Authors: Zhong Zhengsheng, Chang Yixin (Zhong Zhengsheng is a director of the China Chief Economist Forum and the chief economist of Ping An Securities)
Key takeaways
Matters: In the first quarter of 2024, the profits of industrial enterprises increased by 4.3% year-on-year, down 5.9 percentage points from January to February.
1. The growth rate of revenue and profit of industrial enterprises turned negative, and the volume, price and profit margin were all dragged down. In March 2024, the profit of industrial enterprises increased by -3.5% year-on-month and the revenue increased by -1.2% year-on-year, ending the positive year-on-year growth since August last year. In terms of separation, 1) volume decrease: the year-on-year growth rate of industrial added value in March was 4.5%, down 2.5 percentage points from January to February; 2) Price reduction: PPI in March was -2.8% year-on-year, down 0.2 percentage points from the average value in January and February. 3) Profit margin fell year-on-year: In March, the profit margin of industrial enterprises' operating income pulled more than 10 percentage points from January to February. From the perspective of factors affecting profit margins, the costs and expenses per 100 yuan of operating income of industrial enterprises have increased, while other difference items have fallen, or they may benefit from the depreciation of the RMB exchange rate.
2. From the perspective of major industries, only the profit growth rate of the mining industry increased from a low level in March, and the cumulative year-on-year growth rate of profits of the manufacturing industry and the water, electricity and gas industry slowed down compared with January and February. Among the main sectors of the manufacturing industry: 1) The profit growth rate of the equipment manufacturing and consumer manufacturing industries slowed down, and the pull on the growth rate of industrial profits weakened by 3.5 percentage points, which was affected by the increase in the base. 2) The profitability of the raw material industry is differentiated, and the drag on industrial profits expands by 2.3 percentage points. Among them, the losses of the ferrous metal processing industry related to the demand for construction investment expanded, the oil and coal processing industry turned from profit to loss, and the profit of the non-metallic mineral products industry expanded year-on-year. However, the chemical fiber manufacturing, non-ferrous metal smelting, rubber and plastic products industries related to export and new energy demand are highly profitable.
3. The inventory growth rate of industrial enterprises is still at a low level, and overcapacity and low prices restrict "replenishment of inventory". In March, the inventory of finished products of industrial enterprises grew by 2.5% year-on-year, although it has rebounded for four consecutive months, but it has not broken through the shock range since June 2023 (the growth rate hovers between 1.6% and 3.1%). Looking at the changes in the inventory of finished products in February 2024 compared with June 2023 (relative low): 1) The inventory growth rate of the raw material industry (about 27% of the industrial inventory) turned from negative to positive, thanks to the simultaneous rise of the industry's PPI and the growth rate of industrial added value. 2) The inventory growth rate of the equipment manufacturing industry (about 46% of the industrial inventory) and the consumption manufacturing industry (about 22% of the industrial inventory) has declined, and the growth rate of the industrial added value of the two sectors has increased, but in the face of different degrees of overcapacity, the PPI has fallen rapidly, restricting the process of replenishing inventory.
4. The growth rate of assets and liabilities of industrial enterprises has declined, and the asset-liability ratio has risen. The asset-liability ratio of industrial enterprises at the end of March 2024 was 57.3%, up 0.2 percentage points from the end of February. On the one hand, there is a certain seasonal pattern in the asset-liability ratio of industrial enterprises, which is manifested in "leverage" at the beginning of the year and "deleveraging" at the end of the year. Since 2013, the asset-liability ratio at the end of March has increased by 0.2 percentage points on average compared with the end of February. In March, the growth rate of total industrial assets and total liabilities were 6.1% and 5.7% respectively, down 0.4 and 0.5 percentage points respectively from the end of February.
Risk warning: the effect of the steady growth policy is less than expected, the degree of overseas economic recession is greater than expected, and the structural changes in the economic transformation have changed the leading lag relationship between the data.
