Date
17 August 2019
Profit warnings may reflect cyclical problems, one-off problems, or more seriously a weakening in a company’s fundamentals. Photo: Reuters
Profit warnings may reflect cyclical problems, one-off problems, or more seriously a weakening in a company’s fundamentals. Photo: Reuters

Profit warnings from blue chips: should investors be concerned?

At least five Hong Kong-listed bluechip companies have issued profit warnings this year.

Three of them – AAC Technologies Holdings Inc. (02018.HK), Sunny Optical Technology (Group) Co. Ltd. (02382.HK), and Geely Automobile Holdings Ltd. (00175.HK) – are in cyclical sectors: their earnings are quite sensitive to macroeconomic growth.

As the global economy cools amid the US-China trade war, cyclical businesses are expected to be the most affected, putting pressure on these three companies.

If the macro environment gets worse, it’s possible that blue chips from other sensitive sectors, such as banking and insurance, would also face earnings pressure.

The other two companies that have issued profit warnings are CLP Holdings Ltd. (00002.HK) and MTR Corp. Ltd. (00066.HK). Profit alerts from these two utility firms are somewhat unusual as they are widely perceived as relatively stable.

CLP Holdings projected a first-half loss due to a HK$7 billion write-down on the value of its Australian business. Nevertheless, the write-down may not affect its core power generation business in Hong Kong.

Investors took the announcement quite calmly. The company’s share price has only dropped 3 percent since it issued the profit warning on June 20.

In the case of rail operator MTR Corp., its profit warning was the first-ever since its listing in 2000. It was mainly due to a HK$2 billion provision for the troubled Shatin to Central Link project, which is about 22 percent of the company’s full-year underlying profit in 2018.

MTR was mired in a confidence crisis due to the problem-plagued Hung Hom MTR station on the Sha Tin-Central link. The scandal has forced several people from its top management to step down.

The question is whether the HK$2 billion provision is sufficient, or whether MTR will be able to shift some of the losses to its contractors. More importantly, do these problems indicate a deterioration of the company’s fundamentals.

Profit warnings may reflect cyclical problems, one-off problems, or more seriously a weakening in a company’s fundamentals. They should be seen on a case-by-case basis. It’s hard to generalize.

This article appeared in the Hong Kong Economic Journal on July 19

Translation by Julie Zhu

[Chinese version 中文版]

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RT/CG

Hong Kong Economic Journal columnist

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