HK & China - Market Direction 01 (May08 - Oct08)

[winston]

China So Cheap Chalco's Twice Profit Growth Discounted to Alcoa
By Darren Boey and Chua Kong Ho

June 2 (Bloomberg) -- Chinese stocks have fallen so much this year that Aluminum Corp. of China Ltd. is offering investors twice the profit growth of Alcoa Inc. at a lower price.

The 32 percent slump in China's CSI 300 Index, the steepest decline among the world's 20 biggest equity markets, narrowed the price-earnings gap with the Standard & Poor's 500 Index to 13 percent from 139 percent. Mainland stocks traded in Hong Kong, where no foreign investment limits exist, are 23 percent cheaper than U.S. shares, data compiled by Bloomberg show.

The CSI 300 fell after a fivefold gain sparked concern that prices are outstripping earnings prospects as the fastest-growing major economy slows, inflation accelerates and a stronger yuan makes exports less competitive.

``The correction in China provides a good opportunity to get in,'' said Mark Mobius, 71, who oversees about $42 billion of emerging-market equities as executive chairman of Templeton Asset Management Ltd. in Singapore. ``Valuations of these companies are very attractive. There's no question that even if you downgrade China growth by a few points, it's still going to be greater than in the U.S.''

The CSI 300 Index surged 478 percent in the past two years as China's government adopted measures to make state-owned shares tradable and the economy grew more than 10 percent every quarter. Chinese gross domestic product, which expanded 11.9 percent last year, may rise 10 percent in 2008 compared with 1.3 percent in the U.S., economists' forecasts compiled by Bloomberg show.

Rally Fizzles

The rally pushed valuations on Chinese shares to the most expensive among the largest equity markets. It fizzled this year amid concern new stock sales will overwhelm demand and the highest interest rates in nine years will slow profit growth.

Companies in the CSI 300 trade at an average price-earnings ratio of 26.4, down from a record 52.8 in October, weekly data compiled by Bloomberg show. That compares with a ratio of 23.4 for the S&P 500. The benchmark index for American equities last traded at a premium to the CSI 300 in March 2006.

The Hang Seng China Enterprises Index, a gauge of 42 Chinese companies that trade in Hong Kong, became cheaper than the S&P 500 in March and is now valued at 18.1 times profit, Bloomberg weekly data show. Chinese companies list in Hong Kong to lure international investors who face restrictions on mainland shares.

`Irrational'

``Selling has been irrational,'' said Chen Shide, who manages the equivalent of $2.3 billion at GF Fund Management Co. in Guangzhou, China. ``The current level already holds great investment opportunities in the medium and long term.''

Chinese measures to combat the fastest inflation among the world's 10 biggest economies may dent earnings, some investors say. The People's Bank of China raised its benchmark one-year lending rate six times last year to 7.47 percent, helping slow economic growth to 10.6 percent in the first quarter.

Inflation rose to 8.5 percent in April, close to the highest since 1996. The yuan has gained about 5 percent this year against the dollar, making exports more expensive. Overseas sales grew 22 percent in April from a year earlier, down from 31 percent growth in March.

Valuations have ``gone from very high to still high, that's why we're cautious,'' said David Darst, who helps oversee more than $700 billion as chief investment strategist at Morgan Stanley Global Wealth Management in New York. ``We don't think it's time yet to go trying to do too much bottom-fishing.''

Earnings in China

Chinese companies' first-quarter profits grew 5.5 percent. Earnings exceeded forecasts by 4.3 percent for the 203 with estimates tracked by Bloomberg. By comparison, profits at U.S. companies dropped 16 percent in the first quarter and trailed analysts' forecasts by 4.4 percent, according to Bloomberg data.

Net profit at Beijing-based Aluminum Corp. of China will rise 20 percent in the next two years, outpacing the 8.7 percent growth for New York-based Alcoa, analyst estimates compiled by Bloomberg show. Chalco, as the company is known, is valued in Hong Kong at 14.5 times profit, down from 25.1 seven months ago. Chalco trades at an 11 percent discount to Alcoa, the world's third-largest aluminum producer.

