Chinese Stocks Must Drop More to Be ‘Attractive,’ JPMorgan Says

By Chua Kong Ho

Jan. 21 (Bloomberg) -- Chinese stock valuations must fall further before they become “more attractive and defensive,” according to JPMorgan Chase & Co.

Companies on the MSCI China Index are currently valued at an average 9.8 times estimated 2009 earnings, and would provide a “better opportunity” if they fall to between 8 times and 9 times profit, according to Frank Gong, JPMorgan’s China strategist, in a note today.

The MSCI China index, which tracks 98 Chinese stocks mostly traded in Hong Kong, has declined 11 percent this year, extending a 52 percent drop in 2008, the worst performance on record. The measure remains the most expensive among the so- called BRIC countries including India, Brazil and Russia, whose RTS Index trades at 2.7 times profit.

“We believe the market needs a valuation cushion for the earnings announcements in late February to March, given the fragility of the global market environment and high risk aversion,” Gong wrote in the note.

There is a risk that China’s policymakers may delay a second round of economic stimulus, the report said. The government unveiled a 4 trillion yuan ($585 billion) in November to help arrest the slowdown in the world’s third-largest economy. China’s central bank has cut the key lending rate five times from September and eliminated quotas that limited bank lending.

Becoming Complacent

“We believe policy makers are satisfied with the fact that macro data have started to show stability recently and it appears like the stimulus has shown some initial success,” said Gong in the report. “The risk is that policy makers tend to become complacent and could delay any necessary stimulus.”

China is due to release its fourth-quarter and 2008 full- year figures for gross domestic product at a briefing in Beijing tomorrow at 10 a.m. Economic growth may have cooled to 6.8 percent last quarter, the slowest pace in seven years, according to a Bloomberg News survey of economists.

Investors should favor independent power producers and property companies as these two industries are the most sensitive to lower interest rates, Gong wrote.

“We expect more interest rate cuts in the first half of 2009 and more supportive measures from the government to boost property transaction volume,” wrote Gong.

The mainland benchmark CSI 300 Index, which measures yuan- denominated stocks largely restricted to domestic investors, has risen 12 percent this year and is valued at 14 times reported earnings.

To contact the reporter responsible for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net