On April 27, 2024, the National Bureau of Statistics released the operating data of industrial enterprises above designated size in the first quarter. In the first quarter, the total profit of industrial enterprises above designated size was 1,505.53 billion yuan, a year-on-year increase of 4.3%, down 5.9 percentage points from January to February.
The economic benefits of industrial enterprises mainly show the following characteristics:
1. The year-on-year growth rate of revenue and profit of industrial enterprises turned negative in a single month, and the volume, price and profit margin were all dragged down.
In March 2024, the profits of industrial enterprises increased by -3.5% year-on-year in a single month, while the cumulative year-on-year growth from January to February was 10.2%, ending the positive year-on-year growth since August last year. In March, the revenue of industrial enterprises increased by -1.2% year-on-year, while the year-on-year growth rate from January to February was 4.5%.
Split volume, price and profit margin: 1) volume reduction: the year-on-year growth rate of industrial added value in March 2024 was 4.5%, down 2.5 percentage points from January to February; 2) Price reduction: PPI was -2.8% year-on-year, down 0.2 percentage points from January to February. 3) Profit margin fall: The profit margin of industrial enterprises' operating income in March 2024 is lower than that of the same period last year, and the growth rate of industrial profits will drop by more than 10 percentage points compared with January and February.
In the first quarter of 2024, the operating profit margin of industrial enterprises was only 4.86%, far below the historical average of 5.49% for the same period (since 2012), only slightly higher than the same period in 2020, and flat in the same period in 2023. From the perspective of factors affecting profit margins, the costs and expenses per 100 yuan of operating income of industrial enterprises increased by 0.14 yuan and 0.05 yuan respectively over the same period last year, forming a drag. However, the other difference items per 100 yuan of revenue (corresponding to taxes and surcharges, asset impairment, foreign exchange gains and losses in the accounting statements, etc.) decreased by 0.19 yuan from the same period last year, hedging the negative impact of the increase in costs and expenses, or benefiting from the year-on-year depreciation of the RMB exchange rate.
2. From the perspective of major industries, the year-on-year growth rate of profits in equipment manufacturing, consumer manufacturing, raw material manufacturing, and water, electricity and gas industries will all slow down in the first quarter of 2024.
In the first quarter of 2024, industrial profits increased by 4.3% year-on-year, down 5.9 percentage points from January to February. Among the major industries, the profit growth rate of the mining industry has improved from the low level, and the year-on-year profit growth rate has narrowed by 2.6 percentage points to -18.5%, and the drag on industrial profits has decreased by 1.1 percentage points. The profits of the water, electricity and gas industry increased by 40.0% year-on-year, the growth rate fell by 23.1 percentage points from January to February, and the pull of industrial profits decreased by 1.3 percentage points. The manufacturing industry is the main component of industrial profits, with a cumulative year-on-year increase of 7.9%, a growth rate of 9.5 percentage points lower than that from January to February, and a decrease of 5.7 percentage points on industrial profits.
Among the main sectors of the manufacturing industry: 1) the profit growth rate of the equipment manufacturing and consumer manufacturing industries slowed down, and the pull on the growth rate of industrial profits weakened by 3.5 percentage points. In the first quarter of 2024, the profits of the equipment manufacturing industry increased by 18.0% year-on-year, down 10.9 percentage points from the growth rate from January to February, and the profits of the consumer manufacturing industry increased by 10.9% year-on-year, down 2 percentage points from January to February. We estimate that equipment manufacturing and consumer manufacturing drove industrial profits above designated size by 4.9 percentage points and 2.7 percentage points respectively in the first quarter, down 1.8 percentage points and 1.7 percentage points respectively from January to February. Structurally, the profits of the equipment manufacturing industry in electronics, railways, ships, aerospace transportation equipment, and automobiles performed strongly, increasing by 82.5 percent, 45.8 percent, and 32.0 percent respectively; in the consumer manufacturing industry, the profits of the paper industry increased by 1.38 times, and the profits of the furniture, printing, culture, education, arts, and textiles industries grew between 25.0 percent and 51.4 percent.