Alcoa bought Chalco shares in its initial public offering in 2001 and sold a 7 percent stake last September.

Analysts expect net income at Guangshen Railway Co., which operates trains in China's richest province, to increase 41 percent over the next two years. That compares with 31 percent for Burlington Northern Santa Fe Corp., estimates compiled by Bloomberg show.

Heaviest Snowstorms

Guangshen, which was hurt in the first quarter by the heaviest snowstorms in five decades, may see its profits boosted by government plans to spend 300 billion yuan ($43 billion) upgrading China's rail network this year.

The Shenzhen-based rail operator's Hong Kong-listed shares are valued at 17.3 times profit, a 17 percent discount to Fort Worth, Texas-based Burlington, the second-largest U.S. railroad. That's the biggest gap since 2003.

``It's probably time for investors who have not been involved in this area to start nibbling,'' said Alan Gayle, a Richmond, Virginia-based senior investment strategist at RidgeWorth Capital Management, which oversees about $74 billion. ``The long-term story is still intact.''

[winston]

Heard a chartist on Bloomberg this morning mentioned that the HSI can go up 30% by year end.

Please do take this with a large pinch of salt..

Will post the guy's name if they replay the video later. This ang moh chartist is based in Thailand.

[winston]

If you are investing in any Chinese companies or companies that are doing business in China, please do make sure you know their story well before you invest in them.

Companies in China are sometimes asked to do "National Service" in the spirit of controlling inflation.

Examples:-
1) Sinopec has to absorb losses on it's refining business
2) Yangzhou coal was asked yesterday to supply coal in Shandong at a discount to spot prices
3) Wilmar's share was hit when cooking oil was declared as a "controlled item" ie. Wilmar had to apply for any price increases

[winston]

If you want to invest in some Chinese Infrastructure counters, here are some names for you. Not vested in any of them as I'm trying to figure out whether they're able to pass on the higher cost of raw materials eg. steel, copper, cement etc..

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From UOB-Kay Hian:-

1) China Infrastructure Construction
2) China Communications Construction vs China Railway Construction and China Railway Group
3) Beneficiaries of Government’s Infrastructure Investment

Investment in China’s railway sector has significantly lagged behind the investment growth of other modes of transportation, especially the highway sector, in the last 10 years.

China’s government announced the Rmb1.25t railway expansion plan under the 11th Five-Year Plan. However investment appears to remain significantly behind the government’s schedule. To meet the target, the Ministry of Railways (MOR) has to accelerate investments over 2008-10.

The leading contractors, including China Communications Construction (CCC), China Railway
Construction (CRC) and China Railway Group (CRG), are expected to benefit from an investment boom in railway industry and gaining global market share, especially in African and Asian markets.

CRC and CRG have higher exposure to the railway construction industry. CCC has better pricing power and achieved higher profitability given its dominant position in the ports construction
industry in China.

CCC is trading at a more attractive valuation despite less exposure to the railway construction industry. CRC outperformed CRG in terms of operating efficiency and gaining global market share. CRC also benefits from faster growth in international business.

The short-term share price upside for CRG is mainly capped by potential earnings disappointment in FY08. However, we believe that the market has been underestimating the growth potential of CRG’s property and mining operations.

Share price catalysts to the sector include potential upward revision of reference pricing by MOR, asset injections from parents, signing of new contracts, and forthcoming interim results.

[winston]

Bought my first tranche of the A50Chinatracker 2823 today. I think it has dropped about 55% from the peak..

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China Stocks Cheaper Than U.S., First Time Since 2006
By Chua Kong Ho

June 13 (Bloomberg) -- Chinese stocks became cheaper than U.S. shares for the first time in more than two years on concern the fastest-growing major economy will slow after the central bank tightened lending.

