The rate of profit increases slowed down for Chinese companies as government measures to cool down overheated sectors began to bite, according to data on half-yearly results compiled and released by the Shanghai and Shenzhen exchanges yesterday.

In the first half of 2005, the average weighted earnings per share of China's 1,386 listed companies fell 2.13 percent year-on-year to 0.138 yuan (1.7 US cents).

The companies' cost increases outpaced income growth which led to reduced profits.

Figures from 1,340 companies surveyed show a combined income of about 1,833.6 billion yuan (US$226.4 billion), 23.87 percent higher than the same period last year. But their costs were 4 percentage points higher than income growth at 1,473.3 billion yuan (US$182 billion).

The gross profit rate for the 1,340 companies slumped to 19.65 percent in the first six months from 22 percent.

Net profit was 103 billion yuan (US$12.7 billion), an increase of 4.17 percent over the same period last year.

"The big gap in the growth rates of income and net profit is a signal that China's economy has been slowing down and is headed for a soft landing," Dong Chen, the chief director of the research department of China Securities, said.

Upstream and downstream industries had contrasting performances due to the government's cooling-down measures, Dong said.

Of the 22 industries, half witnessed a pick-up in profit pace while the other half slowed down.

Timber and furniture, real estate and mining were the top three industries where profits rose steeply while electronics, manufacturing; and communications and culture recorded the lowest profit growth.

Resource industries such as oil, coal and steel enjoyed accelerated growth.

Top Chinese steel maker Baosteel posted a net profit of 7.15 billion yuan (US$883 million) for the first half of 2005, up by almost 50 percent from last year. Overseas-listed oil heavyweight PetroChina's income rose about 36 percent.

In the consumption sector, electronics, automobiles, and power and machinery companies posted lower profits, which analysts said was because of increased costs of raw materials.

Top refiner Sinopec chalked up only a 17-percent income increase due to the lack of a market pricing mechanism, which drags down the revenues of refining companies, Lorraine Tan, director of research, Asia-Pacific Equity Research Service of Standard & Poor's, said.

The big difference in pricing power between companies in upstream sectors, such as oil and gas, iron ore and coal, and those further down the value chain will remain, Wen Tianna, executive director of SBI (Softbank Investment) E2-Capital, a Hong Kong-based investment bank, said.

This means that investors will be focusing on industries where profit margins are steady and avoid sectors with low pricing power or heavy margin pressures, Wen said. Mid-stream sectors like power generators, steel, aluminium, refineries, chemicals and cement still have some pricing power, while producers of textiles, household goods, electronics and cars are seen facing margin pressures due to over-capacity or rising costs, Wen explained.

"The food and beverage sector is also worth keeping an eye on, as these companies are seeing rising margins at the moment due to a decline in the price of agricultural products like barley, soybeans and palm oil. The key challenge for these companies is to build a brand that domestic investors will recognize," Wen added.

(China Daily September 1, 2005)