June 28, 2012 / 10:44 AM / 6 years ago

Companies feel the heat as China slowdown takes toll

HONG KONG (Reuters) - An economic slowdown in China is taking a toll on a growing number of companies, with a series of profit warnings highlighting how weakness in the world’s second-largest economy is hitting earnings and rattling investors across the board.

Shareholders of GOME Electrical (0493.HK), China’s No.2 home appliance retailer, said at the company’s annual general meeting on Thursday that they were concerned about the impact of a China slowdown on the company’s sales.

“The management admitted that sales have been affected by a slowdown in economic growth, but they didn’t clearly say if a recovery will come or things will be steady for the rest of the year,” said Calvin Tan, a director of investment at Ma & Wong Asset Management.

GOME’s shares, which have plunged 44 percent so far this year, closed down nearly 4 percent at HK$0.98 on Thursday, their lowest level since October 2008, lagging a 0.8 percent drop in the benchmark Hang Seng Index .HSI.

“It is too late for us to sell the shares and we don’t know how long we have to keep the stock,” said a GOME shareholder who left in the middle of the meeting and declined to be named.

The concerns over GOME come after shares of China Resources Cement Holdings (1313.HK) closed down 5.5 percent on Thursday after it warned of a sharp fall in first-half earnings as selling prices for cement products have fallen.

China’s central bank cut its policy rates in June for the first time since the global financial crisis as data for April and May suggested growth was weakening more than previously thought.

Many economists have cut their forecasts since May and say second-quarter growth could be just over 7 percent, which would be the weakest pace of expansion since the global economic crisis.

A Reuters poll in May showed a consensus forecast for full-year growth in 2012 of 8.2 percent, which would be the slowest pace of growth since 1999.

“The worst is yet to come,” said Paul Tang, chief economist at the Bank of East Asia (0023.HK). “The impact could be reflected in the third quarter before some sign of improvement. That is why there is an urgent need for the Chinese government to launch some supportive measures.”


A clampdown on China’s property sector by policymakers has weighed on GOME and its bigger rival, Suning (002024.SZ), seen by some as China’s answer to Best Buy (BBY.N), as spending on appliances has eased.

“Sales simply fell miserably this year, at least 30 percent down from last year, in terms of refrigerators and laundry machines,” said a sales assistant at a GOME store in China who would only give her surname Zhang as she was not authorized to speak to the media.

Indeed, home appliance sales rose just 0.5 percent in May from a year earlier, underperforming a 13.8 percent increase in overall retail sales, government data shows.

“It’s also related to the slowdown in new apartment purchases, because as soon as you buy an apartment, you need to buy a new refrigerator, washing machine and such,” said Bruno Lannes, Shanghai-based head of Bain & Company’s retail and consumer products practice for Greater China.

China’s property investment grew 18.5 percent in the first five months from a year earlier, down from an annual rise of 27.9 percent for the full year of 2011 and 33.2 percent in 2010.

Some Suning staff shrugged off concerns of a slowdown.

“The tightening policy only has minimal impact on our sales. Even though a household is restricted to one or two homes, the total transactions are still huge and people’s demand for home appliances is strong,” said Xiao Yuanfu, a sales manager at Suning who joined the company in 2004.

High-end products have also come under pressure.

Zhang Yuping, executive chairman of Hengdeli Holdings Ltd (3389.HK), China’s top luxury watch retailer, told Reuters earlier this month that an uncertain economic environment had slowed sales growth of luxury watches on the mainland this year.

“On the industry front, a trend of slower demand for high-end products is expected this year, with sales of Cartier and Rolex already seen slowing,” Zhang said.

Caterpillar Inc (CAT.N), the world’s largest heavy machinery maker, warned of weakness this month and said it was scaling back production in China to reflect a slowdown in the industry.

Caterpillar rival Sany Heavy Industry (600031.SS) said on Thursday it might delay its planned Hong Kong initial public offering of shares if market conditions remained weak. It filed for a $2 billion listing, Thomson Reuters publication IFR reported in May.

Sany’s group president was, however, optimistic for the company’s sales in the second half.

“The second half of this year will be better than the second half of last year,” said Sany’s president, Tang Xiuguo, adding this was because he did not expect further tightening policies.

Additional reporting by Liangi Chiang and Terril Jones in BEIJING, SHANGHAI Newsroom; Editing by Matt Driskill

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