Gaurav Dogra and Patturaja Muraboopathy

(Reuters) – March saw Asian businesses lose earnings for the first quarter in seven. This was due to a slowing of demand in China, and shrinking margins with rising input costs.

According to a Reuters analysis of Asia’s top 1,500 large- and mid-cap companies by market-capitalization and those that are covered by at least three analysts, cumulative profits of these firms declined 3.2% in the March quarter year-on-year.

GRAPHIC: Asian companies’ quarterly profit (https://fingfx.thomsonreuters.com/gfx/mkt/gdpzyeoyevw/Asian%20companies’%20quarterly%20profit.jpg)

It was the first drop since June 2020.

Their average net margin was also 5.86%. This is the lowest level in seven quarters.

GRAPHIC: Asian firms’ net margins (https://fingfx.thomsonreuters.com/gfx/mkt/jnpwezneopw/Asian%20firms’%20net%20margins.jpg)

Herald van der Linde, head of equity strategy Asia Pacific at HSBC, stated that higher commodity prices have an impact on profit margins as companies are unable to pass more input costs onto their customers.

Investors abandoned regional equities to reduce the risk of losing earnings due to concerns about how firms might cope with inflation and rising interest rates.

China’s first quarter saw a slowdown in business activity and consumption due to an increase of COVID-19-related cases. This also had an impact on regional exporters to Asia.

Data showed that South Korean and Malaysian businesses, who derive most of their income from China, saw 18.3% and 18.9% drops in their earnings for the first quarter, respectively.

GRAPHIC: Breakdown by country for profit growth in Q1 2022 (https://fingfx.thomsonreuters.com/gfx/mkt/zgvomegmxvd/Breakdown%20by%20country%20for%20profit%20growth%20in%20Q1%202022.jpg)

Toyota Motor (NYSE 🙂 announced a 33% decline in March quarter operating profits and cautioned that rising raw material prices could cause a loss of a fifth its full-year profit. This is in spite of supply chain stress, which has been raging the auto industry.

Lenovo reported the slowest quarter-to-quarter revenue growth for seven years. This was due to a decline in personal computer demand after two years of pandemic driven demand.

Analysts predict that rising interest rates will further impact corporate profit and margins over the coming months.

South Korea’s central Bank has increased its interest rate three times in the past year. India raised twice to counter inflation.

“We expect central banks tightening as inflationary forces continue. Leveraged corporates will be hit by higher borrowing costs,” Zhikai Chen of BNP Paribas’ Asian Equity Division (OTC: Asset Management) said.

He said that it was possible to manage the financial impact of the Asian financial crisis as Asian corporations, particularly those in the most severe, can have reasonable leverage ratios.

Data shows profits from Asian firms are only expected to grow 6.7% by 2022. It is the lowest increase in three years. However, analysts expect that the slowdown in China will continue for some time.

Amman Patel (Credit Suisse’s investment strategist) stated that in the short term slowing economic growth and fading operational leverage, as well as the delayed effect of rising input costs (notably oil), will have a greater impact on margins.

GRAPHIC: Breakdown by sector for net margins (https://fingfx.thomsonreuters.com/gfx/mkt/egvbkwdykpq/Breakdown%20by%20sector%20for%20net%20margins.jpg)

GRAPHIC: Breakdown by sector for profit growth in Q1 2022 (https://fingfx.thomsonreuters.com/gfx/mkt/byprjdyjgpe/Breakdown%20by%20sector%20for%20profit%20growth%20in%20Q1%202022.jpg)