US companies dash hopes for a China recovery

Published Fri, Oct 16 201511:26 AM EDTUpdated Fri, Oct 16 201511:56 AM EDT

After falling more than 40 percent from June to August, China's Shanghai composite is up 16 percent from its lows on speculation the government will support companies and the economy may recover. However U.S. companies on the ground in China dashed those hopes this week by describing rapidly deteriorating business conditions. Yum Brands this week warned about falling China demand for the second time this month. The company Thursday lowered its fourth-quarter China division guidance from mid-single-digit sales growth to zero to 4 percent. Nine days earlier, Yum reported same-store sales for its China division increased just 2 percent in the third quarter, way lower than the Street's consensus estimate of 9.6 percent growth. "The (Yum Brands) updated outlook suggests comps (comparable sales) continue to remain volatile and have likely weakened in the first two weeks of October," Peter Saleh of BTIG wrote in a note to clients Friday. Yum wasn't alone... Brian Krzanich, Intel 's chief executive officer, danced around the China question on the company's third-quarter earnings call Tuesday: "There's been a trend this entire year where the mature markets have tended to be the strongest for us, so U.S., Western Europe, and Asia, PRC, parts of Eastern Europe, developing countries not being as strong, they're having some softness; that carried into the third quarter as well. And so if you just take a look at China in general, it kind of mimics that in that — if you look at sales, they're down slightly. They're softer. And it's more of the consumer than the enterprise in that space." (FactSet transcript) The Macau casino stocks were big gainers in recent weeks on the hopes the Chinese government would intervene and help the industry. As a result, Wynn Resorts traded up as much as 43 percent from its Oct. 1 low. Read More Intel's data center warning to hit these stocks Wynn's Macau business missed third-quarter earnings and sales estimates Thursday and its chief executive officer, Steve Wynn, painted a decidedly negative picture of China's government support during the earnings conference call. "It's become a major issue in Macau as to the impact of government policy in planning for employment, promotions, hiring and compensation. None of us are really clear on what our environment is going to be like going forward, and it makes planning and adjusting almost a mystical process," Wynn said on the conference call, according to a FactSet transcript. "We expect Mr. Wynn's bearish/critical comments to pressure not only his own company's shares, but those of other operators with considerable Macau exposure," Stifel's Steven Wieczynski wrote in a note to clients Friday. Wynn shares were down 3 percent midmorning Friday. Read More Early earnings warnings cast a shadow on economy China reports its third-quarter gross domestic product Monday and the government is expected to say growth was still at about 7 percent. But who would you trust? U.S. companies that have to answer to analysts or a government that doesn't have to answer to anybody?

Wynn Macau casino resort in Macau, China.

Jerome Favre | Bloomberg | Getty Images

After falling more than 40 percent from June to August, China's is up 16 percent from its lows on speculation the government will support companies and the economy may recover.

However U.S. companies on the ground in China dashed those hopes this week by describing rapidly deteriorating business conditions.

Yum! Brands

Yum Brands this week warned about falling China demand for the second time this month.

The company Thursday lowered its fourth-quarter China division guidance from mid-single-digit sales growth to zero to 4 percent.

Nine days earlier, Yum reported same-store sales for its China division increased just 2 percent in the third quarter, way lower than the Street's consensus estimate of 9.6 percent growth.

"The (Yum Brands) updated outlook suggests comps (comparable sales) continue to remain volatile and have likely weakened in the first two weeks of October," Peter Saleh of BTIG wrote in a note to clients Friday.

Yum wasn't alone...