China H Shares to Cut A-Share Gap, Credit Suisse Says

By Chen Shiyin

Feb. 17 (Bloomberg) -- Chinese stocks in Hong Kong will narrow the valuation gap with mainland-traded shares as stronger-than-expected economic growth spurs demand for the nation’s equities, Credit Suisse Group said.

Shares on the Shanghai and Shenzhen stock exchanges are currently trading at a 50 percent premium to their peers in Hong Kong, more than the 31 percent average since 2006, Credit Suisse’s Hong Kong-based analysts Vincent Chan and Peggy Chan wrote in a Feb. 16 report. They advised investors to buy H shares, saying that the MSCI China Index may rise to 50.8 by the end of the year, a 29 percent increase from yesterday’s close.

The Shanghai Composite Index has gained 31 percent this year, the best performer among the 90 global benchmarks tracked by Bloomberg on speculation the government will add to a 4 trillion yuan ($585 billion) stimulus package. The MSCI China Index has retreated 3.6 percent during the same period.

“China’s economic growth in 2009 will be stronger than the consensus market forecast, which should prove a pleasant surprise for the market,” the analysts wrote. “The market cap to GDP for China is not particularly high, so we believe the valuation gap closure will be due mainly to rising H share prices.”

China’s economy will probably grow 8 percent this year, compared with a 6.7 percent projection by the International Monetary Fund, the Credit Suisse analysts estimated.

A Share Premium

The Hang Seng China AH Premium Index, which tracks the premium of A shares to H shares, climbed to 160.50 yesterday, the highest since Nov. 20. That’s still lower than the peak of 208.06 reached on Jan. 16, 2008.

“The huge valuation gap between A and H shares usually emerges during a big bull market for the A share market and in our view it is too far-fetched to assume we will see a big bull market for either A or H shares in 2009,” the analysts wrote.

The brokerage estimates that the Shanghai A Share Index may end the year at 1,808.8, a 28 percent retreat from yesterday’s close, according to the report.

Investors should consider buying shares of Chinese stocks in the mainland that are trading at premium of less than 30 percent to their H shares, the analysts advised. These include Anhui Conch Cement Co., China’s largest construction material producer, and Ping An Insurance (Group) Co., the country’s second-biggest insurer, the report said.

Anhui Conch’s A shares trade at a discount of 1.9 percent compared with the company’s H shares, while Ping An’s are valued at a 4.9 percent premium to the Hong Kong-listed shares, according to Credit Suisse.

Changsha Zoomlion Heavy Industry Science & Technology Development Co., Guangxi Liugong Machinery Co. and Luzhou Laojiao Co. are also among A shares recommended by Credit Suisse, the report said.

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