© Reuters. FILE PHOTO: A cleaning worker is seen through a glass window at a shopping center in the Central Business District (CBD), amid the outbreak of the coronavirus disease (Covid-19) in Beijing, China, June 2, 2022. REUTERS/Tingshu Wang
By Gaurav Dogra and Baturja Murugaupathi
(Reuters) – Asian corporate earnings fell in March for the first time in seven quarters, weighed down by sluggish demand amid the lockdown in China and slipping margins amid rising input costs.
According to a Reuters analysis of the 1,500 largest large and medium-sized companies in Asia by market capitalization and those covered by at least three analysts, the cumulative profits of these companies declined 3.2% year-on-year in the March quarter.
Chart: Asian Companies Quarterly Profit (https://fingfx.thomsonreuters.com/gfx/mkt/gdpzyeoyevw/Asian%20companies’%20quarterly%20profit.jpg)
This was the first drop since June 2020.
The data also showed that their average net margin came in at 5.86%, the lowest in seven quarters.
Chart: Asian Firms Net Margins (https://fingfx.thomsonreuters.com/gfx/mkt/jnpwezneopw/Asian%20firms’%20net%20margins.jpg)
“High commodity prices are affecting profit margins as companies struggle to pass on higher input costs to consumers,” said Herald van der Linde (NYSE: NYSE), head of equity strategy, Asia Pacific, at HSBC.
The profit slump came as investors dragged regional stocks out of fear that companies might be unable to deal with higher interest rates and rising inflation.
Business and consumption in China slowed in the first quarter due to the resurgence of COVID-19 cases, which also affected regional companies exporting to the Asian country.
The data showed that Malaysian and South Korean companies, which derive much of their revenue from China, saw their profits fall 18.3% and 18.9%, respectively, in the first quarter.
Graph: Country Breakdown of Earnings Growth in Q1 2022 (https://fingfx.thomsonreuters.com/gfx/mkt/zgvomegmxvd/Breakdown%20by%20country%20for%20profit%20growth%20in%20Q1%202022.jpg)
Toyota The Motor Company (NYSE:) reported a 33% drop in operating profit for the March quarter and warned that unprecedented increases in raw material costs could wipe out a fifth of its full-year profit amid supply chain stresses that have rocked the auto industry.
Lenovo, the world’s largest PC maker, reported the slowest quarterly revenue growth in seven quarters as demand for personal computers slumped after two years of demand caused by the pandemic.
Some analysts believe that higher interest rates will continue to affect corporate earnings and margins in the coming months.
South Korea’s central bank has already raised interest rates three times this year, while India’s central bank has raised twice to fight inflation and stem outflows.
We expect central banks to tighten monetary policy as inflationary pressures persist. “High borrowing costs are sure to hurt leveraged companies,” said Zhikai Chen, head of Asian equities at BNP Paribas (OTC:) Asset Management.
However, he added that the impact on financing should be manageable as Asian companies, particularly those hit hard by the Asian financial crisis, have reasonable leverage ratios.
According to the data, profits of Asian companies are expected to rise by only 6.7% in 2022, the lowest level in three years, with analysts continuing to expect a slowdown in China for a while.
“In the near term, we believe slowing economic growth, diminishing operating leverage and the lagging effect of higher input prices (particularly oil) are likely to have a greater impact on margins in 2022,” said Oman Patel, investment analyst at Credit Suisse.
Graph: Sector Breakdown of Net Margins (https://fingfx.thomsonreuters.com/gfx/mkt/egvbkwdykpq/Breakdown%20by%20sector%20for%20net%20margins.jpg)
Chart: Sector Breakdown of Earnings Growth in Q1 2022 (https://fingfx.thomsonreuters.com/gfx/mkt/byprjdyjgpe/Breakdown%20by%20sector%20for%20profit%20growth%20in%20Q1%202022.jpg)