These Analysts Just Made A Substantial Downgrade To Their China Literature Limited (HKG:772) EPS Forecasts

The analysts covering China Literature Limited (HKG:772) delivered a dose of negativity to shareholders today, by making a substantial revision to their statutory forecasts for this year. Revenue and earnings per share (EPS) forecasts were both revised downwards, with the analysts seeing grey clouds on the horizon.

After the downgrade, the consensus from China Literature's 18 analysts is for revenues of CN¥8.3b in 2022, which would reflect a perceptible 4.5% decline in sales compared to the last year of performance. Statutory earnings per share are supposed to plunge 51% to CN¥0.88 in the same period. Previously, the analysts had been modelling revenues of CN¥9.3b and earnings per share (EPS) of CN¥1.25 in 2022. Indeed, we can see that the analysts are a lot more bearish about China Literature's prospects, administering a measurable cut to revenue estimates and slashing their EPS estimates to boot.

View our latest analysis for China Literature

Analysts made no major changes to their price target of CN¥38.57, suggesting the downgrades are not expected to have a long-term impact on China Literature's valuation. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. The most optimistic China Literature analyst has a price target of CN¥87.56 per share, while the most pessimistic values it at CN¥28.77. With such a wide range in price targets, the analysts are almost certainly betting on widely diverse outcomes for the underlying business. With this in mind, we wouldn't rely too heavily on the consensus price target, as it is just an average and analysts clearly have some deeply divergent views on the business.

Of course, another way to look at these forecasts is to place them into context against the industry itself. We would highlight that sales are expected to reverse, with a forecast 8.8% annualised revenue decline to the end of 2022. That is a notable change from historical growth of 1.7% over the last year. Compare this with our data, which suggests that other companies in the same industry are, in aggregate, expected to see their revenue grow 17% per year. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - China Literature is expected to lag the wider industry.

The Bottom Line

The most important thing to take away is that analysts cut their earnings per share estimates, expecting a clear decline in business conditions. Regrettably, they also downgraded their revenue estimates, and the latest forecasts imply the business will grow sales slower than the wider market. The lack of change in the price target is puzzling in light of the downgrade but, with a serious decline expected this year, we wouldn't be surprised if investors were a bit wary of China Literature.

With that said, the long-term trajectory of the company's earnings is a lot more important than next year. We have estimates - from multiple China Literature analysts - going out to 2024, and you can see them free on our platform here.

Of course, seeing company management invest large sums of money in a stock can be just as useful as knowing whether analysts are downgrading their estimates. So you may also wish to search this free list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.