The State Assets Supervision and Administration Commission (SASAC), which directly oversees 169 central government-invested enterprises, released half-year economic results for those in the pharmaceutical, machinery, metallurgy and building material sectors on August 1. Despite maintaining growth, they reported decreasing profitability.

Pharmaceutical sector needs improving

All 23 pharmaceutical enterprises retained double-digit growth in production and sales. However, their profitability was only about one-third the country's total. Their sales revenue grew 11.4 percent over the same period last year, much lower than the sector average of 21.18 percent. They reported a 0.8 percent decline in profits, but the average profit growth was 19.84 percent. 

Rapidly increasing consumption and drug price adjustments last year made their operations in the first half of 2005 much better than last year. Zhang Shiyuan, a research fellow of Southwest Securities, said these pharmaceutical manufacturers reaped over 25 percent growth in revenues and profits, driving up operations of key enterprises and the whole sector.

However, Zhang warned that drug prices and foreign exchange policies will be two important factors for the sector. The recent 2 percent RMB appreciation reduced their profitability by 10 percent, while drug price adjustment remains a sword hanging over their heads.

Manufacturers must grasp the opportunities of consumption growth, accelerate adjustment of product mixes, and further control costs and expenses, Zhang suggested. Only by boosting industrial integration and avoiding unnecessary price wars can growth be sustained, he said, also warning of related environmental protection issues.

Machinery sector impacted by slowed investment

In the first half of the year, the whole machinery manufacturing sector retained steady growth on a high benchmark. All 50 state firms achieved over 20 percent growth in production, sales and profits.

Their combined industrial output was 123.18 billion yuan (US$15.2 billion), up 23.2 percent and 3.6 percentage points on the first quarter. Revenues from their main businesses reached 135.16 billion yuan (US$16.67 billion), up 20 percent. Their profits were 6.63 billion yuan (US$818 million), up 28.9 percent and 6.9 percentage points higher than the first quarter.

Wei Mingliang, a research fellow of Everbright Securities, said their total fixed-asset investment in the first half of 2005 reached 3.2895 trillion yuan (US$405.8 billion), up 25.4 percent on the same period last year. Due to this, the sale of engineering machinery kept at a high level. Since the price of raw materials was higher than the previous year, gross profits were decreased, which slashed their profitability on a large scale.

Metallurgy sector: lagged effect to come

About 38 state-owned metallurgy enterprises maintained a moderate growth in production, sales and profits after a period of high-speed growth. In the first half of the year, they produced a total industrial output of 449.44 billion yuan (US$55.4 billion), up 34.4 percent, 17.6 percentage points lower than the same period last year.

Revenues from their main businesses were 478.85 billion yuan (US$59 billion), up 29.6 percent, 26.1 percentage points lower than the same period last year. Their profits grew 27.1 percent to 44.47 billion yuan (US$5.48 billion), but their growth rate was down 69.1 points.

A research fellow of Haitong Securities, Yong Zhiqiang, believed steel prices already reached the peak of an economic cycle in spring 2005, so industrial profits might decline in the future.

While keeping production growing, the steel sector saw an abrupt price hike and fall in the first half of the year. Yong said such fluctuations will not appear in the latter half of 2005 and steel prices will rebound slightly. A turning point for the sector has already appeared and, with a lagging effect, will become more apparent in the second half of the year.

Building material sector: tough tasks ahead

The 25 state-owned building material manufacturers achieved industrial output of 25.29 billion yuan (US$3.12 billion) in the first half of the year, up 15.4 percent on the same period last year and 4.2 percentage points higher than the first quarter. Their revenue reached 31.7 billion yuan (US$3.9 billion), 7.1 percentage points higher than the first quarter.

However, the production-sales ratios fell 0.9 percentage points to 95.9 percent. Their total profits were 0.99 billion yuan (US$122.1 million), 61.4 percent lower than the same period last year.

Zhou Huan, an analyst with United Securities, said the good returns were due to growth in demand for building materials. Currently, infrastructure construction and real estate development are entering a busy season and flood-hit areas need immediate reconstruction.

In the first half of the year, 457 million tons of cement was produced, up 8.2 percent on the same period last year and 7 percentage points higher than the first quarter. The production of plate glass reached 173 million boxes, up 14.5 percent on the same period last year and 3 percentage points lower than the first quarter. Despite that, demand growth in the second quarter should improve the production -- sales ratio, but the sector still faces severe profit decline.

Zhou attributed downward prices to the expansion of production capacity while costs of coal and power have remained high in recent years. Since real estate investment, influenced by macroeconomic control measures, is expected to slow down in the latter half of the year, profits for the building material sector are unlikely to improve.

(China.org.cn by Tang Fuchun, August 8, 2005)