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Antler Capital

Stanley Tsai, CFA

Macroeconomics

Industrial profits round out the macro data releases for the month. Overall, the numbers are in line with expectations, but if we look past the impact of commodity price dislocations, earnings outlook is decidedly less sanguine (Exhibit 1).
Headline industrial earnings reinforce the trends in PPI we saw earlier in the month. The 20% two-year CAGR in May was driven mainly by higher factory gate prices. Unit sales growth remained anemic and reflects weaker-than-expected infrastructure capex, exports and consumer spending. 
The upstream resource extraction industry continued to benefit from the commodities boom. Profitability gains from price hikes have more than offset low transaction volumes. This significant distortion has prompted Beijing's recent interventions. We believe margins may have topped out for the upstream producers and we will be looking at progressively tougher comps ahead.
The midstream refiners and equipment manufacturers vary in their ability to pass on price hikes to their customers. Earnings growth slowed for ferrous metals and accelerated for non-ferrous metals for this reason. In any case, margins have risen to a recent high for the sector as a whole and are set to narrow. Equipment producers have led the retreat thus far.
The logical pecking order going forward would seem to be downstream &gt; midstream &gt; upstream. We believe there is a strong case for cyclicals and discretionaries as input prices ease. And more earnings upgrades may be in the works following in Li Ning <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">(2331 HK)</a>'s footsteps. CPI still looks benign for the time being, but we would keep an eye out for a rebound in food prices. The recent recovery in pork prices - coupled with an unusually dry season globally - could make for a nasty surprise.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 100%;">Exhibit 1: Monthly Industrial Profits by Sector | % ∆ y/y </td>
</tr>
<tr>
<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/821/original/image_984775689201624923389813.png?1624923389" class="editor-image img-responsive" data-smartkarma-image-id="215821"></figure>
Note: Growth rates = 2Y CAGR
Source: National Bureau of Statistics, Our analysis
</td>
</tr>
</tbody>
</table>
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Industrial profits round out the macro data releases for the month. Overall, the numbers are in line with expectations, but if we look past the impact of commodity price dislocations, earnings outlook is decidedly less sanguine (Exhibit 1).
Headline industrial earnings reinforce the trends in PPI we saw earlier in the month. The 20% two-year CAGR in May was driven mainly by higher factory gate prices. Unit sales growth remained anemic and reflects weaker-than-expected infrastructure capex, exports and consumer spending. 
The upstream resource extraction industry continued to benefit from the commodities boom. Profitability gains from price hikes have more than offset low transaction volumes. This significant distortion has prompted Beijing's recent interventions. We believe margins may have topped out for the upstream producers and we will be looking at progressively tougher comps ahead.
The midstream refiners and equipment manufacturers vary in their ability to pass on price hikes to their customers. Earnings growth slowed for ferrous metals and accelerated for non-ferrous metals for this reason. In any case, margins have risen to a recent high for the sector as a whole and are set to narrow. Equipment producers have led the retreat thus far.
The logical pecking order going forward would seem to be downstream &gt; midstream &gt; upstream. We believe there is a strong case for cyclicals and discretionaries as input prices ease. And more earnings upgrades may be in the works following in Li Ning (2331 HK)'s footsteps. CPI still looks benign for the time being, but we would keep an eye out for a rebound in food prices. The recent recovery in pork prices - coupled with an unusually dry season globally - could make for a nasty surprise.



Exhibit 1: Monthly Industrial Profits by Sector | % ∆ y/y 




Note: Growth rates = 2Y CAGR
Source: National Bureau of Statistics, Our analysis




Related Insights

China Financials: Silver Linings Playbook

China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat 

China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 

China Macro: Exports Disappoint, but It's Still Early in the Game 


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