China Industrial Profits Plunge Most On Record

On Friday morning local time, China reported that industrial profits crash the most on record in January-February, both due to the Lunar new year, but mostly due to the virus outbreak and the government’s restrictive measures to contain the virus. In year-over-year terms, profit growth was -38.3%, the biggest drop on record, and far worse from the -6.3%Y/Y decline in December. On a seasonally adjusted basis, the average level of profits in January-February also declined materially by 22% (non-annualized) from the December level.

The decline in profits was bigger than the decline in industrial production in January to February, likely due to the fact that while production and sales were suspended, certain costs (such as labor and depreciation costs) remained.

Here are the key numbers:

Industrial profits: -38.3% yoy in January-February (-22.0% growth mom non-annualized, seasonally adjusted by GS); December: -6.3% yoy (-14.6% mom sa).

Industrial revenue: -17.7% yoy in January-February (-7.9% growth mom non-annualized, seasonally adjusted by GS); December: -3.3% yoy (-9.7% mom sa).

Commenting on the plunge in profits, Goldman notes that all major industries saw lower profits, led by automobile manufacturing where profits shrank by 79.6% yoy, and computer manufacturing industry where profits declined by 87%. Ferrous metal smelting and pressing profits dropped by 34.4% yoy.

Profit margins (total profits divided by revenues) for industrial companies narrowed to 3.9%, vs 5.2% in the same period last year based on our calculation. Sales slowed while certain costs such as labor and depreciation cost remained. The increased hygiene standard and disinfection needs could also have pushed up costs. The implied real industrial sales growth in January-February was -17.6% yoy, down from -2.8% yoy in December and weaker than the industrial production growth of -13.5% yoy in January to February. Travel and logistics control might have lowered the sales to production ratio and caused the divergence between these two indicators.

Looking forward, it is very likely that profits will stay weak until industrial activities fully rebound, and the high base in March 2019 may also put downward pressure on year-over-year profit growth in March.