2) The profitability of the raw material industry is differentiated, and the drag on industrial profits expands by 2.3 percentage points. In the first quarter of 2024, the losses of the three major raw material industries related to construction investment demand expanded, or the profit contraction intensified, among them, the loss of the ferrous metal smelting and rolling processing industry widened to 21.36 billion yuan, the petroleum, coal and other fuel processing industry turned from a profit to a loss of 3.56 billion yuan, and the profit growth rate of the non-metallic mineral products industry fell to -54.2% year-on-year. However, the profitability of the raw material industry related to the demand in the field of exports and new energy is strong, and the profits of chemical fiber manufacturing, non-ferrous metal smelting, and rubber and plastic products industries increased by 310.2%, 57.2% and 21.5% year-on-year respectively.
3. The inventory growth rate of industrial enterprises is still at a low level, and overcapacity and low prices restrict "replenishment of inventory".
In March 2024, the inventory of finished products of industrial enterprises increased by 2.5% year-on-year, although it has rebounded for four consecutive months, but it has not broken through the shock range since June 2023 (the growth rate hovers between 1.6% and 3.1%).
Since the growth rate of finished goods inventory by industry in March has not yet been announced, we will temporarily observe the changes in finished product inventory in each sector with February data:
1) The inventory growth rate of the raw material industry (about 27% of industrial inventory) has turned from negative to positive. In February 2024, the inventory growth rate of finished goods in the raw materials industry was about 2.3%, compared with -3.7% at the end of June last year. The "replenishment of inventory" in the raw material industry may benefit from the simultaneous rise of the industry's PPI and the growth rate of industrial added value.
2) The inventory growth rate of equipment manufacturing (about 46% of industrial inventory) and consumer manufacturing (about 22% of industrial inventory) has declined. We estimate that the growth rate of finished product inventory in the equipment manufacturing industry in February 2024 will be about 3%, down 1.2 percentage points from the end of June last year, and the growth rate of finished product inventory in the consumer manufacturing industry will be about 3.2% in February 2024, down 1.7 percentage points from the end of June last year. During this period, the growth rate of industrial added value in the equipment manufacturing and consumer manufacturing industries has increased, but they are facing different degrees of overcapacity pressure (refer to the previous report "Detailed Explanation of Overcapacity: Historical Dialogue Reality"), and the growth rate of PPI has fallen rapidly, restricting "replenishment of inventory".
4. The growth rate of assets and liabilities of industrial enterprises has fallen, and the asset-liability ratio has risen.
The asset-liability ratio of industrial enterprises at the end of March 2024 was 57.3%, up 0.2 percentage points from the end of February. In terms of ownership, the asset-liability ratios of joint-stock, private and foreign-funded industrial enterprises increased by 0.2, 0.3 and 0.5 percentage points respectively at the end of March 2024 compared with the end of February, while only the asset-liability ratios of state-owned enterprises remained unchanged in February.
The rise in the asset-liability ratio of industrial enterprises in March is not enough to represent an improvement in business confidence and expectations. On the one hand, there is a certain seasonal pattern in the asset-liability ratio of industrial enterprises, which is manifested in "leverage" at the beginning of the year and "deleveraging" at the end of the year. Since 2013, the asset-liability ratio at the end of March has increased by 0.2 percentage points on average compared with the end of February. On the other hand, while the asset-liability ratio rose, the growth rate of assets and liabilities of industrial enterprises fell rapidly. In March, the growth rate of total industrial assets and total liabilities were 6.1% and 5.7% respectively, down 0.4 and 0.5 percentage points respectively from the end of February.
Risk warning: the effect of the steady growth policy is less than expected, the degree of overseas economic recession is greater than expected, and the structural changes in the economic transformation have changed the leading lag relationship between the data.