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China's slowing economy claiming firms' CEOs, profits

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07/10/2012 | 11:07pm CEST

China's slowing economy is hammering corporate profits and costing some CEOs their jobs as investors show little patience for companies that fall behind, even for a brand founded by a former Olympic star gymnast and revered sports hero.

In the space of weeks, at least half a dozen Chinese companies - ranging from a steelmaker to the country's biggest airline - warned that earnings will be softer than expected as the world's second-biggest economy grows at the weakest pace in three years.

"We are seeing a lot of companies start to come under greater financial stress, and we are going to find out how robust their business models really are," said Patrick Chovanec, associate professor at Tsinghua University's School of Economics and Management.

"A rapidly growing market can disguise a lot of problems with a company that become evident once the market begins to slow down."

Several prominent firms have also unexpectedly lost their top executives recently. While it is uncommon for CEOs to be ousted from Chinese companies, which abhor management instability, it has happened occasionally in the past.

Li Ning Co Ltd (>> Li Ning Co Ltd), whose founder and namesake won six medals including three golds at the 1984 Summer Olympics, in June warned of a "substantial decline" in profit for 2012 due to weaker sales and higher marketing costs, knocking its shares to a 6-1/2 year low. [ID:nL3E8HC0C2] Last week, the sportswear retailer replaced its chief executive and said it will focus more on its mainland business. [ID:nL3E8I43ZF]

Jin Zhiguo, chief executive of the century-old Tsingtao Brewery Co Ltd (>> Tsingtao Brewery Company Limited), abruptly resigned last month, ostensibly for health reasons. The company said Jin's departure would make room for further growth in the company's management team and for a better succession system.

The latest executive to depart was China Yurun Food Group Ltd's (>> China Yurun Food) founder and Chairman Zhu Yicai, whom the company said over the weekend had resigned because of personal commitments.

Yurun shares, which fell 9.75 percent on Monday, have plunged 53 percent from this year's high and are at their lowest since October 2008. Zhu's departure also came just days after the company denied "recent rumors alleging certain accounting misstatements," without giving further details.

Debt-laden China Southern Airlines <1055.HK> (>> China Southern Airlines Limited), the country's largest airline by fleet size, warned on Tuesday that first-half profit may slump by more than 50 percent. {ID:nL3E8IA3D0]

CORPORATE GOVERNANCE

The slumping economy and stock market made it all the more vital for Chinese firms to strengthen corporate governance, said Steven Chow, an analyst with Kingsway Group Research.

"Management would feel good in a rising market, but they now have to rethink what they have to do to stay competitive in a slowing market and how to lure and maintain investors' confidence," Chow said.

"Raising the transparency of corporate governance is one of the options," he said. Investors "have less tolerance to any negative news and unload their holdings without any patience to wait for companies' clarification."

According to economists polled by Reuters, China's second-quarter economic growth slowed to just 7.6 percent from a year earlier, the weakest pace since the first three months of 2009. The government is scheduled to release gross domestic product data on Friday.

The economy's double-digit growth rates from 2003 to 2007, and again in 2010, meant "Chinese companies were trying to catch up as a result and did not pay much attention to internal control," said Terence Tsai, associate professor of management at China Europe International Business School.

Li Ning, like many Chinese sportswear groups, plans to tackle bloated inventory and cut back on new store openings after an expansion blitz following the 2008 Beijing Olympics.

For Li Ning, "it is not an easy task to rebuild a brand name when locals have caught up to it, while its products are not premium enough to compete with foreign rivals," said Alex Wong, a director at Ample Finance Group.

"It must solve issues in distribution and inventory," Wong said.

Europe-focused clothing retailer Esprit Holdings Ltd (>> Esprit Holdings Ltd.), in the midst of a costly restructuring, was another that saw its CEO go when Group Chief Executive Ronald van der Vis resigned, citing personal and family reasons. It was the company's second senior management change in two months.

Numerous consumer-related companies have signaled or reported weak profits in recent weeks.

"The overall sentiment is weak in particular the retail sector, which has been under pressure since fourth quarter last year when the operators reported their quarterly sales data." said Steven Leung, a director from UOB Kay Hian.

Sportswear retailer China Dongxiang (Group) Co Ltd (>> China Dongxiang) said last week that it expected first-half revenue to decline by about 29 percent, with profit margin expected down as well because of fierce competition and excessive inventory.

"The slowdown in the Chinese economy is actually good for Chinese enterprises as they can ... pay more attention to business strategy," China Europe International Business School's Tsai said. (Reporting by Terril Yue Jones and Donny Kwok; Edited by Ryan Woo and Emily Kaiser)

By Terril Yue Jones and Donny Kwok

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