AS the earnings reporting season gets underway, analysts are expecting flat to modest earnings growth for Chinese listings here or so-called S-chips in the third quarter.

Companies in the consumer discretionary, industrials and property sectors are likely to outperform the S-chips universe, they say. This could set the stage for a further re-rating of S-chips.

'We believe earnings for S-chips should have already bottomed out last year. However, the nascent recovery means that year-on-year growth should be minimal,' said Kim Eng analyst James Koh.

SIAS Research vice president Roger Tan projected a flat growth for export oriented companies and a modest growth of 5-8 per cent for domestic consumer companies, as the outperformance of China's economy relative to the rest of the world continues to set domestic players apart from export-driven ones.

According to Beijing's statistics bureau, China's gross domestic product rose 8.9 per cent in the third quarter from a year ago. For the first nine months of 2009, the Chinese economy grew 7.7 per cent, with domestic demand accounting for all of the advance.

This growth is unlikely to be derailed as the Chinese government refrains from draconian tightening measures. Economic bellwethers like the financial and property sectors will thus be key beneficiaries, Mr Tan said.

While there are currently no S-chips in the financial sector, there are a handful of property players riding the wave of rising property prices in China. Among them are Shanghai high-end residential player Yanlord and Pan Hong Property, a niche property player in the second and third-tier cities that has been reporting strong pre-sales.

Buoyed by China's stimulus package, infrastructure firms such as railcar profile maker Midas Holdings would also benefit.

But Chinese shipbuilders could continue to be a mixed bag, with Cosco Corp having reported a number of rescheduling of vessel deliveries and Yangzijiang Shipbuilding reporting none last quarter, said DBS Vickers analyst Ho Pei Hwa. Both have not announced new contracts in the past few months.

While consumer discretionaries like the sportswear companies could see a pick up in sales as consumer sentiment improved, the third quarter results for companies in the food and beverage sector and the chemical fibre industry may be less exciting to watch, said CIMB-GK analyst Ho Choon Seng.

Nonetheless, F&B players like Synear may have hit the bottom in their earnings, he added. While there remains overcapacity in some chemical fibre producers, the worst has probably blown over for many of them. 'A common theme across companies seems to be that the inflexion point has passed,' Mr Ho said.

Some companies with no overcapacity issues have swung back into expansionary mode, tapping the rising equity tide to finance their expansion plans. This includes Midas, Pan Hong Property and Sinomem. Analysts believe that this trend of equity fund-raising will continue.

Most S-chips already have healthy balance sheets with strong net cash positions prior to the financial crisis. The market, however, has focused on the few black sheep plagued by debt and trade receivables, said Mr Tan of SIAS. But after months of shakeout of weak companies, investors have started to relook and take up positions in undervalued S-chips.

Alan Lok, director at Sabio Global said that given the recent market recovery, 'investment-hungry coun-ters would definitely spring out of hibernation to tap external funding, more so given the unwillingness of banks to extend their loans to small companies.'

With the reputation of S-chips on the mend and some still heavily discounted in terms of price-to-book value, 'valuations should go up steadily over time, especially among those counters in growing industries as well as having decent management track record', he added.