China Stocks to Rise Less Than Forecast, UBS Says

By Chen Shiyin

Jan. 19 (Bloomberg) -- China stocks will rise less than forecast this year because of a drop in earnings, UBS AG said.

The Shanghai Composite Index, which tracks the bigger of China’s two stock exchanges, may climb to 2,400 by the end of the year, less than an earlier forecast of 2,600, UBS analyst Li Chen wrote in a report. Earnings will probably shrink 14 percent this year, compared with an earlier estimate of growth of 0.5 percent, the report said.

The Shanghai Composite added 1.8 percent to 1,954.44 on Jan. 16. The measure has gained 7.3 percent this year, the second-best performer in Asia after Sri Lanka, following a record 65 percent decline in 2008.

“A-share earnings growth rate might be lower than consensus because of the earnings declines in energy, industrials, materials, consumer discretionary and financials,” the analyst wrote in the report, dated Jan. 16.

China’s economy grew 9 percent in the third quarter of 2008, the least in five years. The fourth-quarter expansion, due to be announced this week, was 6.8 percent, the weakest since 2001, according to the median estimate of 12 economists surveyed by Bloomberg News.

Earnings of non-financial companies will probably contract 25 percent, more than an earlier estimate of a 7 percent decline, the analyst said. Raw materials, steel and other metal suppliers may face “inventory pressures” as companies fail to cut their output, increasing the risk to earnings, according to the report.

China Merchants, Vanke

Companies in the electrical equipment, railway infrastructure, health care, food and beverage, and retail industries may be among the best performers this year, UBS said.

The brokerage added shares of China Merchants Bank Co., the nation’s fifth-biggest bank by value, and China Vanke Co., the largest publicly traded real-estate developer, to its list of recommended companies, replacing ZTE Corp. and Daqin Railway Co.

Kweichow Moutai Co., China’s biggest liquor maker by market value, and Gree Electric Appliances Inc., a maker of home air conditioners, are also among UBS’s top picks, the report said.

In 2009, valuations of Chinese stocks are likely to increase as the government eases its monetary policy and as commercial banks start making more loans, UBS said.

The central bank has cut interest rates five times since September to bolster growth, while Premier Wen Jiabao pledged this month to increase a 4 trillion yuan ($585 billion) stimulus package to create employment and support the nation’s industries.

The Shanghai Composite is valued at about 15 times reported earnings, down from a high of about 50 times in January 2008, according to data tracked by Bloomberg. The benchmark index could end 2009 at a multiple of 22 times, UBS said.

“Reinflation can push up A-share valuations,” the analyst said. “The low valuation of the equity market appears attractive.”

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net