China's Earnings Growth Outlook Splits JPMorgan, Morgan Stanley

By Chua Kong Ho and Chen Shiyin

Sept. 4 (Bloomberg) -- Fears of a ``hard landing'' for China's economy are misplaced as inflation has peaked and government measures to bolster expansion will support profit growth, JPMorgan Chase & Co. said. Morgan Stanley disagrees, saying that earnings estimates are ``still too bullish.''

Easing oil prices will reduce the cost pressures on companies, while the slump in the valuations of Chinese stocks suggest that investors have already ``priced in'' the slowdown in global economic growth, Frank Gong, JPMorgan's Hong Kong-based head of China equity research said in a research note today.

``China has passed a critical turning point of macro uncertainty in the past two months,'' Gong wrote. ``We expect the emerging-market funds flowing into Chinese equities markets to continue to grow in the longer term, as we expect there is very limited downside risks for China's growth story.''

The MSCI China Index, which tracks 102 Chinese companies, has declined 36 percent this year as measures to tackle inflation eroded profit and amid concern a global slowdown will cut demand for China-made goods. The index is valued at 13 times reported earnings, the lowest since June 2006, according to Bloomberg data.

China's economy grew 10.1 percent in the second quarter, the fourth consecutive slowdown, prompting Communist Party leaders to put a bigger emphasis on maintaining expansion and protecting jobs. Government measures and likely easing of monetary policy means that growth in gross domestic product won't slow below 9 percent in the coming quarters, Gong wrote.

ICBC, PetroChina

Cost pressures will ease following the 26 percent drop in crude oil from the July 11 record of $147.27 and a slump in prices of commodities traded on the London Metal Exchange, the JPMorgan note said.

Gong, whose team was top-ranked for China research in a survey by Institutional Investor last year, reduced his portfolio weighting on raw-materials producers and added to financial companies and oil refiners. His top picks include Industrial & Commercial Bank of China Ltd., the nation's largest bank, and PetroChina Co., the country's biggest oil company.

Morgan Stanley is advising investors to be ``cautious,'' saying that companies are facing an ``earnings recession'' in 2009, according to a Sept. 3 report by analysts led by Jerry Lou.

Analysts had on average forecast in August that companies on MSCI's China index could post profit growth of 14 percent this year, Morgan Stanley said. That's 7 percentage points lower than the average consensus forecast in February, the brokerage said, adding that expectations could be cut further.

`Earnings Recession'

``The danger for corporate China to further decelerate into an earnings recession in 2009 is high,'' the Morgan Stanley analysts wrote. ``The market is still pricing in too much growth optimism, and we think there is plenty of room for downward earnings revisions in the next 12 months.''

JPMorgan's more bullish view is shared by Merrill Lynch & Co., which initiated a call to be ``long'' Chinese equities in a Sept. 2 note on leveraged trading strategies.

``Valuations have dramatically improved,'' wrote Merrill Lynch analysts including London-based Francisco Blanch in the note. ``In our view the only missing ingredient for a decent rally is price momentum.''

The brokerage's chief global emerging markets strategist Michael Hartnett on Sept. 2 raised his rating on Chinese shares to ``overweight,'' saying that ``pro-growth policies should prevent China from slowing too sharply.''

To contact the reporter responsible for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net; Chen Shiyin in Singapore at schen37@bloomberg.net.