The Chinese stock market is no longer the barometer of the Chinese economy. While the overall earnings of listed companies have been on the up — growing 16 percent to 1.726 trillion yuan in the first three quarters of 2013, the benchmark indexes have been on the slide.
The benchmark of the Shanghai stock exchange fell 8.47 percent and the Shenzhen bourse 12.82 percent on the last day of the year. Shanghai slid 6.75 percent for the entire year while Shenzhen shrank 11 percent.
Part of the reason is the challenges confronting traditional, yet profitable, backbone sectors such as banking. Mainland lenders are rolling in dough — leader Industrial and Commercial Bank of China (601398.CN) raked in 750 million yuan in net profit per day and 205.53 billion yuan in total in the first nine months. The combined net profit of all 16 listed mainland lenders was 918.4 billion yuan for the period, 110.2 billion yuan more than the other 2,418 counters put together.
But investors are worried about upcoming challenges from issues like interest rate liberalization and local government debt. Those fears kept the price-earnings ratios of these red-hot profit machines below the market average for most of last year.
Analysts advise investors to look instead at emerging upstarts from various industries, focusing on profit margin. Analysis by newspaper Southern Weekend identified a number of counters with greater prospects.
Stripping out non-recurring items, oil and gas technical solution provider Sino Geophysical Co., Ltd. (300191.CN), water treatment operator Zhongshan Public Utilities Group Co., Ltd. (000685.CN) and highway investor Dongguan Development (Holdings) Co., Ltd. (000828.CN) have led the way in profit margin during the past three and a half years, with average margins ranging from 51 percent to 57 percent.
The newspaper also gauged the sustainability and potential for growth by calculating the five-year (2008-2012) average increase in net profit.
Drug producer Shanda WIT Science & Tech Co., Ltd. (000915.CN, 69 percent), building materials maker Gold Mantis Construction Decoration Co., Ltd. (002081.CN, 68 percent), logistics operator Freetrade Science & Technology Co., Ltd. (600794.CN, 60 percent) and traditional Chinese medicine supplier Kangmei Pharmaceutical Co., Ltd. (600518.CN, 60 percent) were among the best performers by this standard.
Analysts say these companies benefit from China’s economic structural reform and industrial integration and have been pioneers in their areas with strengths in innovation and marketing.
– Contact the writer at [email protected]