(Bloomberg) -- After a bleak first half for corporate earnings in China, the current reporting season is bringing more grim news.
About 44% of more than 1,200 firms that have given profit guidance for the third quarter predicted worse earnings than from a year earlier, in terms of smaller profits, deeper losses or swings into loss. It shows earnings are still deteriorating after a wave of profit warnings in the first half. The ratio is on par with the level in same period last year, which was the highest for a third quarter since 2015.
Pain is spreading through the economy. After worsening data this week, third-quarter gross domestic product figures due Friday are expected to show a deepening slowdown. Concerns about the impact of the trade war on the global economy are building, with the U.S. and China seen to be far apart on negotiations despite pledges made last week.
CHINA PREVIEW: 3Q GDP Likely Sub-6%, Adding Easing Pressure
“It all hinges on the trade talks,” said Chaoping Zhu, a global market strategist with JPMorgan Asset Management in Shanghai. “Earnings could deteriorate further as economic weakness will likely persist into the first half of next year, given the impact of trade talks on exports and firms’ confidence in investment.”
NavInfo Co., a navigation software maker, lost 14% over two days through Wednesday after it estimated a plunge of as much as 91% in nine-month profits on weaker auto sales. Film-distributor Huayi Brothers Media Corp. also sees a loss for the period, triggering a 3% drop over two days through Wednesday. FAW Car Co. saw a three-day decline of 2.1% through Thursday, after flagging a loss of as much as 306 million yuan ($43 million) for the third quarter.
The earnings guidance pool is dominated by Shenzhen-listed firms. Companies listed on the ChiNext board are required to give guidance on their quarterly results, while the rest of the market must flag significant changes such as a rise or drop of more than 50% from a year earlier. Shanghai-listed firms can warn investors of any big change in their quarterly earnings voluntarily.
More than half of companies said earnings probably improved or remained unchanged. Still, China International Capital Corp. estimates profits grew 9.8% in the nine months through September, indicating a slowdown from the 10.4% growth reported for the first half. It sees automakers, developers and liquor producers among sectors under pressure, analysts led by Hanfeng Wang wrote in a note earlier this week.
Companies favored by investors also face risks if they don’t meet lofty expectations. Kweichow Moutai Co. dropped as much as 4.2% Wednesday, after its third quarter earnings growth left analysts unimpressed.
Investors may need to lower their expectations, given that any trade talk progress will take time to filter through to the economy, said Gerry Alfonso, executive director of the international business department at Shenwan Hongyuan Group Co.
“Positive developments, such as a partial trade deal, will help the real economy but you will need to wait a few months to see it actually reflected on the hard data.”
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