Hottest China Trade May Unravel as Earnings Disappoint Investors

Shares of China’s state-owned enterprises have been a hot trade in a mostly lackluster equities market this year, but disappointing earnings are causing investors to reassess their bullish bets.

About three-fifths of the largest constituents in a Hang Seng gauge of state-owned enterprises missed earnings-per-share estimates in the latest results season, according to data compiled by Bloomberg Intelligence. Weighted average earnings were about 4.4% lower than expected, with utilities, telecommunications and consumer staples having the biggest sectoral misses.

Low valuations coupled with expectations of reforms and a bigger role in carrying out Beijing’s policy agenda have been catalysts for shares of large state firms. But a bleak earnings picture and investors’ renewed interest in private enterprises following the overhaul of Alibaba Group Holding Ltd. signal further gains may be hard to come by.

“There are still no clear signs of earnings improvement for most of the sectors,” said Minyue Liu, investment specialist for Asian and Greater China equities at BNP Paribas Asset Management. “SOEs are more resilient in a downside market given their market cap and lower valuation. Essentially, in a growth market, POEs are likely to be more attractive.”

The SOE cohort’s weighted aggregate net income grew 6.1% in 2022, less than a quarter of the growth in 2021, according to Bloomberg Intelligence.

The latest earnings season contributed to dismal 2022 results for several companies. China Life Insurance Co. shares fell the most in five months after the nation’s largest life insurer posted a drop in full-year profit due to Covid lockdowns and a plunging stock market.