China: Strong industrial profits are sustainable – ING

Iris Pang, Economist at ING suggests that although old sectors’ growth dominated, new sector growth rates are encouraging and lead to their conclusion that China’s profit growth is sustainable.

Key Quotes

Industrial profits outgrew the market consensus in September (actual: 22.8% YoY YTD, INGF: 21.7%; prior: 21.6% YTD YoY) even with a fading base effect on the old sectors. Coal mining was the best performer in terms of profit growth but in terms of profits in CNY terms, it was automobiles.

With Xi’s team focusing on supply side reform to cut overcapacity, we should see more examples similar to coal mining that will experience cuts in supply, for example cement and glass.

But even though deleveraging reforms will end one day, we are not worried that industrial profits will lose steam.

Looking at new sectors, profit growth is high. In yuan terms they have been good profit earners. Automobiles earned CNY452bn YTD in September and this sector is growing at 10.03% YoY YTD. Specialized equipment, though not earning a lot (CNY163bn YTD) is growing at an accelerating rate of 24.5% YoY YTD, compared to 22.7% YoY YTD last month. With continuous high growth, new sectors, especially those related to the use of technology, should rise in the profit earners’ hall of fame in the coming years.