Improving first-quarter results from some of China's biggest steel and cement firms suggest that Beijing's economic recovery plan may be starting to filter through into corporate profits.
That would bring a leavening touch to data released this week indicating that China's factories are expanding less quickly than expected, more evidence that the pace of recovery is slowing despite a boom in credit supply.
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Earnings growth for China-listed companies averaged 10.5 percent for the first quarter, a big improvement from losses in the same period last year of about 10 percent, but still short of the 16.5 percent expected, according to research from CLSA-Fortune Securities.
"Commodities-related companies have all shown some kind of improvement ... but it's still very much a company-specific story at this point," said Shumin Huang, an investment manager with the Greater China team at JP Morgan Asset Management, who declined to make any specific stock mentions.
Most market watchers expect an increase in demand for building materials as the first quarter credit boom translates into fixed asset investment, which should pick up modestly in the second quarter as more infrastructure projects start.
Faced with the possibility of an A-share delisting were it to record a third straight annual loss, Angang Steel Co Ltd <0347.HK><000898.SZ> made 550 million yuan ($89.21 million), its first quarterly profit in more than a year.
Angang shares in Hong Kong are now down 19 percent on the year, versus a 4.5 percent slide on the China Enterprises Index of the leading Chinese listings in Hong Kong.
Although Angang has underperformed the H-share benchmark in the previous three years, it is still trading at 36 times its forward 12-month earnings, a 238.9 percent premium to its median, according to Thomson Reuters StarMine.
Lower fuel prices plus cost cuts the company started implementing in the fourth quarter last year helped. Standard Chartered analysts said Angang's steel inventory declined 10 percent from its peak in mid-March, but industry officials remain cautious.
Late last month, the China Iron and Steel Association warned its members to rein in expectations for the rest of the year. An anticipated increase in demand would not be enough to justify big rises in production in coming months, it said.
NEW YEAR, SAME PROBLEMS
There are also signs of a moderate pickup in cement prices, which some stock-pickers see as a barometer of economic activity in China.
Bank of America Merrill Lynch economist Ting Lu said in a note on April 24 that reported increases of 10 to 15 percent in cement prices were "beyond what seasonality could explain" and in some regions of central China, cement prices were close to the peak recorded in the fourth quarter last year.
Analysts have tended to favor Anhui Conch Cement Co Ltd <0914.HK><600585.SS> over its fast-expanding rival China National Building Material <3323.HK>, whose quarterly earnings have raised more questions about the success of its aggressive acquisition strategy.
Anhui reported a 22 percent decline in quarterly profit from a year earlier, but Macquarie analysts said China's largest cement maker paid lower production costs. CNBM posted a worse-than-expected 48 percent decline in quarterly net profit, largely due to interest payments on its debt.
Analyst sentiment is shifting on Chinese companies but remains particularly slow on the materials sector. Only 39 percent of the 148 companies in the materials sector recorded an increase last week in their Analyst Revision Model, a StarMine measure of analyst sentiment.
Corporate earnings have largely been flat for the past two years, and investors are concerned that the shrinking margins and high inventories that were the major problems for China Inc last year are dragging into 2013.
Almost three-quarters of China-listed companies and 54 percent of all Hong Kong-listed companies that have posted their earnings for last year missed market expectations, according to StarMine.
67 percent of the 138 China-listed companies that reported first quarter earnings missed expectations, according to StarMine.
"We are expecting a sequential recovery in the second quarter, but bear in the mind the first quarter is a historical low season," said William Fong, who helps manage about $4 billion worth of assets in a set of Barings China funds.
(Additional reporting by Reshma Apte and Patturaja Murugaboopathy in Bangalore; Editing by Daniel Magnowski)