Last year's most profitable industry
Tianfeng Securities believes that the industry with the highest profit growth rate in 2023 is likely to be the production and supply of electricity, heat, gas, and water in public utilities.
Revenue or profit margin?
The industry with the highest profit growth rate in 2023 is likely to be the production and supply of electricity, heat, gas, and water in public utilities. In the first 11 months, the cumulative profits of the industry increased by 47.3% year-on-year, with the profits of the power and heat production and supply industries increasing by 58.2% year-on-year, while the overall profits of industrial enterprises only increased by -4.4% year-on-year.
The high profit growth in the electricity and heat production supply industry is largely attributed to the decline in coal prices, which has increased the industry's profit margin. Taking November as an example, the PPI of the coal and coking industry was -15.5% year-on-year, corresponding to a profit margin of 6.1% for the power and heat production and supply industries, which is 2.1 percentage points higher than the same period in 2022. In addition, electricity demand also rebounded normally last year, with a 6.3% increase in total social electricity consumption from January to November, driving a 4.6% increase in revenue for the power industry.
Similar to the power supply industry, the profits of the non-ferrous metal smelting and rolling processing industry, chemical fiber manufacturing industry, rubber and plastic products industry also increased significantly last year. The core logic is that the decline in upstream raw material prices has driven the profit margins of related industries to rebound.
Petroleum is the upstream of chemical fibers and plastics, and the PPI of the oil and gas extraction industry has fallen from 35.9% at the end of 2022 to -10.9% in November 2023, driving the profit margins of the chemical fiber, rubber, and plastic products industry to slightly increase from 1.8% and 5.1% at the end of 2022 to 2% and 5.9% in November 2023.
Another type of industry is different from the power supply industry. Last year's profit growth was mainly supported by revenue, with transportation equipment manufacturing (profit growth of 22.3%) and electrical machinery and equipment manufacturing (profit growth of 17.2%) as representatives.
The revenue growth of transportation equipment manufacturing industry mainly relies on ship exports. In 2023, China ranked first in the world in shipbuilding completion, new orders received, and handheld orders, accounting for 48%, 59.5%, and 46.4% of the world market share, respectively; The cumulative growth rate of ship exports (HS89) from January to November was 21%, significantly higher than the industry's revenue growth rate of 7.3%.
The revenue growth of the electrical machinery and equipment manufacturing industry mainly relies on domestic electricity investment. The export delivery value growth rate of the electrical machinery manufacturing industry from January to November was 3.1%, lower than the growth rate of 10.3% in operating revenue. The investment in power engineering completed by major power generation enterprises in China increased by 39.6% year-on-year, and the high investment in electricity supported the demand for electrical machinery and equipment manufacturing industry.
In addition, last year's automobile manufacturing industry increased revenue without increasing profits. Although the revenue growth rate of the automobile manufacturing industry ranks first among all industries at 11.2%, the year-on-year profit growth rate of the automobile manufacturing industry in November was only 2.9% due to the impact of car price cuts (the year-on-year PPI of automobiles in November was -1.6%, and data from the China Association of Automobile Manufacturers showed a discount rate of 19% in the passenger car market in November).
The industry with the lowest profit growth rate last year may belong to the chemical raw material and chemical product manufacturing industry. Although chemical industry is also a downstream industry of petroleum, it is more inclined towards the middle and upper reaches, and its pricing ability is weak. Last year, the industry's inventory was high, and prices showed a significant decline. From January to November, the cumulative year-on-year PPI of chemical raw materials and chemical products was -9.3%. Combined with weak external demand, the export delivery value increased by -14.4% from January to November. Under the joint drag of revenue and profit margin, the cumulative growth rate of profits in the chemical industry has been -38.5%, ranking last among all industries.
Similar to the chemical industry, the non-metallic mineral products industry, pharmaceutical manufacturing industry, computer, communication, and other electronic equipment manufacturing industries are also facing pressure of simultaneous decline in revenue and profit margins.
The non-metallic mineral products industry (such as cement, glass, gypsum, stone, etc.) is an upstream industry of real estate, and the demand side is easily affected by the downturn in real estate. However, the decline in cost side is limited. Last year, the industry's profit margin quickly declined, leading to a significant negative increase in industry profits.
Last year, the style of the capital market was also influenced by industry profit differentiation. The annual fluctuations of the stability, cycle, finance, growth, and consumption style indices are+2.1%, -2.4%, -3.8%, -6.5%, and -7.8%. The best performing stable style index last year mainly included the electricity and public utilities, construction, and transportation industries, all of which benefited from the increase in profit growth brought about by the decline in raw material prices.
The core contradiction that determined the profits of various industries last year was the profit margin, and most industries with high profit margins were dominated by midstream manufacturing. On the one hand, these industries benefit from the profit margin provided by the decline in upstream raw material prices, and on the other hand, the industry itself has a stable competitive landscape and pricing ability for downstream, which can keep profits in the middle. However, the difficulty of significantly increasing or decreasing PPI in upstream industries this year is relatively high, and the elasticity of profit margins in midstream industries is highly likely to be limited. The winner of profits in various industries may be determined by the elasticity of revenue.