The 44 percent slump this year in China's CSI 300 Index, the steepest decline among the 20 biggest equity markets, closed the price-earnings gap with the Standard & Poor's 500 Index from a 127 percent premium at the start of 2008, data compiled by Bloomberg show.

The gauge of companies listed in Shanghai and Shenzhen today traded as cheaply as 21.82 times reported earnings, compared with 21.84 for the S&P 500. The CSI 300 was last at a discount to the benchmark for American equities in March 2006. The CSI 300 ended its trading day at 21.85.

``Investors are worried that inflation will pressure corporate earnings,'' said Leslie Phang, the Singapore-based head of investments at the private-clients unit of Schroders Plc, which oversees about $260 billion.

The CSI 300 has tumbled after a fivefold gain sparked concern that prices are outstripping earnings prospects as China's growth slows, inflation accelerates and a stronger yuan makes exports less competitive.

The index slumped 15 percent this week after the People's Bank of China ordered banks to set aside more reserves for the fifth time this year, limiting the amount they have available to lend. The central bank raised interest rates six times in 2007.

Market Slump

The CSI 300 fell below the 3,000 point level today for the first time since April 2007, declining 3.4 percent to 2,979.12, amid concern government measures to curb inflation will hurt company profits. The index has retreated for an eighth-straight day, marking its longest run of losses since August 2006.

China Vanke Co., the nation's largest publicly traded property developer, is down 43 percent this year, on speculation the curbs on lending will affect financing for future projects. Shanghai Pudong Development Co., part-owned by Citigroup Inc., has retreated 41 percent.

Citic Securities Co., the nation's largest brokerage by market value, is down 38 percent this year as the daily value of shares traded on China's two stock exchanges slumped by about a third to 65.9 billion yuan ($9.5 billion) this year in the week ended June 6, data compiled by Bloomberg show.

The CSI 300 surged 478 percent in the past two years as China's government adopted measures to make state-owned shares tradable and the economy grew more than 10 percent every quarter. Chinese gross domestic product, which expanded 11.9 percent last year, may rise 10 percent in 2008 compared with 1.3 percent in the U.S., economists' forecasts compiled by Bloomberg show.

Tightening Measures

The rally pushed valuations on Chinese shares to the most expensive among the largest equity markets. It fizzled this year amid concern new stock sales will overwhelm demand and the highest interest rates in nine years will slow profit growth.

The People's Bank of China raised its benchmark one-year lending rate six times last year to 7.47 percent, helping slow economic growth to 10.6 percent in the first quarter.

The statistics bureau yesterday said inflation slowed to 7.7 percent in May from an almost 12-year high of 8.5 percent the previous month. The yuan has gained 5.7 percent against the dollar this year, making exports more expensive. Overseas sales rose 28.1 percent from a year earlier, after gaining 21.9 percent in April, the customs bureau said yesterday.

China's stock valuations ``can be considered very acceptable, given the economic growth we're seeing in China,'' said Dai Qilei, a portfolio manager at Lord Abbett China in Shanghai, which oversees about $900 million. ``Even the most pessimistic forecast puts China's economic growth at above 8 percent.''

[winston]

Just found a better ETF to invest directly in Shanghai. WISECSI300 2827 listed in HK. Not invested yet. Is the bounce today a dead cat bounce, window dressing or long fund buying ?

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China's Stocks Surge, Snapping Record Decline; Sinopec Climbs
By Zhang Shidong and Patrick Rial


June 18 (Bloomberg) -- China's stocks rose for the first time in 11 days after the benchmark index fell 50 percent from its record high and some investors judged the losses as overdone.

The CSI 300 Index advanced 148.60, or 5.2 percent, to 2,991.27 at the close, its biggest advance since April 24. The gauge has lost $1.2 trillion, more than India's market capitalization, since its October peak.

Stocks gained on speculation the government will intervene to support the market following its 10-day, 22 percent rout, which cut the benchmark index's price earnings ratio to the lowest in two years. Shares had fallen on concern central bank measures to combat rising inflation will erode earnings growth.

