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Economy

Chinese Earnings Reports Reveal That New Technologies Are Where It’s At

May 10 , 2019
  • Sara Hsu

    CEO, China Rising Capital Forecast

Newly released earnings reports show that new technologies are at the center of China’s growth. Despite China’s slowing economy, new energy vehicles and 5G communications equipment sellers performed especially well. Communications operators are expanding into 5G, which promises to provide strong future revenues.

Automobiles

Annual reports of auto manufacturers were recently released, and results indicate (link in Chinese) that the market as a whole is not functioning at its peak due to weaknesses among traditional automakers. According to the China Association of Automobile Manufacturers, passenger car sales this year are predicted to remain at about the same level as last year. Changan Automobile showed a year-on-year operating income decline of 17.14%, while net profit attributable to listed shareholders declined by 155.37%. On the other hand, BAIC enjoyed a year-on-year doubling of its net profit, most of which came from Beijing Benz, its joint venture brand. Brilliance China experienced a year-on-year decline in total revenue of 17.5%, although net profit increased by 33% much of which was due to profits from BMW.

SAIC Group, another joint venture, also performed well. Its three major joint venture brands, SAIC Volkswagen, SAIC-GM, and SAIC-GM-Wuling accounted for 87% of total sales. SAIC Group's brands Roewe and MG sales were up 32.18% and 34.45% respectively. Sales included new energy and Internet vehicles. Coming in just behind SAIC Volkswagen, FAW-Volkswagen and SAIC-GM, Geely Automobile's annual sales rose 20.3% year-on-year. Geely’s revenue increased by 15%, and its net profit rose by 18% after it launched new models that experienced strong sales. The company’s auto finance arm experienced a net profit surge of 352% from 2017.

Sales of new energy vehicles have been performing well. BYD, Beiqi Blue Valley (BAIC New Energy) and Great Wall had the highest sales this month. BAIC New Energy gained a total revenue increase of 43%, although it suffered a loss of 729 million RMB. BYD did much better- the company is an electric car maker that has outperformed Tesla in terms of its profitability. The company reported an increase in profits of 632% in the first quarter, year-on-year. Government subsidies helped its profitability- its subsidy amounted to 2.073 billion RMB.  BYD expects growth to continue, as demand for electric vehicles continues to rise in China. Sales of new energy vehicles were up 147% in the first quarter year-on-year, and outpaced the sales of traditional vehicles.  This has allowed the government to reduce the scale of subsidies to some extent. The new energy vehicles market shows great promise going forward, as electric cars have gained in popularity.

Communications

For communications equipment makers like Huawei, 5G is proving to be an important area of expansion. Huawei’s earnings showed that the company has not been kept down by political pressure from the US and other countries. The firm reported a 39% year-on-year increase in its first quarter revenue. Huawei shipped 59 million smartphones over this period, and had signed 40 commercial contracts for 5G with top global carriers by the end of March. The US has contended that Huawei is a national security risk, and has unsuccessfully attempted to persuade countries like Germany and the UK to prevent Huawei from entering their 5G communications systems. In fact, the UK plans to allow Huawei to participate in construction of 5G networks, while Orange worked with Huawei to complete the first commercial verification of 5G mobile phones in Spain.

Communications operators lag behind equipment makers, as they have not fully launched 5G platforms. However, this area shows promise. Both China Unicom and China Telecom have held 5G conferences. China Unicom launched the 5G Application Innovation Alliance to fund 5G projects, while China Telecom has released three major 5G platforms and 10 Big 5G businesses, such as intelligent transportation and smart manufacturing. China Mobile’s 5G strategy was launched in 2018 to accelerate application of 5G networks. Although operating income declined by a small amount for all three operators, both China Telecom and China Unicom experienced an increase in net profit attributable to shareholders, of 4.5% and 24.8% respectively.

New technologies as bright spots

Firms operating in areas in which new technologies are being implemented are bright spots in China’s otherwise lagging economy. The performance of companies like Huawei and BYD is far better than that of firms like Wanda Movies and Xishui (Tianan Property Insurance). Although economic sentiment is improving, China’s economy continues to suffer from softer global demand and the ongoing trade war with the U.S. China’s government has intervened in the economy through the use of monetary and fiscal policy, ensuring the availability of funds while controlling for risks, cutting taxes, and supporting infrastructure growth. In this environment, enthusiasm for traditional sectors may rise and fall, but new technologies will likely to prove a consistent source of growth.

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