October marked the start of the earnings season for American and Chinese stocks alike. The bulk of U.S. companies reported in October while most Chinese companies are going to report in November.
Interestingly, October was not all about earnings. With the economy on a shaky footing, investors needed corporate earnings to feel good about their investments. And while corporate earnings came out better then expected, investors are still not convinced if the rally is sustainable. The last week of October demonstrated the uncertainty surrounding capital markets, when the DJIA moved over 100 points four days out of five trading sessions.
The DJIA was virtually unchanged from September but Chinese stocks did much better in Shanghai and Hong Kong. The Hang Seng index rose 3.8% for the month while the Shanghai Composite index advanced 7.8% following the big dip in August.
The world’s most valuable financial institution, Industrial and Commercial Bank of China (SHA:601398), rose 9.0% in October while Petrochina (SHA:601857) (NYSE:PTR), another index heavy weight, surged 5.75% for the month.
The Hang Seng Index outperformed American listed China stocks for most of the month but came to a halt after Chinese regulators tightened property transactions and required more transparency. This in turn soured property stocks, a significant portion of index.
But the bigger picture is that the Chinese economy remains bright for the most part. Manufacturing activity and commercial lending remain robust, suggesting that the Chinese economy is accelerating.
On a corporate level, the largest Chinese companies have already reported earnings, giving some clues about the micro economy.
Aluminum Corp. of China (NYSE:ACH), the world’s largest aluminum maker by market capitalization, returned to profitability in the third quarter with a bright outlook for 2010. As the chart to the right displays, the price of aluminum recovered over 45% since March 2009, helping the aluminum market world wide. Demand is strong in China thanks to the government infused infrastructure and property boom. The Chinese car market is another catalyst for this non-ferrous metal, with the number of passenger cars sold surpassing 1 million units for the first time in September.
Petrochina (NYSE:PTR), the largest oil producer in China, reported a net profit drop of 23% year-over-year (YoY), a result that was in-line with expectations. Petrochina derives most of her revenue from oil exploration and production. So when the price of crude fell to the $70/barrel range from the $115/barrel a year ago, a net profit drop of 23% came as no surprise. What looms above Petrochina (NYSE:PTR) is the lack of oil production growth, something that other international majors, like Exxon Mobile (NYSE:XOM), are struggling with.
Net income for China Petroleum & Chemical Corp. (NYSE:SNP), known as Sinopec, more then doubled on the lower crude price. Sinopec is Asia’s largest refiner by volume, and is vulnerable to the fluctuations of the crude price. The Chinese government keeps a tap on refined gasoline prices while the price of the crude, the cost Sinopec (NYSE:SNP) is paying for the crude, reflects international prices. So when the price of the crude comes down, margins for Sinopec improve.
CNOOC ltd. (NYSE:CEO), China’s off-shore specialist, reported a significant drop in profits due to lower oil prices, but oil production grew by 16%, attributed to underdeveloped foreign fields off Nigeria. This in turn suggests CNOOC ltd. (NYSECEO) has more upside assuming they can successfully bring these fields into full production.
Another energy company, Yanzhou Coal (NYSE:YZC) reported a net profit decline of 54.7% for the January-September period. While some of it is explained by softer coal prices in China, prices that follow price developments of oil very closely, Yanzhou Coal (NYSE:YZC) is behind larger competitors China Shehua (HKG:1088) and China Coal (HKG:1989) from a coal production point of view. Production growth for Yanzhou Coal lags behind of China Shenhua and China Coal.
Chinese airliners are also sensitive to oil prices, kerosene accounting for the largest portion of airliners’ costs. China Eastern Airline (NYSE:CEA) swung to a net profit in the third quarter as passenger numbers upped while the price of oil declined. Should trends continue, Chinese airliners will keep improving on strong passenger traffic volume and acceptable kerosene prices.
Most Chinese stocks listed on the NASDAQ haven’t reported earnings yet, but those that did got hammered. Baidu.com (NASDAQ:BIDU), the largest Chinese company on the NASDAQ by market cap, fell $77.26 after reporting strong Q3 numbers but lowered Q4 revenue guidance. As the first chart on this page testifies, share price of Baidu.com (NASDAQ:BIDU) has been experiencing a wide range of fluctuations but a $70 drop from close to next day open is unheard of. Taking a closer look at the third quarter report, the lowered revenue guidance is due to the full implementation of a revenue model that’s been around for a long time and shouldn’t have come as a big surprise. As the chart testifies, Baidu.com has been successful in growing not just revenues but delivering earnings in tandem. This fact that gives us some peace of mind assuming BIDU will keep dominating the Chinese search engine market and reward investors over the long haul.
Sohu.com (NASDQ:SOHU), experienced a very similar situation to Baidu.com (NASDAQ:BIDU) by reporting revenue and earnings growth form previous quarter but guided Q4 lower. Shares of Sohu.com fell 16% the following day and continue to struggle.
But the brunt of the NASDAQ listed China stock universe is about to report earnings as the following earnings calendar indicates.
Investors better pay close attention to the following companies
· Suntech Power (NYSE:STP) and LDK Solar (NYSE:LDK) from the solar sector. The whole Chinese solar sector has been underperforming in 2009 but the recovery is around the corner for the industry. With oil hovering around $80/barrel, expect solar markets to get back on their feet. If you are a risk taker, build some positions in Chinese solar companies before they announce earnings. You might just get a nice surprise!
· China Automotive Systems (NASDAQ:CAAS) will help investors get a better visibility into financial strength of the Chinese auto makers such as Tongxin Int. (NASDQ:TXIC)
· NetEase.com Inc. (NASDAQ:NTES) and Shanda Interactive (NASDAQ:SNDA) comprises over 50% of the Chinese online game sector. This sector derives the most revenues from the internet in China, a highly profitable segment. Ramifications will be felt all the way to Giant Interactive (NYSE:GA), Changyou.com (NASDAQ:CYOU) and The9 Ltd. (NASDAQ:NCTY).
· Ctrip.com (NASDQ:CTRP) is another NASDAQ listed prominent Chinese player. The company has been successful in delivering earnings in the past, something that will help CTRP to anchor above $60/share.
· Sina Corp. (NASDAQ:SINA) is another internet heavy weight announcing in November, something SOHU, NTES and other internet plays will feel as well.
Wish you successful investing, Blaze Fabry