Large inventories, sluggish demand hamper listed firms

Slightly more than half of A-share listed companies reported a positive outlook in their first-quarter reports and many others are burdened by large inventories and sluggish demand amid slower-than-expected GDP growth.

Analysts said the outlook is likely to remain uncertain for A-share companies in the first half of 2013.

Companies in the retail, machinery and construction materials sectors posted the least positive performances and made the most guarded forecasts for the next quarters.

Automobile, domestic appliance and realty companies made the brightest forecasts, amid hopes that sales may recover in the second half of the year.

"If you look at the macroeconomic data, you'll find that market performance was surprisingly lower than expectations. In some sectors, including realty and retail, the recovery has been soft," said Guo Lei, an analyst at Zheshang Securities Co Ltd.

Shenzhen-listed Jiugui Liquor Co Ltd was among the companies that posted a gloomy performance. The company in Hunan province reported a 91.5 percent year-on-year drop in net profit, which dived to 10.1 million yuan ($1.6 million).

"The entire sector is frozen amid the current sentiment and consumption of high-end liquor goes against the mainstream as official policies encourage frugality. Given the current situation, we do not expect the situation to change in the short term," said a source with the liquor maker.

As many as 359, or some 40 percent of the 904 companies listed in Shanghai or Shenzhen that had released first-quarter reports by Monday, said their performance was not as good as in the previous quarter.

Ninety companies reported first-quarter losses, according to Shanghai-based financial information services provider Wind Information Co Ltd.

The outlook for the next few months is no brighter, with 414 companies forecasting either a decline in profit or falling into the red, the Wind data showed.

A report by Barclays said: "The March activity indicators, which were released along with Q1 GDP, also point to modest industrial production", which grew 8.9 percent year-on-year, slowing from 10 percent in the previous quarter.

This unexpected slowdown suggests that despite some visible restocking of raw materials in the fourth quarter of 2012, the gradual pickup in final demand is not strong enough to support a visible follow-up in inventory restocking among downstream industries, said Barclays.

The report added that industry overcapacity continues to weigh on upstream industries and restocking needs, while steel and cement output slowed in line with slowing investment growth.

Large inventories also burdened realty developers and manufacturers. The combined value of the inventories of A-share listed companies more than doubled from 1.94 trillion yuan in 2009 to 3.91 trillion yuan by the end of 2012, according to financial data service iFind.

Realty developers had combined inventories of around 1.64 trillion yuan by the end of 2012, followed by manufacturing companies at 1.15 trillion yuan, according to iFind.

"A booming stock market in China requires reforms of the mechanism for initial public offerings, and more funds to be injected into the A-share market to increase its liquidity. Otherwise, little will be improved in the A-share market," said Zhang Qi, an analyst with Haitong Securities Co Ltd.