What surprises did the A-share third quarter reports reveal?

After a significant rise in October, the market quickly faced its first fundamental test: the third-quarter reports. The data explains the rationality of this market trend.

It's not that the fundamentals are turning upward; rather, they are declining. Consumption data from major cities, profits from large-scale industrial enterprises, and GDP all reflect a severe search for a bottom. Among them, the GDP growth rate was 5% in the first half of the year, 4.8% in the first three quarters, with the third quarter dragging significantly behind.

The introduction of a combination of policy measures to stimulate the stock market is a response to the severe situation that forces policy adjustments. Previously, the stock market was neglected and allowed to develop freely; now, with no good strategies available, there is no choice but to try stimulating the market.

In this third quarter, many companies faced the rare dilemma of declining revenues, even among blue-chip stocks that appeared to have stable business demand, unprecedented profit declines occurred.

A single quarter's financial report is enough to expose many companies with average competitiveness. Of course, the strong remain strong, and some companies have managed to swim against the tide, achieving their best performance. This round of quarterly reports has conveyed many signals.

1. Overall Poor Performance

According to relevant statistics, in Q3 2024, the revenue and profit of the entire market accelerated their decline, with over 54% of stocks experiencing profit declines, while only 53% of companies saw year-on-year revenue growth. The median profit decline was -7%, and the median revenue growth was 1.1%. This shows a significant discrepancy from the GDP growth rate.

Specifically, in terms of quarterly performance, over 60% of stocks experienced a quarter-on-quarter profit decline, meaning Q3 profits were lower than Q2. During the pandemic, quarterly performance also experienced turbulence, but combined with the revenue decline, this is indeed rare.

It is evident that Q3 triggered an acceleration in economic decline.

For companies with volatile performance, such as those in the technology, insurance, real estate, and industrial cyclical sectors, it is meaningless to look at their growth performance. However, other stable-type companies have also encountered some issues.

First, in the consumer sector, CTG DUTY-FREE's performance has rapidly declined, and among liquor companies, Yanghe has become a major disappointment, with other companies showing negative revenue growth, although profits can still be squeezed a bit, but all have significantly slowed down in Q3. Leading beer companies like Qingdao Beer and Chongqing Beer have seen a general decline in revenue and profits. The dairy industry is similarly bleak.

Even the edible oil seller, Golden Dragon Fish, has experienced a significant drop in revenue and profits.

Hong Kong stocks such as Anta and Li Ning have announced a slowdown in Q3 revenue, while the home textile and apparel sector in the A-share market is not as large as that in Hong Kong but has almost completely collapsed. These companies are mainly low-growth income stocks with low expectations, but it was unexpected that profit fluctuations could be so significant.

These are all industry-leading companies, and if they encounter problems, the issues for smaller companies will clearly be more dangerous. From the GDP data, it can also be seen that the biggest drag on growth is consumption, with exports and investments performing better. Therefore, expectations for stable business must be based on the current driving forces of the domestic economy.

Some utility-type companies have also performed unexpectedly, such as China Mobile, which has seen its quarterly revenue decline year-on-year for the first time. However, it is not surprising since China Mobile has experienced performance declines before. But the leading highway stock, Ninghu Expressway, has seen both revenue and profit decline, which indicates some issues.

The decline in revenue is not limited to Ninghu Expressway; both Beijing-Shanghai High-Speed Railway and Guangdong Expressway are also experiencing declines, reflecting the current economic state of decreased passenger and freight flow.

If the population declines while GDP is expected to continue growing, it will inevitably lead to a significant increase in per capita GDP. Therefore, industries that rely on volume and scale will not fare well; only those businesses that can increase the average transaction value will be able to sustain themselves.

The aforementioned stable growth companies are generally believed to potentially not grow during poor economic times, but they also should not decline; at least they are aimed at dividend value, so they shouldn't incur losses. However, the reality is that with declining performance, whether dividends can be maintained has become an unknown.

Many companies considered to have growth potential are also showing strong volatility as the economy declines, such as in the medical device sector, where numerous biopharmaceutical and medical device companies have reported revenue declines.

