Can Chinese bank earnings fuel the rebound? Can Chinese bank earnings fuel the rebound? Can Chinese bank earnings fuel the rebound?

Can Chinese bank earnings fuel the rebound?

Peter Garnry

Head of Saxo Strats

The Q2 earnings season is almost complete in the US and the numbers are stacking up to be the best seen since the Great Financial Crisis. S&P 500 companies had 9.3% year-on-year growth in revenue and 8.6% y/y growth in EBITDA per share (given the extensive share repurchase programmes the actual EBITDA growth was likely lower).

Next week, 64 companies will report earnings out of the 2,000 companies we track during earnings season. As we communicated in our latest equities webinar, the latest earnings season has been the main driver behind the summer rally in global equities. With the MSCI World index below the highs from January but underlying earnings higher, the valuation picture has improved short-term and the long-term positive picture is intact given leading indicators remain positive.

S&P 500
Chinese banks to reveal cracks?

Next week's main focus will be Chinese bank earnings with China Construction Bank (Tuesday), CITIC (Wednesday) and ICBC (Thursday) reporting Q2 earnings. All three banks are reported to show robust earnings growth but the recent slowdown in China has negatively impacted construction spending and likely increased bad loans. Investors will focus on bad loans and impairment ratios while keeping a sharp eye on the cost/income ratio of Chinese banks as there has been an increasing demand for reigning in costs. CITIC is expected by sell-side analysts to perform the best of three banks despite its bigger exposure to a brokerage business that has likely suffered somewhat from the worsening investors sentiment in China.

The three releases will hopefully give clues to whether they expect to follow the demands of the government to extent credit into the economy to boost activity. As we have been saying on our Morning Calls lately, the Chinese government has communicated that it sees a weakening credit transmission like what Europe has experienced which potentially leads to unconventional measure by the People's Bank of China going forward. But most importantly, strong earnings from Chinese banks are essential fuel for a rebound in the broader Chinese equity market.

Will Salesforce continue to deliver high growth?

Salesforce, one of the earliest movers of cloud-based technology platforms, reports Q2 earnings on Wednesday (after-market) with analysts expecting EPS at $0.47, up 43% y/y, and revenue of $3.23 billion, up 26% y/y. Salesforce has grown revenue by 25% consistently for a decade while slowly expanding its EBITDA margin as the business reaches economies of scale. As with Amazon, investors have always focused on accounting earnings with Salesforce instead of looking at the cash flow generation. Because of the massive upfront spending in growth and subscription model, there is a mismatch between the accounting figures and the cash flow figures. In the past 12-month Salesforce generated $2.5bn in free cash flow and with an enterprise value of $105.8bn this squares to a little less than 2.5% free cash flow yield. We expect growth to continue driven by deeper penetration of the existing client portfolio but also international expansion and potential topped with some add-on acquisitions.

Chinese tech: The growing margin concern?

Chinese ecommerce bellwether Alibaba reported FY'19 Q1 earnings yesterday, which was a highly anticipated release given the series of weak earnings from other Chinese technology companies. The company reported 61% y/y which was a bit higher than estimated, but the weak point was the sharp EBITDA margin contraction with Q1 seeing 9% (on adjusted basis) down from 42% a year ago. The bigger issue for many Chinese technology companies is the pursuit of growth is forcing Tencent, Alibaba, and Baidu to diversify away from their core business into secondary businesses with lower profit margins. The margin pressure will likely be a continuous theme for Chinese technology companies going forward, eating away some of the high top line growth. We are short-term sceptics of the Chinese technology sector but long-term bullish on the sector.
Alibaba
Alibaba (weekly, source: Saxo Bank)
Earnings

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992