FOCUS: China-listed firms' 2000 earnings growth belies latent problems

SHANGHAI (AFX-ASIA) - Headline figures in China-listed companies' 2000 results point to respectable earnings growth last year, but the details of many financial statements point to a range of questionable management and accounting decisions, and highlight doubts about these companies' ability to chart sustained growth in coming years, analysts said.	    While some B-share companies, particularly export-oriented firms, genuinely saw their earnings grow strongly during the year, many companies targeting the domestic market saw their margins squeezed by heavy price competition, even as the domestic economy recovered, the analysts said.	    Meanwhile, several B-share and H-share companies which performed poorly during the year still reported earnings growth on the back of extraordinary gains from asset sales.	    Companies also revealed a heavy dependence on government subsidies, and on government moves to curb competition in their respective markets, while some said their performance has been, or may be, heavily affected by changes in tax policy and enforcement.	    Some companies also revealed major debt problems that raise doubts about their ability to remain operational, analysts said.	    Nonetheless, concerns over the quality of listed companies' earnings are unlikely to have a significant impact on A- or B-share prices in the mid-term, as domestic share movements continue to be determined largely by liquidity levels and expectations of institutional support for prices, they said.	    Shenyin & Wanguo Securities analyst Yan Dinggong said the 2000 annual reports do appear to have revealed more window-dressing and questionable accounting practices than in previous years, but added that this may merely reflect the fact that domestic accounting rules have been tightened, putting companies under greater pressure to reveal the exact sources of their earnings.	    "Of course, from the reports you can tell that many companies boosted their earnings through extraordinary gains, and if you take these away, the companies become money-losing.	    "But this in itself is progress, because in previous years companies never told you where their earnings came from. Now the companies tell you they made share sales and asset exchanges in order to book a profit, so investors can come to their own conclusions," he said.	    Yan also said chartered accountants have become more cautious about helping listed companies mislead investors, as the risks of being seriously punished for this have increased.	    Figures based on the results of 601 of the 608 companies listed in Shanghai, reported in the Shanghai Securities News, indicate that Shanghai-listed companies' average net profit in 2000 rose 20 pct from 1999, while their earnings per share rose 8.68 pct.	    Shanghai-listed companies' average return on net assets in 2000 amounted to 8.28 pct, up 1.31 percentage points from 1999.	    According to figures compiled from annual reports, Shanghai and Shenzhen-listed B-shares both saw their average net profit grow by 14 pct from a year earlier.	    A total of 48 of Shanghai's 55 B-share firms achieved a net profit last year, up from 47 in 1999, while 52 of Shenzhen's 59 B-shares earned a profit, up from 49 in the previous year.	    Among 30 profitable Shanghai B-share firms which gave a figure for return on net assets last year, the average return was 4.8 pct, and among 46 profitable Shenzhen B-share firms which gave this figure, the average return was 8.83 pct.	    Shenzhen B-share companies' average EPS in 2000 dropped 8.9 pct from 1999.	    Qinghai Securities analyst Bao Bing said the wide variation in the quality of companies' 2000 earnings makes it difficult to reach an overall judgement on the extent of earnings growth.	    "Judging by the statistics, there has been some earnings growth. It is difficult to say how much earnings are inflated, because that just depends on the company. If a company has good business, it probably doesn't need to inflate its earnings. If business is bad, then it may need to," he said.	    Qunyi Securities analyst Wu Jian said he believes companies that boosted their 2000 earnings via asset sales are in a minority, while last year's GDP growth of 8.1 pct provided a basis for genuine earnings growth during the year.	    He said that since listed companies are generally better quality than other state enterprises, he had been expecting net profit growth among listed firms to average 20-30 pct in 2000.	    Where companies have suffered a reduction in net profit, this is mainly because of product price cuts amid fierce market competition, he said, adding that this was particularly evident in the market for electrical appliances. 

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