Anti-corruption in the pharmaceutical industry and centralized procurement are no longer new issues, so the decline is not surprising. The underlying reason is naturally the payment capability of to-G businesses. The impact of to-G payment capabilities is not limited to the pharmaceutical industry; other industry leaders such as Hikvision, SMIC, and China State Construction have also been significantly affected.

However, the advantage of large companies lies in their scale, allowing them to optimize efficiency and extract profits from employees, expenses, and downstream operations. In fact, among the leading companies in the A-share market, many have seen profit growth rates exceed revenue growth, indicating an improvement in profit margins that makes performance look less bleak. This also suggests that in the current economic environment, large companies are more resilient to risks and should have more reasonable valuation expectations. However, with the shift in market style, the logic of leading companies improving profit margins has not been recognized by the market In summary, this third quarter has reminded us that without progress, there is regression. There are no stable income-generating stocks, and the future economic environment will inevitably see rapid per capita growth alongside a decline in volume. Relying on usage to maintain company performance is unrealistic.

II. Who is benefiting?

Companies that performed well in Q3 generally fall into three categories: those going overseas, cyclical companies, and those adapting to the logic of the market.

First, the performance boost driven by the overseas expansion logic has completely resisted the domestic demand environment. For example, Hong Kong stocks like Pop Mart and Miniso, as well as A-share companies like Yutong Bus and Hong Kong's BeiGene, etc.

These companies have seen high growth rates in their overseas businesses, driving their performance to new highs against the trend. For Chinese companies, under the backdrop of a slowing domestic economy, demanding 20%+ growth will inevitably be accompanied by a rapid increase in the proportion of overseas revenue.

The performance of overseas companies is primarily driven by their overseas business growth phase, and the overall economic growth overseas is not high. Companies that have already achieved mature globalization also do not see particularly high performance growth.

From the perspective of the overseas trend, China has long been the world's largest manufacturing country, with Chinese products spread across various fields overseas, but there is still significant room for improvement, such as creating new products and shifting from low-end OEM to high-end branded goods. There is ample opportunity for this.

For instance, what Pop Mart has done can be seen as an evolution from previously doing labor-intensive production for foreign brands to now selling premium concept toys, representing an upgrade in the industrial chain.

Many companies have also replaced overseas brands in niche markets through price and quality advantages, such as Jack Sewing Machine, Chuanfeng Power in the sand vehicle sector, and Qianjiang Motorcycle in the motorcycle industry. These are all invisible champions in industries that have achieved rapid profit growth.

Even without changing product forms or improving their position in the industrial chain, companies can still achieve growth through cost control and performance improvements. The difficulty of going overseas is more about courage and capability.

The difficulty of going overseas varies by industry, and one should be aware of this. For example, the gaming industry finds it easy to expand overseas, while the photovoltaic industry has a high proportion of global revenue. In contrast, real estate, finance, and public utilities are typical sectors where going overseas is challenging.

The enthusiasm for overseas expansion has already been reflected in the stock market; it is not simply about investing in industries that easily go overseas. There are many small regional companies in the U.S. stock market that are successful without pursuing globalization, such as Pool.

Moreover, domestic gaming companies are now primarily focused on the global market, making overseas expansion a norm and not a key factor for performance growth. Conversely, utility stocks that cannot globalize have seen a significant number of new highs this year.

Therefore, the overseas factor does not need to be overvalued. The value of going overseas comes from the breakthroughs in overseas ventures, transitioning from impossible to possible. Going overseas is a marginal factor; industries that have been overseas for years with almost zero progress suddenly see a surge, with previously zero overseas revenue suddenly accounting for 10% of total revenue. For example, companies that have exported for many years and earned meager profits suddenly begin to command a premium, significantly improving their profit margins At this point, for companies going overseas, promoting profits and converting them into rising stock prices requires a rational observational perspective.

The second category is cyclical drivers, mainly manifested in industrial stocks, resource stocks, and manufacturing stocks, which are fundamentally driven by cyclical reversals. The growth of cyclical stocks is largely accompanied by a low base caused by past declines, allowing them to achieve high growth rates independent of macroeconomic conditions.

For example, gold stocks have reached new highs in performance alongside new highs in gold prices.

