suffer as officials have so far given little indication how they plan to reflate the economy.

“It would be too early to expect companies to form a positive view or outlook now,” said Nicholas Yeo, head of China equities at abrdn. “We would look more at their guidance after the fourth quarter of this year, which would be more meaningful because by then, the stimulus measures would have started to work their way through the economy.”

China International Capital Corp and China Merchants Securities Co both expect mainland-listed companies to report the slowest earnings growth of the year for the third quarter, due to weak demand, persistent deflationary pressures and a high base for comparison.

China is facing the longest period of deflation since the 1990s, with factory gate prices continuing to fall and consumer prices remaining weak in September. From electric vehicles to fast food, companies are engaging in a price war to lure customers, which in turn eroded their profit margins.
Laggards

Industries tied to the property sector, from coal, steel to construction materials may have remained major laggards, CICC analysts including Li Qiusuo wrote in a note. Earnings growth at consumer companies, especially those with a domestic focus, was likely flat.

Insurance industry, however, may stand out as a rare bright spot. The stock rally since late September has bolstered insurers’ investment returns, lifting profits to levels that Guotai Junan Securities Co. says will “exceed expectations.”

Ping An Insurance (Group) Co said profit jumped 36% for the first nine months of the year. Competitors including China Life Insurance Co have made preliminary forecasts for even bigger increases in net income, partly thanks to higher exposure to equities.

The unusual steps taken by Chinese leaders since late last month to revive economic growth and the country’s stock market have triggered hopes for a turnaround.

Analysts raised their targets on Chinese companies in the Bloomberg World Large & Mid Cap Index by a weighted average of about 6% over the past month, the most among major markets.

After the recent surge, the CSI 300 Index is trading at 13 times forward earnings estimates, up from a September low of 10.6 and slightly above its five-year average.

For those looking to corporate earnings to support the expanding valuation, they may have to be patient.

“Since the announcement of the monetary easing measures on September 24, the number of companies that revised their earnings downward has fallen to a recent low,” said Chunai Jean, senior strategist at Daiwa Asset Management. “On the other hand, the number of companies that revised their earnings upward did not increase, reflecting the view that the stimulus package was not strong enough to boost the economy.”

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