China Industrial profits fell 27.1oya in September-111120631

Asia Pacific Economic Research28 October 2024J P M O R G A Nwww.jpmorganmarkets.comEmerging Markets Asia, Economic and Policy ResearchGrace Ng(852) 2800-7002grace.h.ng@jpmorgan.comHaibin Zhu(852) 2800-7039haibin.zhu@jpmorgan.comTingting Ge(852) 2800-0143tingting.ge@jpmorgan.comJPMorgan Chase Bank, N.A., Hong Kong Branch•Industrial profits fell 27.1%oya in September, reflecting coprorates’ weak pricing power amid sluggish demand conditions (with sales revenue growth undershooting cost increases), as well as a high base effect •High-tech manufacturing sectors continued to show decent profit growth; profit trends at private and foreign enterprises held up better •Industrial profit growth likely will remain sluggish amid lingering deflation pressure and a high base effectThe National Bureau of Statistics (NBS) announced that total industrial profits (including all industrial companies with annual sales from principal business exceeding 20 million yuan) fell 3.5%oya for January-September, compared to +0.5%oya for Jan-Aug. For the single month of September, the NBS estimates that industrial profits dropped 27.1%oya (vs. -17.8%oya in August). Overall, the softness in the September industrial profit data seems to reflect: (1) Sluggish domestic demand and general weakness in industrial corporates’ pricing power (recall that PPI fell 2.8%oya in September, and down 0.8% m/m sa); (2) Overall industrial coporates’ sales revenue growth (at 2.1%oya in Jan-Sep) underperformed the rise in the costs of production (+2.4%oya), hence dragging down profit margins; (3) A high base effect, as industrial profits picked up notably in August and September last year. In further details, sales revenue growth slowed further to 2.1%oya in Jan-Sep (vs. 2.4%oya in Jan- Aug), while the cost of sales rose 2.4%oya (vs. 2.6%oya in Jan-Aug). Profit margins fell further to to 5.27% in Jan-Sep (vs. 5.34% in Jan-Aug). By ownership type, profits of foreign enterprises (+1.5%oya in Jan-Sep) and private enterprises (-0.6%oya) continued to outperform, while those of SOEs (-6.5%oya) and shareholding firms (-4.9%oya) remained weak. Regarding industrial corporates’ operating efficiency, product inventory rose 4.6%oya in September (vs. +5.1%oya in August), while inventory turnover eased modestly to 20.0 days (vs. 20.4 days in August). Regarding corporates’ cash flow conditions, bills and accounts receivables increased 7.6%oya in September (vs. 8.4%oya in August), while the payback period for receivables eased modestly to 66.3 days (vs. 66.8 days in August).By sector breakdown, the manufacturing sector’s profits fell 3.8%oya in Jan-Sep, while the upstream mining sector’s profits fell 10.7% amid easing commodity prices. The high-tech manufacturing sector’s profits grew 6.3%oya in Jan-Sep (vs. +10.9%oya in Jan-Aug), contributing 1.1%pts to overall industrial profits growth. According to the NBS, the leading sectors included green manufacturing such as lithium-ion batteries (58.8%oya in Jan-Sep),