At Least 20 Companies in China Issued Profit Warnings in One Day

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Chinese executives are sounding warning bells over the world’s second-largest economy.

At least 20 companies, including China Life Insurance Co. and Chongqing Changan Automobile Co., told investors late Tuesday that full-year earnings would fall well short of expectations. Reasons they cited included the country’s economic slowdown, as well as recent changes to accounting rules and the equity market’s $2.3 trillion rout last year, the world’s biggest loss of value. China Life fell as much as 4.3 percent in onshore trading Wednesday.

The firms join a growing chorus from around the globe warning about China’s weaker demand. More gloomy signals are likely before a deadline Thursday, when many Chinese companies must report whether they expect any substantial changes in their financial results. More than 1,800 firms have announced preliminary data, with those in the tech, communications and financial sectors suffering the most.

“Private companies are particularly vulnerable to the economic downturn,” said Lv Changshun, a money manager at Beijing Dajun Zhimeng Investment Management Co. “The deleveraging campaign and the deterioration of their corporate health is normal for any economy that is shifting gears and slowing down.”

Changan, Ford Motor Co.’s main partner in China, said 2018 profit probably tumbled as much as 93 percent. China Life, the country’s biggest life insurer by market share, said net income may have dropped as much as 70 percent. Detailed releases are due by the end of March.

Beijing HualuBaina Film & TV Co., cloud-storage operator Gosun Holding Co. and First Tractor Co. all said they’ll probably post billions of yuan in losses for 2018 after being profitable in 2017. Anhui Shengyun Environment Protection Group Co. and Anhui Ankai Automobile Co. -- which makes buses and auto parts -- said their net losses will be at least twice as large as in 2017.

Guangdong Homa Appliances Co., a maker of refrigerators, dropped by the 10 percent daily limit Wednesday to its lowest price since June 2014 after predicting a loss in 2018. That’s only months after saying it would post a profit. An equity benchmark for Shenzhen, where most of the stocks are listed, closed 1.3 percent lower.

China’s economy slowed for an eighth straight month in January, as weaker global demand and decelerating factory inflation combined to undercut growth, according to a Bloomberg Economics gauge aggregating the earliest-available indicators on business conditions and market sentiment. The data suggests government efforts to stimulate the economy have yet to translate into more business activity so far in the first quarter.

Tougher regulatory scrutiny on accounting calculations has also forced companies to reduce the value of goodwill on their balance sheets, after expensive acquisitions proved less fruitful than expected. The China Securities Regulatory Commission in November required listed firms to assess goodwill impairments at the end of each year, spurring concerns that those costs will dent earnings over a number of years.

Impairment Charges

Instead of posting years of losses, some companies have opted to bite the bullet in one go, allowing them to report better numbers going forward.

“Companies whose shares are already quite battered have nothing to lose by lowering earnings forecasts or taking large impairments for 2018,” said Qi He, a fund manager at Huatai Pinebridge Fund Management Co. in Shanghai. “Many of these companies are actually ‘taking a bath’ to begin anew in 2019.”

A case in point was Anhui Liuguo Chemical Co., which warned it will probably report a net loss of as much as 620 million yuan ($92 million) due to impairment charges at its subsidiaries. The stock also closed limit down.

More companies on Wednesday said impairment losses have hurt profits, including chemical-maker Sichuan Hongda Co. and brokerage Industrial Securities Co.

Chinese equity investors had nowhere to hide last year in a market under pressure from a slowing economy, record defaults and the country’s souring relationship with the U.S. Throw in a national vaccine scandal, a decline in consumer spending, the Trump administration’s crackdown on Chinese tech and Beijing’s tightening grip on education, gaming and drugs, virtually no sector was spared in one of the broadest sell-offs since the global financial crisis.

“While investors had expected poor earnings given the economic slowdown, the scope and magnitude of profit declines and losses were bigger than expected,” said Ken Chen, a Shanghai-based analyst with KGI Securities Co. “A lot of companies’ guidance and estimates were too aggressive in 2016-2017, making their earnings’ slide last year all the more drastic.”

--With assistance from Amanda Wang, Mengchen Lu, Jeffrey Black, Jun Luo and Tian Ying.

To contact Bloomberg News staff for this story: Sofia Horta e Costa in Hong Kong at shortaecosta@bloomberg.net;April Ma in Beijing at ama112@bloomberg.net;Fox Hu in Hong Kong at fhu7@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Emma O'Brien

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With assistance from Bloomberg