Buy China Stocks on Valuations, Profits, Says Emperor’s Mullen

By Fabio Alves

Dec. 4 (Bloomberg) -- Investors should buy Chinese stocks because the so-called H shares of the mainland companies traded in Hong Kong are nearing the bottom and may rise as much as 30 percent in 2009, according to Emperor Investment Management.

“H shares earnings multiples, such as price-to-book ratio, at close to the same levels seen during the 1998 Asian crisis, which was the lowest point we’ve ever seen,” said Ed Mullen, chief executive officer at Shanghai-based Emperor, a hedge fund that oversees $150 million in Chinese stocks.

Corporate profits in China will outpace other emerging and developed markets as the country’s economic growth remains robust, Mullen said in an interview in New York. His firm’s Emperor Greater China Fund, which was set up eight years ago, fell 51 percent this year through October after climbing 93 percent in 2007.

The Hang Seng China Enterprises Index of mainland shares in Hong Kong has lost 55 percent this year on concern shrinking industrial expansion and slowing exports will stifle economic growth. China’s government last week cut its key lending rate by the most in 11 years to prevent an economic slump and four weeks ago pledged a 4 trillion yuan ($580 billion) stimulus package.

“China’s economy will start to recover in the second half of next year when we’re going to see the stimulus package and monetary easing taking effect,” Mullen said.

The country’s economy, the biggest contributor to global growth, expanded 9 percent in the third quarter, slowing from 11.9 percent a year earlier. Fourth-quarter growth may slump to 5.8 percent, the slowest pace in 18 years, Credit Suisse Group AG estimated in a report last month.

Profit Growth

Earnings growth of Chinese companies may lure investors back to the country’s stocks, Mullen said. Chinese businesses whose profits depend on domestic demand, such as infrastructure and consumer-staples companies, will have faster earnings growth than “anywhere in the world,” he said.

Mark Mobius, the Singapore-based executive chairman of Templeton Asset Management Ltd., said in a Bloomberg Television interview last month that he’s “aggressively” buying consumer stocks in emerging markets including China. Mobius, whose firm oversaw more than $24 billion in emerging-market stocks on Sept. 30, said growth in per-capita income is fueling a consumer ‘boom” in those countries.

The declines in the Hang Seng China Enterprises Index pushed the measure to trade at 9.3 times the trailing profit of its 42 companies, compared with a 32.4 times high in October 2007. The MSCI Emerging Markets Index, which has dropped 59 percent this year, trades at 7.8 times the profit of its 787 companies.

“The price-to-earnings and price-to-book ratios are compelling evidence that China stock market is a buy right now,” said Bill Santos, Emperor’s president.

To contact the reporters on this story: Fabio Alves in New York at falves3@bloomberg.net