Recent data releases from the National Bureau of Statistics have highlighted a significant surge in profits for China's large industrial enterprises in the first two months of the year. While the broader economy is still in a recovery phase, the industrial sector has shown remarkable strength.
The first key dataset concerns industrial enterprise profits. Data shows that from January to February, profits earned by major industrial firms increased by 15.2% year-on-year. Significant profit growth was observed in several key sectors: the computer, communication, and other electronic equipment manufacturing industry saw profits surge by 200%; profits in the smelting and processing of non-ferrous metals increased by 150%; and the chemical raw materials and chemical products manufacturing sector grew by 35.9%. The non-metal mineral products industry and the textile industry also posted growth of 16.2% and 12.6%, respectively. Essentially, robust profits in the electronics, non-ferrous metals, and chemical industries drove the overall high growth for the industrial sector.
High-tech manufacturing, particularly in electronics and smart products, was a primary driver. Profits in high-tech manufacturing rose by 58.7% year-on-year, accelerating by 45.4 percentage points compared to the full previous year, and contributed 7.9 percentage points to the total profit growth of major industrial firms. Specific high-growth segments included smart unmanned aircraft manufacturing (up 59.3%), smart vehicle equipment manufacturing (up 50.0%), and other smart consumer device manufacturing (up 31.3%). The manufacturing of semiconductor discrete devices, optoelectronic devices, and electronic circuits saw profit increases of 130.5%, 56.1%, and 19.5%, respectively. This rapid expansion in high-tech sectors boosted demand for raw materials like non-ferrous metals, while the chemical industry's profit surge is linked to rising oil prices this year. Within non-ferrous metals, profits in aluminum processing, non-ferrous metal alloy manufacturing, and copper processing grew by 264.0%, 205.1%, and 50.8%, respectively. In chemicals, the manufacturing of inorganic salts, inorganic acids, and organic/microbial fertilizers saw profit growth of 518.5%, 306.3%, and 38.5%.
The second major dataset was the Purchasing Managers' Index (PMI). The March manufacturing PMI came in at 50.4%, up 1.4 percentage points from the previous month, exceeding the 50% threshold that separates expansion from contraction and surpassing the forecast of 50.1%. This indicates a recovery in manufacturing activity. The production index and new orders index rose to 51.4% and 51.6%, up 1.8 and 3.0 percentage points respectively, both entering expansion territory, signaling accelerated production and significantly improved market demand. The statistics bureau attributed this to rising prices for some bulk commodities and accelerated purchasing activity by enterprises. The index for purchasing prices of major raw materials and the ex-factory price index rose to 63.9% and 55.4%, up 9.1 and 4.8 percentage points, indicating a clear rebound in overall industrial product prices. In sectors like petroleum/coal/fuel processing and chemical raw materials, both price indices were above 70.0%, reflecting substantial price increases.
Within the A-share market, banks account for nearly half of all listed company profits but show modest growth. The other major profit contributors are primarily industrial enterprises. Given the strong industrial profit growth, the average profit level for listed companies in the first quarter could exceed expectations. Companies showing an inflection point in their performance, such as turning losses into profits or shifting from marginal to substantial profitability, are particularly noteworthy.
For asset allocation, one analysis suggests four potential strategies: First, focus on energy security and high inflation themes, where coal chemicals and new energy could serve as alternative resources amid supply chain pressures, and pesticides/fertilizers may see price increases due to rising input costs like natural gas. Second, maintain holdings in defensive assets with stable cash flows, such as coal and hydropower companies known for high dividends and consistent payouts. Third, seek out undervalued growth sectors with solid fundamentals that have been oversold due to market sentiment, such as AI computing and innovative drugs, which have clear positive drivers. Fourth, monitor potentially promising sectors with low valuations that might benefit from a rotation into cheaper stocks amid tightening liquidity, such as certain consumer segments that are currently less crowded in terms of trading.
It is crucial to emphasize that strong earnings do not always translate to stock price gains. Companies with already elevated share prices can experience declines after reporting results. For example, Pop Mart International Group Ltd., listed in Hong Kong, reported impressive figures with revenue and net profit surging 184.71% and 308.76% year-on-year on March 25, yet its stock price plummeted 22.51% that day. Since last August, its shares have fallen more than 50%. Similar "sell-the-news" phenomena are common in the A-share market. Typically, these companies' share prices have been heavily speculated on in advance, fully pricing in the positive expectations. Once the results are announced, major investors often sell into the strength, leaving retail investors who bought at high prices trapped.