China's Big Earnings Showdown Looms as Stocks Begin to Sink

(Bloomberg) -- The next few days are likely to be a tipping point for the world’s top performing stock market in China.

With some of the nation’s largest companies scheduled to report earnings, investors will be looking for evidence that an improving corporate sector will support valuations at a time when the government is paring back stimulus.

Doubt is creeping in -- the Shanghai benchmark has slumped nearly 6 percent this week as of Friday, its worst performance since October. That’s reduced this year’s gain to 24 percent, still the best among major global gauges tracked by Bloomberg. A stronger dollar is the latest headwind, while the memory of a flood of profit warnings in January may be spurring some profit taking before the earnings data.

"The days of valuation expansion on back of China’s strong economic stimulus are behind us now," said Dai Ming, a Shanghai-based fund manager with Hengsheng Asset Management Co. "People will need to take a longer-term view and focus on earnings."

Firms making up more than two-thirds of China’s $7.2 trillion equity market are yet to release results before this season’s deadline on April 30, data compiled by Bloomberg show. The calculations include companies reporting for 2018 as well as for the first quarter.

Results so far have not been encouraging. Nearly half of companies that had reported 2018 results saw their earnings deteriorate, and about 40 percent of those that announced first-quarter results recorded a loss or profit decline from the same period last year.

Earnings releases led to mixed fortunes for some stocks Friday. Liquor distiller Luzhou Laojiao Co. jumped 7 percent to a record high after strong first-quarter results prompted brokers to boost target prices. OFILM Group Co. sank 10 percent to be the worst performer on MSCI China Index, after an unexpected loss for the first three months.

Investors are looking for clues on growth from the biggest bellwethers among China’s 3,600-odd listed firms that are reporting this season. Industrial & Commercial Bank of China Ltd. -- the country’s biggest company and the 13th most valuable stock in the world -- is scheduled to report its first-quarter results on Monday. An update from oil giant PetroChina Co. is also due that day.

All signs suggest China’s nervy bull market is in need of a fresh catalyst.

"Companies with solid earnings should be able to outperform," said Dai. "Even in a downtrend."

--With assistance from Lei Mu and Matt Turner.

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David Watkins

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With assistance from Bloomberg