In June, the year-on-year decline in profits of industrial enterprises above designated size in China narrowed to 4.3%, with a notable support from the equipment manufacturing sector.

China's industrial profits saw their year-on-year decline narrow significantly to 4.3% in June, improving by 4.8 percentage points from May, though total profits for January-June still decreased 1.8% to 3.44 trillion yuan. This improvement was largely driven by a rebound in the manufacturing sector, which saw profits turn positive (+1.4%) in June, led by a 96.8% surge in the automotive industry and strong growth in equipment manufacturing (+9.6%). Government 'Two New' policies, promoting equipment updates and old-for-new initiatives, significantly boosted high-tech and green sub-sectors, while private and foreign-funded enterprises also maintained profit growth, signaling a stabilizing industrial landscape despite ongoing weakness in mining.

Analysis

China's industrial profits showed a marked improvement in June, with the year-on-year decline narrowing to 4.3% from a much steeper fall in May, signaling a potential stabilization in the industrial economy. This recovery is not broad-based but is instead concentrated in specific, policy-supported areas. The manufacturing sector was the primary driver, flipping from a 4.1% profit decrease in May to a 1.4% increase in June, powered by a 9.6% surge in equipment manufacturing profits. Standout performers include the automotive industry, which saw a 96.8% profit jump due to promotional activities, and high-tech segments boosted by 'Two New' government policies, such as smart unmanned aerial vehicle manufacturing (+160.0%) and lithium-ion battery manufacturing (+72.8%). However, this targeted strength contrasts sharply with persistent weakness elsewhere. The mining sector's profits contracted by 30.3% year-to-date, and state-controlled enterprises underperformed with a 7.6% profit decline, while private and foreign-funded firms posted modest growth. Furthermore, underlying financial health indicators warrant caution: accounts receivable grew 7.8% year-on-year, significantly outpacing revenue growth of 2.5%, and the average collection period lengthened by 3.9 days to 69.8, indicating potential cash flow pressures and deteriorating working capital efficiency.

Key Decisions for Investors

• Investors should consider overweighting exposure to Chinese manufacturing sectors benefiting from targeted government stimulus, particularly in advanced equipment, automotive, and technology sub-sectors like UAVs and green energy that show strong profit momentum.
• It is crucial to scrutinize corporate balance sheets for rising accounts receivable and deteriorating cash conversion cycles, as the extended collection period signals potential cash flow risks that may not be reflected in headline profit figures.
• Exercise caution with exposure to commodity-related industries, such as mining and coal, and be selective with state-controlled enterprises, which are exhibiting significant profit contractions and lagging the private sector's policy-driven recovery.