CAUGHT IN A VORTEX: The global financial crisis has caused a drop in demand for Chinese steel and textile products, prompting factory closures and layoffs. In this photo a worker inspects steel rolls at a steel company in Shanxi Province (YANYAN)

Xinlong Holding (Group) Co. Ltd., a Shenzhen-listed company, issued a performance forecast last October 25, saying it expected to eliminate its losses in 2008. This pleased the company's shareholders. But just two months later, the company modified its forecast, saying that it would be difficult for it to get rid of its losses and that its estimated losses for 2008 would amount to about 30 million yuan ($4.39 million).

Xinlong Holding manufactures and sells mainly non-woven fabrics and deep-processed products. But when raw material prices and the company's production costs fell in the fourth quarter, the prices of the company's goods also dropped, lowering its gross profit. Xinlong Holding had to change its forecast. When the company issued an announcement with its revised forecast in early January, its board of directors and management team included an apology to its investors for the significant difference in its performance projection.

Xinlong Holding is not the only company that has offered an apology to its stockholders for poor financial performance forecasts. More listed domestic companies are issuing downgraded projections, because the impact of the financial crisis on the country's once hardy economy has affected them. By January 9, nearly 600 companies listed in Shanghai and Shenzhen had issued revised performance projections for 2008, 88 percent of which either lowered their growth rates, revised previous growth projections to losses or increased their rates of losses.

Of the 1,574 companies listed on China's A-share market, only 38 percent had issued announcements with revised annual performance projections by January 9. Li Gang, an analyst at China Securities Co. Ltd., estimated that among the remaining 900 listed companies, more than 80 percent would post weaker performance results in the last quarter compared with the third quarter.

"This indicates that in the fourth quarter, the operations of listed companies were worse than expected, and the performance in the fourth quarter also tied down the performance of the whole year," Li added.

Worse than expected

Most of the listed companies that have issued revisions cite various reasons. Cnlight Co. Ltd., which designs and manufactures lighting equipment, electronic vacuum devices, education materials and electric light sources and components, issued a revision on January 6. The Shenzhen Stock Exchange-listed company said it would likely post a 60-80 percent decline in net profit for 2008 compared to 2007, instead of its previous estimate of a 30-60 percent drop made in the third quarter last year. The company said the impact of the financial tsunami was more severe than it had expected and led to a decline in orders and a sharp decrease in sales volume in the fourth quarter. It also said the decrease in orders and the high prices of raw materials in storage raised its costs.

Most of the listed companies that have issued revised projections attribute their dismal performance to the financial crisis that started in the United States. The crisis has directly affected foreign trade companies and is increasingly hitting domestic demand-oriented companies, as well as China's overall economy, Li said. The performances of listed companies would increasingly reflect this impact, and in particular the fourth quarter of 2008 would be more severely affected than initially expected, he said.

Many companies have had to lower their prices because the financial crisis has reduced demand for their products and created inventory oversupplies. As their sales volumes have fallen, so have their financial results, he said.

Li noted the financial performance of listed companies in the fourth quarter could be worse than expected. In the first half of last year and especially in the first quarter, most listed companies achieved good financial results. Even in the second quarter, some industries and companies still maintained high growth, and many were optimistic about their performance for the entire year.