In the just competed interim result disclosure season, China's listed companies reported strong profit growth in the first six months of the year, maintaining their upward track since last year, as the Chinese economy continues to boom.
By the end of August, all together 1,370 listed companies in Shanghai and Shenzhen had released interim reports.
They all together realized net profits of 98.5 billion yuan (US$11.9 billion) during January and June, up 47.6 per cent compared to the same period a year ago.
Their turnover from core business also increased by 32.5 per cent to reach 1.6 trillion yuan (US$193.2 billion) in the same period.
The best performers were from the sectors of nonferrous metal, petrol and chemical, machinery, iron and steel, coal and power.
Also, the 1,370 companies had their averaged earnings per share grow by 38.7 per cent to 0.145 yuan (1.8 US cents) in the six months, the highest level since 1996.
Their averaged return on equity reached 5.4 per cent in the first six months, 1.54 percentage points higher than that of the same period a year ago.
The number of loss-makers also decreased during the period. Altogether 140 listed companies posted losses in their interim results, a ratio of 10.22 per cent among all listed firms, compared to 176 and 13.89 per cent in the same period last year.
Outstanding sectors
Companies whose first-half-year profit growth exceeded 100 per cent were concentrated in sectors of nonferrous metal, petrol and chemical, machinery manufacturing, iron and steel and coal, mostly resource-type companies who were benefiting from the robust economy, rallying prices and market demand for the raw materials and energy resources, a newly released report by China Securities found out.
Nonferrous metal, for example, is still facing big shortages in supply and prices have been rising steadily. Therefore a number of listed companies in the sector, including Jiangxi Copper, harvested more than 100 per cent net profit growth in the first half year.
Oil companies, gaining momentum from steadily increasing demand for crude oil and petrol products, sustained a strong profit growth, as the prices of such resources and products soared.
Similar reasons also triggered a sharp turnover and profit growth for coal and power firms as well as machinery manufacturers for relevant equipment, and transportation companies that carry such products.
Meanwhile, durable consumer goods are another popular stock pick in the portfolios of fund managers, based on the increasing consuming power of the Chinese population.
The Chinese economy, with a staggering 9.1 per cent growth in 2003 and 9.7 per cent in the first half of this year, is still on the fast track and expected to maintain momentum for the next few years.
That has fuelled investments and consequently, the market demand for coal, power, oil and transportation services, which has been reflected in the robust growth of relevant listed companies.
To ensure sustainable growth, the Chinese authorities are now striving for a soft landing of the economy after the fast expansion, so that the growth will not continue to grow unrestricted and trigger systematic risks if an overall overheating occurs.
The government therefore has taken a series of measures to control growth since the second half of last year, including tighter credit supply in real estate, curbs on investments in overheating sectors such as steel, aluminium and concrete and a 0.5 of a percentage point increase of the reserve requirements for commercial banks in April.
The moves have exerted obvious impacts on steel, auto and real estate listed companies. But some steel and auto companies - such as Wuhan Steel and Shanghai Automotive, have still managed to attain rosy profits, after adjusting production strategy and making more efforts to control costs and develop products with high technology content.
SME board
The 34 companies listed on the newly established small and medium-sized enterprise (SME) board in the Shenzhen Stock Exchange this year also revealed their half-year results, recording averaged earnings per share of 0.222 yuan (2.7 US cents) and an averaged net profit growth of 7.11 per cent.
Three companies on the SME board reported more than 1 billion yuan (US$120.8 million) of turnover in the first six months and five posted more than 50 million yuan (US$6 million) of profits.
Tan Xiaoyu, an analyst with Guotai & Jun'an Securities, said that the potential of growth is the core element deciding the investment value of the SME stocks.
It is still too early to assess the overall profitability and value of these stocks, since they do not have much history to compare and it takes time to see how they apply their proceeds newly raised during initial public offerings for relevant projects and operation results, Tang said.
So far, their corporate results are not yet polarized, with the earnings per share concentrated in a narrow range between 0.01 yuan (0.12 US cent) and 0.66 yuan (8 US cents).
Moreover, many of the SME stocks have a high price/earnings ratio compared to the main board, while their comparatively smaller scale and financial strength often increase exposure.
Picking the right investment target and timing among the SME stocks is like digging gold from the sand, Tang said.
Remaining concerns
One thing that deserves attention is the fact that though the listed companies generally harvested strong profit growth, not all of their cash flows increased accordingly.
The averaged net cash flow per share of the 1,370 listed companies mentioned above was only 0.16 yuan (1.9 US cents) in the first six months of the year, down 11.11 per cent compared to that of the same period in 2003.
Even given the profit and turnover figures of some companies, they should be discounted, given the events last year, when the outbreak of the SARS (severe acute respiratory syndrome) weighed down the results of retailers, travel companies, airlines and consumers businesses in the second quarter, which made this year's recovery more outstanding.
Future outlook
Then what is the trend for the second half of the year?
Analysts said that as the macroeconomic controls further exert their impact on the economy in the second half year, some sectors are expected to slow down growth.
But in sectors where shortage of supply is expected to remain, relevant companies are hopeful of maintaining high growth. Meanwhile, shining new factors will also emerge.
A recent report by Boshi Fund Management said that tight credit supply would hold on in the second half of the year and fixed asset investment growth is also expected to slow down. Consumer goods and service industry, however, should increase growth, especially with the price hikes in foodstuff and other commodities.
There will not be an overall plunge or rally in the stock market in the second half year. The market has become more polarized after the correction in the first half year, the report said.
Some stocks, including auto stocks, have tumbled during the consolidation, partly as a result of the economic controls. And some investors may have ignored the real investment value of stocks and speculated for short-term gains.
But, in the long run, listed companies with good internal value will still be most promising.
Fund managers also said that the market risks have been much digested after the correction and the macroeconomic management has had some effect.
"In the second half of the year, we will maintain the value-oriented investment ideology and study the sustainable competitiveness of listed firms. Those with expected steady cash earnings and performance growth will be our major target," a fund manager with Boshi said.
Yang Xiaodong, a fund manager of Dacheng Fund Management, recommended companies in the bottleneck industries, which are less affected by macroeconomic controls, consumer goods and industries that are in a prosperous period of their business cycle.
Song Bing, an analyst with China Securities, also said that auto stocks should be able to benefit from an expected rebound in auto sales and lower prices for steel used in cars.
