Macro Economy -2Q industrial profit growth dragged down by refiners

Event:
China's industrial firms reported 1.0944 trillion yuan in profits in the first five months of this year, up 20.9 percent from the same period last year; 18.3768 trln yuan in operating revenue, up 29.3% yoy, the National Bureau of Statistics (NBS) said on Friday.
Our view:
 From March to May, industrial profits grew 23%, or 6.5 pct points faster than that in Jan.-Feb., but down 20 pct points from the same period last year. Operating revenue grew 30.3% from March to May, or 3 pct points faster than that in Jan. – Feb., and 4 pct points faster than the same period last year.
 As with Jan. to Feb., the slump in growth rate of industrial profits is caused by the huge losses in oil refiners and coking sector due to price control. The sector, which scored profit of 18.7 bln yuan in the same period last year, turned to 23.7 bln yuan net losses this year. With the loss-making sector excluded, the profit growth of other sectors from March to May is 31%, basically in line with that in Jan.-Feb. and seeing no big drop from the same period last year.
 Ratios of net receivables and inventory in sales revenue in the past 12 months – two indicators of enterprises operation – picked up about 0.3 pct points from that in end-Feb. However, the pickup is seasonal as evidenced by historical data. As a whole, the two indicators are moving downwards, indicating brisk market demand, which will enable sound enterprise earnings.
 We are optimistic about profit growth of industrial enterprises on the significant hike of oil products price and tariff. We expect the growth of the total profits of industrial enterprises to pick up visibly and that of sectors other than oil refiners and coking to improve from June to August. As opposed to some views that tariff hike would erode profits of other sectors, we reiterate our view that it is the brisk demand, rather than cost, that drives enterprise earnings growth.
 A breakdown of the NBS's statistics show that compared to Jan.- Feb., profit growth of coal, iron & steel, chemical, non-ferrous metal metallurgical and rolling, transport equipment manufacturing sectors picked up 31, 13.4, 10.1, 2.3 and 3.7 pct points respectively; while that of petroleum and natural gas exploration, construction materials, special equipment manufacturing, electronics and communications equipment manufacturing, power and chemical fiber sectors slowed down 6.9, 2.6, 10, 1.2, 13 and 26.6 pct points respectively.