Hong Kong, June 14 (BNA): Asian corporate profits fell in March for the first time in seven quarters, due to slowing demand due to the lockdown in China and shrinking margins as input costs rose.
According to a Reuters analysis of the 1,500 largest large and medium-sized companies in Asia by market capitalization and those covered by at least three analysts, cumulative profits for these companies fell 3.2% in the March quarter year-on-year.
This was the first drop since June 2020, Reuters reported.
The data also showed their average net margins were 5.86%, the lowest in seven quarters.
“Higher commodity prices are impacting profit margins, as companies struggle to pass on higher input costs to consumers,” said Herald van der Linde, head of equity strategy, Asia Pacific, at HSBC.
The dip in profits came as investors dumped regional stocks on concerns that companies might not be able to deal with rising interest rates and rising inflation levels.
Business and consumption in China slowed in the first quarter due to the resurgence of COVID-19 cases, which also affected regional companies exporting to the Asian country.
The data showed that Malaysian and South Korean companies, which derive a large portion of their revenue from China, saw 18.3% and 18.9% declines in first-quarter profits, respectively.
Toyota Motor Co. reported a 33% drop in its operating profit for the March quarter and warned that unprecedented increases in raw material costs could cut a fifth of its full-year profit amid supply chain stresses roiling the auto industry.
Lenovo, the world’s largest PC maker, reported the slowest quarterly revenue growth in seven quarters as demand for its personal computers waned after two years of demand caused by the pandemic.
Some analysts expect higher interest rates to affect corporate earnings and margins in the coming months.
South Korea’s central bank has already raised interest rates three times this year, while India’s central bank has raised twice, in a bid to combat inflation and block outflows.
“We expect central banks to tighten as inflationary pressures persist. Higher borrowing costs are sure to hurt leveraged companies,” said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management.
However, he added that the financing impact should be under control as Asian companies, especially those hit hard by the Asian financial crisis, enjoy reasonable leverage ratios.
According to the data, profits of Asian companies are expected to rise by just 6.7% in 2022, the lowest level in three years, with analysts still predicting a slowdown in China for some time.
“In the near term, we believe slowing economic growth, eroding operating leverage and the lagging impact of higher input prices (particularly oil) are likely to impact margins further in 2022,” said Oman Patel, investment analyst at Credit Suisse.