Date
24 July 2017
The number of profit warnings by listed firms is likely to hit a record high of 1,300 this year. Photo: AFP
The number of profit warnings by listed firms is likely to hit a record high of 1,300 this year. Photo: AFP

Poor corporate earnings to weigh on Hang Seng Index

HK-listed companies are asked to issue profit alert if there is material change in their earnings outlook.

According to business intelligence service provider Wisers, there are around 2,300 media reports on profit warnings issued by listed firms so far this year amid a deteriorating business climate.

Media coverage of profit warnings is expected to hit over 5,500 for the entire year.

That would reverse the downtrend since 2012, register a year-on-year rise of over 30 percent from 2015, and mark the highest level since 2013.

Listed companies have issued a total of 557 profit warnings since the start of the year, more than double the figure of positive profit alerts, according to data from the Hong Kong Stock Exchange.  

The number of profit warnings is likely to hit a record high of 1,300 for the entire year.

Also, the ratio of positive profit alerts out of all the issued profit alerts has tumbled again this year, after staging growth in the last three years.

The six-month moving average of the profit warning ratio was hovering at a high level of 4 to 5 percent over the last 12 months, and even spiked to a high of over 5 percent in March.

The six-month moving average of positive profit alert ratio has tumbled to 1.7 percent from a high of over 3 percent in August last year. That means fewer companies have issued positive profit alerts.

The net positive profit alert ratio has started to fall since the third quarter of last year, and touched a low of minus 3.3 percent in late March, the lowest since the end of 2012. That confirms the worsening outlook of company earnings.

The indicator has very close correlation with the movement of Hang Seng Index over the years. That means we can expect more downside for the benchmark.

In terms of sector performance, metals, oil and chemical and hotel/recreation are the top three sectors that recorded the lowest net positive profit alert ratio. Insurance and airline sectors are more resilient.

It’s worth noting that only four sectors have posted positive net positive profit alert ratio out of the 25 industries, and as many as 18 sectors reported negative net positive profit alert ratio. That suggests that deteriorating company earnings are widely spreading across different sectors.

To some extent, it also reflects a worsening of the broad external economic situation. It’s shown that the net positive profit alert ratio actually has very close correlation of 0.74 with the Citi Economic Surprise Index for major economies.

Hong Kong companies have suffered directly from subdued external economic growth.

Considering that companies are still struggling to improve their earnings, the Hang Seng Index may face further downside risk.

This article appeared in the Hong Kong Economic Journal on June 2.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

JZ/DY/CG

Hong Kong Economic Journal chief economist and strategist

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