27 March 2018
Industrial profitability held up on stronger volume growth: Detailed read of January ~ February industrial enterprise financial data


In this note, we make the comparison between January-February industrial enterprise financial data vs. those from 4Q 2017, given the “year-end noise” of December 2017 data that contributed to considerable distortion.

The reported January ~ February 2018 industrial enterprise profit growth edged down to 16.1% YoY from 16.5% YoY in 4Q17. Both reported industrial enterprise profit and revenue growth appears robust January ~ February, after being depressed by the “year-end” effect in November ~ December. Sector wise, upstream profit growth picked up after a temporary “dip” in November ~ December, while mid-to-downstream profit growth softened somewhat. More specifically, upstream profit growth recovered to 21.2% YoY in January ~ February from 5.3% YoY in 4Q17, however, the trend of upstream profitability “normalization” continues, considering 395% YoY upstream profit growth in 2017. On the other hand, profit growth in the midstream and downstream softened to 11.3% YoY and 5.8% YoY from 20.8% YoY and 8.6% YoY in 4Q17, partially driven by a rising base.

The reported industrial revenue growth accelerated visibly to 10% YoY in January ~ February 2018 from 6.4% YoY in 4Q17. January ~ February revenue growth was also recorded meaningful gain of 1.2ppt vs. December 2017. Cross-sector examination showed a broad-based recovery – upstream industrial revenue growth accelerated to 2.4% YoY from -5.5% YoY in 4Q17, while midstream and downstream revenue growth picked up to 8.2% YoY and 7.6% YoY, from 6.6% YoY and 6.2% YoY, respectively.

Industrial profit margin expanded to 6.6% in January ~ February from 6.4% in 4Q17, after seasonal adjustment. Sector wise, upstream profit margin expanded notably to 13.3% from 4.6% in 4Q17. Meanwhile, midstream profit margin also edged up to 6% in January ~ February from 5.8% in 4Q17, while downstream profit margin stayed largely flat at 7.1%. Out of the 41 sub-sectors covered by the National Bureau of Statistics’ industrial enterprise database, 27 industries recorded acceleration of revenue growth in January ~ February compared with 4Q17. Meanwhile, 28 industries saw margin expansion in January ~ February compared with 4Q17.

We have observed the most notable acceleration of revenue growth in metal mining, cement, utilities, as well as consumer-related industries such as medical products, and to a lesser extent, wood processing, textile, wine& beverage, & cultural products. Meanwhile, margin expansion was more notable in petroleum & gas acquisition sector, on the back of higher oil price and surging gas prices in January ~ February. Meanwhile, most of the downstream industries such as auto, food, medical products, furniture, as well as cement and utilities also enjoyed margin expansion in January ~ February.

Inventory level remained largely flat in January ~ February. On the other hand, financial leverage ratio jumped on LNY seasonal factor, and potentially conversion of non-standardized de facto liabilities to loans. Inventory growth stayed flat, while inventory to sales ratio edged up. The total liability/asset ratio jumped in January ~ February, partially due to the seasonal factor around the Lunar New Year (LNY), but may also be attributable to the regulatory tightening over “non-standardized assets” (NSA) since end-2017. Meanwhile, account receivable growth and account receivable (to sales) ratio remained largely flat.

Industrial enterprise financial data showed a pick-up in volume growth, consistent with January-February industrial production growth. While March data may be damped by the LNY distortion, we maintain that the industrial enterprise profitability and balance sheet will continue be on the mend throughout 2018. Although YoY price inflation of industrial product continued to ease as the base effect “normalizes”, faster “volume” growth helped drive robust expansion of industrial enterprise revenue and profit growth – these changes are consistent with the trend in January-February industrial production data. Granted, part of the volume growth in January-February was attributable to the late-LNY effect, which tends to boost YoY production growth in January-February at the expense of weaker growth in March. Therefore, we will not be surprised to see a temporary setback in industrial enterprise revenue and profit growth next month. However, short-term volatilities aside, we continue to observe positive signals from the industrial enterprise financial data, including stronger cash flow, higher return on equities, faster inventory and asset turnover. Going forward, we expect the industrial enterprise profitability to improve further, with more supply-driven divergence of upstream profitability trend, as well as relative strength in the consumption-driven industries.