20130904-美银美林-1H13_earnings__headline_ok_but_quality_poor_18页_764kb

1H13 Earnings Summary

Core Content

In the first half of 2013 (1H13), A-share earnings growth rebounded to +12.2% YoY, driven primarily by the financial sector with +15.5% YoY growth. Non-financials also saw an increase, but at a slower rate of +7.2% YoY, compared to -17.0% YoY in 1H12. However, the overall earnings growth was considered weak due to the reliance on non-core earnings and underlying issues in the real economy.

Main Points

• Earnings Quality Concerns: The headline earnings growth masks significant underlying weaknesses, particularly in the non-financial sector.
• Financial Sector Dominance: Financials accounted for 63% of total market earnings in 1H13, up from 61% in 1H12, raising concerns about the health of the market.
• Non-Core Earnings as Growth Driver: Investment income and other non-operating income contributed Rmb37bn to non-financials' pre-tax profit in 1H13, surpassing the Rmb28bn increase in sector net profit.
• Working Capital Deterioration: The cash conversion cycle (days) increased to 52 days in 1H13 from 48 days in 1H12, due to inventory days (+4d) and receivable days (+3d). This was partially offset by a slowdown in the rate of increase in inventory and receivable days, which led to an increase in operating cash flow (CFO) from Rmb342bn to Rmb431bn.
• Capex Weakness: Non-financials' capital expenditure (capex) was Rmb753bn in 1H13, a -0.9% YoY decline compared to +7.1% YoY in 1H12 and +18.6% YoY in 1H2011. This slowdown is attributed to over-capacity and high real interest rates.
• Leverage Increase: Non-financials' net debt rose to Rmb5,029bn in 1H13, up 16.7% YoY, and the net debt to equity ratio increased to 50%, up from 46% in 1H12 and 38% in 1H11.
• Labor Cost Pressure: Cash compensation per employee in non-financials grew by 8.7% YoY, slightly down from 10.8% YoY in 1H12, but labor cost to sales and labor cost to COGS increased to 6.1% and 7.4%, respectively.

Key Information

• Non-Financials' Sales Growth: Increased by 8.2% YoY in 1H13, slightly higher than 8% YoY in 1H12.
• Non-Financials' Net Margin: Remained at 4.1%, almost unchanged from 4.2% in 1H12.
• Earnings Outperformers: Utilities, insurance, tech hardware, chemicals, and property were the top performers, while coal and consumable fuels underperformed significantly.
• CFO Growth by Sector:
  • Consumer Discretionary: +44%
  • Transportation: +25%
  • Information Technology: +29%
  • Utilities: +57%
  • Coal & Consumable Fuels: -52%
• Capex by Sector:
  • Consumer Discretionary: -15%
  • Diversified Financials: -23%
  • Non-Financials: -1%
• Non-Financials' Inventory Growth: Increased by 13% YoY, with Transportation and Chemicals showing notable growth.
• Non-Financials' AR Growth: Increased by 18.8% YoY, indicating potential cash flow issues.
• Non-Financials' Working Capital Management: Continued to deteriorate, with a cash conversion cycle of 52 days in 1H13.

Conclusion

While the headline earnings growth in 1H13 showed improvement, the underlying issues in the real economy, including weak capex, deteriorating working capital management, and rising leverage, suggest a lack of sustainable growth. The financial sector remains a dominant contributor to market earnings, but the non-financials face significant challenges, particularly in cost management and operational efficiency. Investors should be cautious about relying solely on the earnings growth figures and consider the broader economic and financial indicators.