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China: industrial profits growth slowed to 3.3%oya in 2014,falling 8.0%oya in the month of December

研究机构:摩根大通(亚太) 研究员:Grace Ng,Lu Jiang,Haibin Zhu 发布时间:2015-01-29

The National Bureau of Statistics (NBS) announced that industrial profits (including all industrial companies with annual sales from principal business exceeding 20 million yuan) increased 3.3%oya for full-year 2014 (easing rather notably from the rise at 12.2%oya in 2013). For the monthly figures, industrial profits fell 8.0%oya in the month of December, compared to the fall at 4.2%oya in November. Meanwhile, “profits from principal business” also softened, as the pace of growth eased to 1.6% for full-year 2014, compared to the rise at 4.7%oya in the first eleven months of the year.

Further breakdown in the industrial profits report shows that total industrial sales revenue (from principal business) increased 7.0% in full-year 2014, compared to 7.2%oya growth in the first eleven months. Besides, industrial enterprises’ profit margin (profits as a percentage of sales revenue) came in at 5.91% in full-year 2014, compared to 5.69% in the first eleven months.

Deflationary pressure for upstream industrial products drags enterprise profits. According to the NBS, the weakness in December industrial profits was mainly dragged by deflationary pressure for industrial products, as seen in widening PPI deflation in recent months. In particular, the drag on overall industrial sales revenue due to easing PPI more than offset the impact of reduction in overall industrial enterprises’ cost of sales in recent months (especially as the upstream resources, materials and energy sectors consist of a significant share of overall industrial enterprise profits).

By sector, oil-related and coal mining industries saw notable decline in profits, reflecting falling prices of oil and related industries, as well as weak demand conditions. In particular, the NBS estimates that the decline in profits for oil-related and coal mining industries accounted for almost 80% of the decline in overall industrial enterprise profits in December (in %oya terms).

Meanwhile, profit growth in a few industries, including facility equipments (up 12.4%oya in 2014) and high-tech manufacturing industry (up 15.5%oya in 2014) outperformed overall industrial profits notably, highlighting the impact of gradual upgrade of industrial structure.

Non-state enterprises’ profit growth continued to out-perform SOEs. Industrial profits in the state-owned sector fell 5.7%oya in 2014 (vs. +6.4%oya in 2013). On the other hand, industrial profits for foreign-funded enterprises rose 9.5%oya in 2014 (vs. 15.5%oya in 2013), while profits for domestic private enterprises increased 4.9%oya (vs. 14.8%oya).

Weakness in overall industrial profits lingers into 1H15 To the extent that overall industrial profit trend follows the PPI trend closely (as mentioned above, and refer to last chart), overall industrial profits will likely remain on the weak side going into 1H15, as we expect PPI deflation to linger on, averaging at about -3.3% during 1H15 in our forecast. This will in turn drag manufacturing investment growth, which historically tracks overall industrial profits closely.

Meanwhile, as falling global commodity prices have exerted further downward pressure on overall industrial profits in recent months, it is also worth noting the different impact across various industries. In particular, while profits at the upstream, resources, materials and energy sectors have weakened notably, the profit trend at downstream sectors, including those related to consumer spending and many export industries, will continue to outperform. Such development will be consistent with further re-balancing in the economy through the course of 2015.

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