``Valuations may seem a bit dear still, but in comparison to past levels things have gotten much more reasonable,'' said Michiya Tomita, who oversees about $264 million in Chinese equities for Mitsubishi UFJ Asset Management Co. in Hong Kong.

The 14-day relative strength measure for the CSI 300 was at 20 yesterday. Relative strength indexes show how rapidly prices have advanced or dropped during a specified time period. Readings below 30 indicate it may be poised to rise.

China Securities Regulatory Commission spokesman Zhang Wangjun declined to comment on the speculation.

Government Measures

``There is a lot of speculation about market-boosting measures, given the market has dropped so much,'' said Wei Wei, an analyst at West China Securities Co. in Shanghai.

The government may limit share sales, increase the funds that local banks and insurers can invest or raise the amount that foreign institutions can spend on China's stocks and bonds, Jing Ulrich, JPMorgan's chairwoman of China equities, wrote in a report e-mailed today. Any positive impact may not last, she said.

``As with other recent measures, the boost to investor confidence may be short-lived,'' Ulrich wrote in the report. ``Many investors view the government's price controls and macro- tightening policies as being responsible for weakening the profitability of major companies.''

The central bank required lenders to set aside a record amount of money as reserves this year after raising interest rates six times in 2007.

Refiners Surge

China Petroleum & Chemical Corp. and PetroChina Co., the country's two top refiners, advanced after Zhang Xiaoqiang, vice chairman of China's National Development and Reform Commission, said yesterday the government will use ``prudence'' in raising fuel prices.

China Petroleum, also known as Sinopec, jumped by the 10 percent daily limit to 13.01 yuan. PetroChina Co. rose 5.6 percent to 16.09 yuan.

China's government controls prices of gasoline, diesel and jet fuel for local consumption, restricting the ability of oil refiners to pass rising crude oil costs on to customers.

The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, advanced 5.2 percent to 2,941.12. The Shenzhen Composite Index gained 5.1 percent to 843.19.

[winston]

China A-shares close sharply higher; index up 5.24 pct
06.18.08, 5:39 AM ET

SHANGHAI (XFN-ASIA) - China A-shares closed sharply higher, with the key index up more than 5 pct in an apparent technical rebound, dealers said.

There was also speculation of imminent government intervention to support the stock market, with some of the talk centering on the social security fund being ordered to intervene.

Nonferrous metals stocks and oil refiners led the gains.

Turnover rose to 69.03 bln yuan from 43.84 bln yuan in the previous session.

'It is basically a technical rebound after recent sharp declines,' said Cao Yan, an analyst with Soochow Securities.

Analysts also noted that expectations of a government effort to boost capital inflows also drove the market today.

'Today's gain is similar to that of April 23, 2008, the day before the government's stamp duty announcement,' Wu Dazhong, an analyst with Shenyin&Wanguo Securities, said.

A government move at this point could achieve a similar result to April 24, 2008 with the market warmed up and primed for confirmation of the rumors, he added.

Wu said one way to drive the market higher could be to raise the QFII quota to 60 bln or 100 bln usd from the current 30 bln, which could have been flagged by recent issues of QFII licenses.

Belgium's KBC Asset Management NV said late yesterday that it was granted a QFII license by the China Securities Regulatory Commission, a development which will create expectations of further fund inflows.

Last week, the official Shanghai Securities News reported that US bank State Street received regulatory approval to invest in China under the QFII program.

Yi Linming, an analyst with Industrial Securities said: 'There is much market talk that the social security fund has been ordered to enter the market.'

The sustainability of the rebound will depend on government action materializing later today, analysts said.

Oil refiners were pushed higher by speculation that price controls on refined oil product prices will be eased soon.

Banks were higher. Brokers also rebounded.

