Earnings warnings from Chinese companies picked up pace in the past week as the nation heads into the long Chinese New Year holiday break. Shortly after the top securities watchdog got a new chairman, more than 90 listed firms issued profit warnings in the last few days.
On Monday and Tuesday, there were more 20 announcements each day that saw companies telling their investors that their 2018 earnings would fall short of expectations. Another batch of companies, nearly 40 in total, joined the chorus on Wednesday.
China Life Insurance (02628.HK), the nation’s largest insurer, said its net profit may decline 50-70 percent from the year before due to a “significant” drop in income from equity investments.
Insurers are vulnerable to market volatility since they invest a lot in equity and credit markets.
Among others, many warned of massive profit erosion in 2018 due to the impairment of goodwill.
The China Securities Regulatory Commission (CSRC) has tightened disclosure rules around goodwill in November last year, urging listed companies to conduct timely impairment test at the end of each fiscal year. They are also required to make “rational” assessment of the need for goodwill write-down.
Goodwill refers to an intangible asset class arising from one company acquiring another for a premium value. Many Chinese firms have aggressively done mergers & acquisition (M&A) deals amid the tech boom, paying huge premiums and inflating their book value.
But if the acquisition fails to pay off, goodwill will have to be reassessed and marked down.
More than half of companies issuing warnings cited goodwill write-downs as the reason. For example, Guangdong Homa Appliances Co (002668.CN) said it now expects a net loss of 1.24 billion to 1.58 billion yuan for 2018, compared with a previous forecast of 300 million yuan profit.
Humanwell Healthcare Group (600079.CN) also reversed its forecast from a net profit to a net loss of 2.2 billion to 2.7 billion yuan due to goodwill and intangible assets impairment.
Around 70 stocks fell by the maximum-allowed 10 percent on Wednesday as investors were caught off guard by the massive flow of profit warnings.
This article appeared in the Hong Kong Economic Journal on Jan 31
Translation by Julie Zhu
[Chinese version 中文版]
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