Companies like COSCO Shipping Holdings, Xinhecheng in chemicals, Muyuan Foods in aquaculture, Zhaoyi Innovation in chip manufacturing, and Weir Shares. These industrial and manufacturing giants have indeed performed well, but most companies have not yet returned to their peak performance.

The performance of cyclical stocks is judged based on valuation. For instance, COSCO Shipping Holdings' performance is not considered good, at least compared to 2021-2022, but its stock price has reached new highs, mainly supported by sufficient dividend yield and buybacks. In contrast, Muyuan Foods has achieved new highs in quarterly performance, but its stock price has not shown remarkable performance, primarily because its dividend yield is simply too low.

Similarly, it can be said that the performance of cyclical stocks is related to their earnings, but not strongly so. Companies expected to incur losses will see their stock prices perform well as long as their financial reports do not show losses and they maintain normal dividends. Conversely, companies expected to reverse cycles and generate significant profits may see their earnings improve, but if their valuations are not low, it will not help.

Finally, there are adaptive enterprises that have adjusted to changes in the domestic environment and technological iterations, seizing opportunities to achieve growth driven by internal circulation through increased product penetration and market share.

They may also have logic related to going overseas or cycles, but for now, that is not the main focus.

A typical example is BYD, which has primarily relied on domestic electric vehicles replacing traditional fuel vehicles to achieve simultaneous growth in revenue and profits. In contrast, other peers are facing dire situations.

In the home appliance industry, Midea has expanded its market share against the backdrop of a poor overall environment, with revenue and profit growth rates showing an increase.

Meanwhile, Gree and Haier have not been able to keep up.

Consumer stocks are performing poorly, but in the food and beverage sector, Haitian Flavor Industry, leveraging its scale advantage, is also expanding its profit margins, solidifying the previously expected advantages of large-scale giants, contrasting sharply with the consumer stocks mentioned in the first part.

However, it should be noted that small companies in the food industry are also emerging as dark horses: Youyi Foods, Ganyuan Foods, Jinzhai Foods, Yizhi Konjac, and Dongpeng Beverage have all shown outstanding performance. This indicates that leisure foods and cost-effective beverages are the current directions for growth in the consumer sector. Consumption is down, but people have not reduced their food intake; they are simply consuming in different ways. This reflects a transformation in consumption leading to a decline in consumption amounts Chip stocks performed almost the best in Q3, mainly due to cyclical recovery factors. However, there are also some devices that cannot be imported under the background of overseas sanctions, accelerating domestic substitution. The performance of Northern Huachuang reached a new high first, and the key is that this is not cyclical but rather a rapid increase in domestic market share.

Companies that are based on the latest industry trends and have products widely applied in new applications have also reported impressive financial results, such as Zhongji Xuchuang and NewEase, driven by the explosive demand in the AI industry chain.

The performance of these companies is strongly driven by significant industry trend changes. They are expanding their market share in the domestic market or enhancing their position in the industry chain. For companies that can still rely on domestic market penetration to increase profits in their Q3 reports, optimism is warranted, especially since they are still growing in adverse conditions, which raises expectations for recovery after the economic downturn.

III. Conclusion

The current state of the Q3 reports has unveiled many industries' hidden issues. The illusion of pseudo-stability in many sectors has been shattered; there is no absolute stability, only progress or regression. For example, in some utility stocks, any change in the flow of people, vehicles, and goods will inevitably lead to significant changes in performance. Many industries have also been proven to be pseudo-growth or pseudo-sunrise industries, with the key issue lying with the payers. The opportunities visible now are merely about seeking growth overseas and changes domestically, with cyclical stocks exceeding expectations.

In such an environment, large enterprises are clearly more adaptable, but there are distinctions among blue-chip stocks. The best companies can continue to absorb market share from their peers, achieving dual growth in revenue and profit. If this economic situation continues, it will undoubtedly accelerate the expansion of leading companies. The history of the U.S. stock market is one of leading stocks expanding and market capitalization becoming increasingly concentrated. Although the current market is still speculating on the rebound of small stocks after significant declines, reality will not change the fundamental conditions of small enterprises based on stock price increases