China Stocks Undervalued to Invesco on Government Spending Plan

By Chua Kong Ho

March 30 (Bloomberg) -- China’s stock market, the world’s second-best performer this year, is “undervalued” as prospects for economic growth improved with the government’s efforts to stimulate demand, Invesco Ltd. said.

Infrastructure and consumer stocks will benefit most from the country’s 4 trillion yuan ($585 billion) spending plan, said Joseph Tang, a Hong Kong-based investment director at Invesco, which manages about $343 billion in assets worldwide.

“The market is still undervalued at these levels,” Tang said in a March 27 phone interview. “We’ve probably seen the worst in the fourth quarter, and though we’ll see another slow quarter, things should look better in the second half.”

Tang’s Invesco China Opportunity Fund has risen 29 percent this year, beating 94 percent of 1,407 China focused funds, according to data compiled by Bloomberg. Invesco is one of 79 foreign institutions with government approval to invest in local-currency stocks and bonds.

The Shanghai Composite Index has rallied 30 percent this year, trailing only Peru among 89 benchmark stock gauges Bloomberg tracks globally, as government data pointed to a recovery in the world’s third-largest economy. The Shanghai Composite trades at 18.7 times reported earnings, up from 13 times in October.

China’s urban fixed-asset investment, including roads and railways, jumped 26.5 percent in the first two months from a year earlier, the government said this month. New bank lending quadrupled in February, while vehicle sales rose 25 percent in the same month.

‘Pain’

Investor optimism in China’s rebound may be “overdone,” Morgan Stanley said last week, adding that shareholders will endure “pain” as the government’s measures fail to stem a slide in earnings.

Profits of companies on the CSI 300 Index, measuring yuan- denominated shares in both the Shanghai and Shenzhen exchanges, will tumble an average 15.4 percent in 2009, analysts Jerry Lou, James Cao and Allen Gui wrote in a note on March 27.

“The poor-quality GDP growth, driven by policy stimulus, won’t make much difference to the earnings recession path in 2009,” they said. “Recent market optimism, triggered by early recovery of several macro indicators, we believe is overdone.”

The Shanghai Composite’s valuation is 65 percent higher than the 11.3 multiple that stocks on the Hang Seng China Enterprises Index trade at, data compiled by Bloomberg show. The Hang Seng China index is made up of mainland shares traded in Hong Kong, and have no foreign ownership restrictions.

‘More Aggressive’

Shanghai-traded shares of PetroChina Co., the nation’s biggest company, fetch twice the valuation that they get in Hong Kong. The last time the difference in multiples was this wide, the Chinese shares lost 19 percent in 30 days.

UBS AG, the largest authorized overseas investor in the country’s local-currency stock market, said March 26 it expects yuan-denominated stocks to rally as long as the government continues to encourage banks to lend. China Asset Management Co., the nation’s biggest fund company, said March 27 it will be “more aggressive” in seizing opportunities exposed by last year’s 65 percent plunge in the Shanghai Composite.

Financial services companies made up 31 percent of the Invesco fund, according to its Feb. 27 fact sheet. Beijing-based China Life Insurance Co. and Shenzhen-based Ping An Insurance (Group) Co., the nation’s largest insurers by market value, are its two biggest holdings, the document showed. Insurers are signing up new customers and their stock-market investments may gain following the rally, Tang said.

Dashang, Daqin Railway

The fund also owns shares of Dashang Group Co., a department-store operator based in the northeastern city of Dalian, as well as Datong-based Daqin Railway Co., which operates China’s biggest coal transport line, the fact sheet showed. Beijing-based China Sinoma International Engineering Co., another Invesco holding, said this month it won $49 million of contracts to build and supply equipment for cement plants.

Tang declined to comment on specific stocks, citing company policy.

Premier Wen Jiabao, who first announced his stimulus package in November, also unveiled plans this year to rejuvenate 10 industries, including autos, steel, petrochemicals and textiles. Wen said this month his government has “adequate ammunition” to revive the economy and is able to increase spending at any time.

The government also has “room” for more interest rate cuts as consumer prices may end the year unchanged, Zhang Jianhua, the research head of the People’s Bank of China, said March 28 at a forum in Beijing. The central bank has lowered borrowing costs five times since September.

“We’re comfortable that the market is finding valuation support,” Tang said, adding that an “improvement in the global economy” would be needed for a stronger rally.

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