Analysts upgrade China's 2023 earnings projections on reopening hopes

CHINA: Analysts have upgraded forecasts for Chinese corporate earnings in 2023, on expectations that its economy will benefit from stimulus measures and the easing of COVID-19 restrictions.

Analysts raised forward 12-month earnings of companies on the MSCI China index by 2% in November, data from IBES estimates showed. They had earlier cut the forward 12-month earnings by 15% between January and October this year on concerns over slowing growth.

Refinitiv data also showed that earnings of Chinese large and mid-cap companies, with market capitalization of at least $1 billion, are expected to rise 17.3% in 2023 on average, the second-highest after India.

"We expect significant easing in COVID-19 restrictions in the second quarter. We forecast earnings growth of 15%-20% for MSCI China, which would be underpinned by lower commodity prices, improved economic growth and lower asset write-downs," said James Wong, strategist at UBS.

"This could drive a total shareholder return of 25%-30% for the market next year," he added.

China's COVID-19 cases remain near record highs. Still, some optimism has emerged as major cities, including Guangzhou, have lifted their lockdowns in recent days, with Vice Premier Sun Chunlan saying the ability of the virus to cause disease was weakening.

Among sectors, the consumer discretionary and consumer staples sector led the earnings projections for next year, expecting net profit growth of about 35% each, according to IBES data.

Consumption remains the most significant area of opportunity for China equities in 2023, as consumers increased savings in light of the uncertain macro environment in the last few years, said UBS' Wong.

Industrials and tech firms are also estimated to post a growth of 30% and 23%, respectively, the IBES data shows.

Analysts expect the resumption of online game license approvals, potential resolution of a dispute over U.S. authorities access to Chinese audits, and conclusion of cybersecurity investigations to boost tech sector earnings.

Shares of video game developers rallied this month after China's regulator granted publishing licences to 70 online games, including titles belonging to major internet firms Tencent Holdings Ltd (0700.HK) and NetEast Inc (9999.HK)

In real estate, a recent slew of support measures, including loan repayment extensions is expected to prop up the sector, which is estimated to post nearly a 10% growth next year.

Regulators lifted a ban on equity refinancing for listed property firms this week.

The MSCI China has fallen 29.3% this year, and its forward 12-month price-to-earnings ratio stood at 9.55, much lower than the 10-year average of 11.29.