[winston]

China Has `Limited' Scope to Halt Stock-Market Plunge (Update1)
By Darren Boey and Chen Shiyin

June 18 (Bloomberg) -- China's options to halt tumbling stocks are limited and any measures may falter as a campaign to slow inflation erodes company profits, JPMorgan Chase & Co. said.

The government may limit share sales, increase the funds that local banks and insurers can invest and raise the amount that foreign institutions can spend on China's stocks and bonds, Jing Ulrich, JPMorgan's chairwoman of China equities, wrote in a report e-mailed today.

``As with other recent measures, the boost to investor confidence may be short-lived,'' Ulrich wrote in the report. ``Many investors view the government's price controls and macro- tightening policies as being responsible for weakening the profitability of major companies.''

The benchmark CSI 300 Index today rebounded as much as 4.3 percent, after a record 10 straight declines. The index has tumbled 48 percent this year, the second-worst performer among the 88 global benchmarks tracked by Bloomberg.

The CSI yesterday ended 50 percent below its record close of 5877.20 set on Oct. 16, as China's government stepped up efforts to control increases in consumer prices. The central bank required lenders to set aside a record amount of money as reserves this year after raising interest rates six times in 2007.

Focus on Inflation

The increase in the reserve requirement ``delivered a clear message that the Chinese government's focus remains on reigning in inflation,'' Ulrich wrote.

Shares of refiners and power producers may receive a boost should inflation slow and enable China to relax controls on fuel and energy prices to offset higher raw material costs, Ulrich said.

China Petroleum & Chemical Corp., the nation's largest refiner, and Huaneng Power International Inc., a unit of China's largest power producer by capacity, have both plunged 47 percent this year.

China's government has introduced a series of measures since the start of the year to halt the stock-market slump, including resuming approval for new mutual funds and suspending a tax on mutual fund income, Ulrich said.

The government cut the tax on equity trading on April 23 to 0.1 percent from 0.3 percent to halt the slump, two days after the Shanghai Composite Index, which tracks the larger of the two mainland markets, sank to more than 50 percent below its October record.

The move prompted a 9.3 percent surge on April 24 in the Shanghai Composite, before it fell 3 percent in the next two days.

There are ``diminishing returns to supportive measures and a danger that investors will become overly-focused on the direction of government interventions rather than investment fundamentals,'' Ulrich said in the report.

[winston]

"As the market has corrected enough, investors should take the opportunity to buy more China stocks," JPMorgan head of China research Frank Gong told reporters. "We recommend infrastructure and banking sectors."

It is possible China may set up a market-stabilization fund to prop up share prices, as other emerging markets have done, Gong said.

[winston]

From Dr. Check:-

Reasons to keep smiling
Thursday, June 26, 2008

There are signs a short-term rebound in the Hang Seng Index could be underway. After all, the recent turmoil in mainland stocks was partly to blame for the downturn in local shares.

Perhaps now - with the mainland markets rising for the past two days - we can be cautiously optimistic.

Several positive signs are emerging concerning mainland stocks.

First, Shanghai A shares have found support after falling to 16-month lows. So now they offer value.

Currently, the average expected price-earnings ratio for the next financial year is 14 times. This is not expensive.

The China Securities Journal reported on Tuesday that the average historical PE for A shares in Shanghai and Shenzhen had dropped to 23.51 times, not far from the 19.96 times hit during the stock market slump in mid-2005.

Second, the Shanghai Composite Index fell to 2,700 level on Friday - its lowest since February 2007. Technically speaking, any more rallies above the downtrend resistance line at 3,260 is tipped to trigger a very strong rebound.

Third, as we near August 8 - the start of the Beijing Olympics - the authorities will do their best to put a smile on everyone's face.

Fourth, outstanding contracts on HSI June and July futures have hit 137,500 from below 100,000 last week. It seems somebody has gone long - in a large manner - on the HSI.

So, if you are convinced that slightly better days lie ahead for mainland shares, then you may want to take a look at A50 China Tracker Fund (2823). The unit price is already down 25 percent since early last month.