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Chinese earnings are playing catch-up
Peter Garnry
Chief Investment Strategist
Summary: Chinese earnings were less impacted than the rest of the world in the initial phase of the pandemic, but since then China has moved into crisis mode due to a housing crisis and energy constraints lately being intensified due to severe drought. We also take a look at Lululemon earnings next Thursday where expectations are high for revenue growth and a significant margin rebound.
Underweight Chinese equities as growth has stalled
China came through the early phase of the pandemic with less scars on the economy due to the country’s effective lockdown. The impact on corporate earnings were less than that in the rest of the world (see chart), but the subsequent phase during the reopening has been much more challenging. China is currently facing a real estate crisis, rising unemployment, energy shortages that have recently been worsened by severe droughts, and general slowdown of the economy. In many ways it looks like the Chinese economy will go through some painful years of readjustment away from being heavily dependent on heavy investments in housing and exports.
Earnings in Q2 have been better than expected but Chinese earnings growth since Q3 2019 has lacked behind the rest of the world. A lot of new regulation in the private sector has lowered profit growth and investor flows into China has slowed down as well. Following the war in Ukraine investors have further cut exposure to China and our take is still underweight Chinese equities at this point.
Is Lululemon still attracting the consumer amid worsening inflation outlook?
While big Chinese earnings are scheduled for next week it will not have the market’s attention. From a macro perspective we are much more interested in Lululemon reporting Thursday because the company’s result will be a good barometer on consumer spending and also the outlook. We have recently seen in earnings releases from Dell and Salesforce that both companies are observing a significant change in business spending starting in July.
Analysts expect Lululemon to grow revenue in FY23 Q2 (ending 31 July) by 22% y/y with operating margin expanding again from a low level in Q1. Freight rates and global supply chains have eased somewhat over the past three months and Lululemon has had great success with its introduction of footwear. The key downside risk to watch is revenue growth expectations for the current quarter ending in October as analysts expect 20% y/y which might be too optimistic given the current trajectory of the US economy.
The list below shows the most important earnings releases next week.
- Monday: Haier Smart Home, Foshan Haitian Flavouring, Agricultural Bank of China, BYD, Pinduoduo, Trip.com, DiDi Global, CITIC Securities
- Tuesday: Woodside Energy, ICBC, China Yangtze Power, Muyuan Foods, SF Holdings, Shaanxi Coal, Midea Group, Tianqi Lithium, Ganfeng Lithium, Bank of Montreal, China Construction Bank, Bank of China, Great Wall Motor, COSCO Shipping, Partners Group, Baidu, Crowdstrike, HP
- Wednesday: MongoDB, Brown-Forman, Veeva Systems
- Thursday: Pernod Ricard, Broadcom, Lululemon Athletica, Hormel Foods
- Friday: BNP Paribas Fortis
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