Better profits seen as key to boosting A-share market

Improved profits of listed companies, likely to be sustained by China's supportive policies and economic recovery, will be an important driver of A-share market performance in the following months, experts said.

The comments came after the average net profits of A-share companies rose 9.02 percentage points year-on-year to 2.43 percent during the first six months, according to interim results reports released at the end of August.

It is the first time that A-share companies are reporting growth after seeing negative profits for a long time, said Xia Fanjie, an investment strategist at CSC Financial Co Ltd.

The annual profit increase came in at 11.56 percent during the first quarter, even as it narrowed in the following three months. But a clear turning point in the profitability cycle is being seen now, Xia said.

Price and cost pressures have been relieved and consumption confidence has recovered, helping to push up revenues. Expanded fiscal expenditure and trade-in policies have further boosted domestic demand. These have led to a significant increase in the profits of A-share companies, said Xia.

Against the backdrop of a mild economic recovery, industry leaders have managed to increase profits, thanks to their pricing power over the supply chain, strengths in cost control and higher financing accessibility. The more eye-catching profits reported by growth enterprises have reflected the structural opportunities amid industrial upgrading and favorable policies, he said.

According to market tracker Wind Info, a robust recovery was seen in the agricultural, computer and electronics industries in the first six months. A-share agricultural, forestry, livestock and fisheries companies reported a net profit spike of 165.7 percent during the first six months of the year.

The year-on-year profit increase for computer and electronics companies was 41.17 percent and 28.5 percent, respectively, reflecting the outstanding performance of the overall technology sector, said Xia.

A-share companies' profits will significantly improve this year, partly because of the indicator's sluggish performance over the previous year or so, Meng Lei, China equity strategist at UBS Securities, said during a news meeting on Monday.

Given the low base figures during the second half of 2024, the profit increase is likely to speed up in the following months and the whole-year growth rate is estimated at around 6 percent, he said.

Industrial companies' profits, which are released every month, are positively related to A-share industrial companies' profitability, which is released on a quarterly basis. Industrial companies' profits have bottomed out since June. Therefore, a positive outlook can be inferred for A-share companies' profitability, said Meng.

Yang Fan, chief macro and policy analyst at CITIC Securities, said that China's efforts to create a fair competition environment have started to positively affect industrial companies' profits.

One proof is that raw material providers have started to see prices rebound in July. Emerging industries including semiconductor, aerospace and medicine have all benefited from such efforts in terms of profits, she said.

Prices will go up mildly in the second half of this year, helping to maintain the stability of public companies' profits. External demand is estimated to remain resilient, helping exporters and outbound companies to continue their upswing, she added.

Experts from Huajin Securities said that the A-share market will show an uptick in September as companies' profits continue to grow.

The benchmark Shanghai Composite Index gained 0.46 percent to close at 3875.53 points on Monday, while the Shenzhen Component Index closed 1.05 percent higher.

The technology-focused ChiNext in Shenzhen jumped 2.29 percent. The combined trading value of the Shanghai and Shenzhen exchanges reached 2.75 trillion yuan ($390 billion).

Risk appetite will continue to improve amid a stronger profitability outlook, said analysts from Dongguan Securities. This will help to bolster market confidence and provide more upward momentum in a relaxed liquidity environment, they said.

Technology innovation, the core competitiveness of Chinese companies, should be the focus for investments in the country, said Fang Dongming, head of China Global Markets at UBS, at the news meeting on Monday.