By Michael Tsang and Chua Kong Ho
March 16 (Bloomberg) -- China, the world’s best-performing stock market, is looking increasingly expensive after valuations climbed to the highest in a year compared with mainland companies traded in Hong Kong.
Stocks listed in Shanghai and Shenzhen rose 21 percent since the end of 2008 as local investors snapped up shares on speculation the government’s 4 trillion yuan ($585 billion) stimulus package will boost the slowest growth in seven years. Shares in the yuan-denominated CSI 300 Index traded at 16.2 times earnings this month, compared with 8.6 times for 43 mainland companies in Hong Kong. PetroChina Co., the country’s biggest company, fetches twice the valuation in China as in Hong Kong.
The growing gap shows that international investors are losing confidence both in China’s earnings growth and in the country’s ability to help revive the global economy. The last time the difference in multiples was this wide, Chinese shares lost 19 percent in 30 days.
“I can’t see any way that China is the locomotive that pulls the world out of recession,” said Andrew Milligan, the head of global strategy at Standard Life Investments, which oversees $181 billion in Edinburgh. “It’s difficult for people to buy the China story.”
The Hang Seng China Enterprises Index, which tracks 43 so- called H shares that trade in Hong Kong, has fallen 7.7 percent in 2009. The drop left H shares trading at a 41 percent discount to those on the mainland, which are off limits to most foreigners, according to data compiled by Bloomberg.
Narrowing the Gap
The CSI 300 Index would have to decline 15 percent from its peak valuation gap to match its four-year average premium over Hong Kong stocks and 47 percent before it reached the multiple on H shares, data compiled by Bloomberg show.
The benchmark index of shares in Shanghai and Shenzhen lost 0.5 percent on March 13, trimming its gain this year to 21 percent. That’s still the biggest of the 91 indexes worldwide tracked by Bloomberg. The H share index rose 4.6 percent.
Restrictions on foreign and local investment that prevent arbitrage with H shares helped make mainland equities more expensive. Investors outside China could only invest a combined $10 billion in local-currency securities under the government’s qualified foreign institutional investor program as of last month. That compares with China’s $2.11 trillion stock market.
Premier Wen Jiabao said this month that the stimulus package, which includes spending on low-rent housing, infrastructure in rural areas and airports, will keep the government’s 8 percent growth target for this year within reach.
‘Difficult But Possible’
The goal is “difficult but possible,” because China can spend more money to revive the economy “at any time,” Wen told reporters in Beijing on March 13.
International investors aren’t counting on the plan’s success. At least 57 Chinese companies have shares traded on both the mainland and in Hong Kong, data compiled by Bloomberg show. Just one -- Shenzhen-based ZTE Corp., China’s second- biggest maker of phone equipment -- has performed better in Hong Kong.
The average gain in China is 23 percent this year, while the same companies are down 4.8 percent in Hong Kong, data compiled by Bloomberg show.
China is among three of the four so-called BRICs economies where local shares are providing bigger returns than are available to foreigners. Goldman Sachs Group Inc. Chief Economist Jim O’Neill coined the term BRICs in 2001 for Brazil, Russia, India and China, the biggest emerging markets.
Falling BRICs
Russia’s Micex index, up 21 percent in rubles since Dec. 31, gained 2.5 percent when measured in dollars. A 9.2 percent decline in India’s Sensitive Index widens to 14 percent in dollars. The exception is Brazil, where the Bovespa Index has risen 5.7 percent, versus a 3.9 percent gain in reais.
PetroChina has climbed 4.3 percent in Shanghai this year, giving the oil company a market valuation equal to $267 billion, even though Chairman Jiang Jiemin said on March 5 he expects profit this year will be less than 2008 and analysts forecast a 21 percent decline. Beijing-based PetroChina, which earned an average of $16.8 billion in each of the past five years, trades at 16.58 times earnings in Shanghai. In Hong Kong, PetroChina sells for 7.92 times profit.
That’s similar to the 7.96 times earnings investors pay for Exxon Mobil Corp., the only company in the world bigger by market value. The Irving, Texas-based company earned an average $37.4 billion the past five years and has a market value of $332 billion, according to data compiled by Bloomberg.
Airline Losses
China Eastern Airlines Corp., the nation’s third-largest carrier, may report its third annual loss in four years as a slowing economy stems air travel, according to analysts’ estimates compiled by Bloomberg. The Shanghai-based airline said last week that its parent company will receive a second infusion of capital from the government, increasing its total bailout to 9 billion yuan.
In Hong Kong, China Eastern has fallen 11 percent in 2009 and trades at 11.8 times reported profit. The airline has risen 11 percent in Shanghai, where it’s valued at 58.6 times earnings.
At that level, the stock is trading at close to the same price-earnings ratio as semiconductor maker Intel Corp. in March 2000 during the dot-com bubble. Santa Clara, California-based Intel has tumbled 80 percent from its record high that year.
“It’s difficult to believe the numbers that are coming out” of China, said Fraser Howie, managing director at CLSA Asia-Pacific Markets in Singapore. “How can Wen Jiabao say confidently in March that you’re going to have 8 percent growth for the year in such an environment?”
Slowing Growth
While China is the only one of the world’s five biggest economies still expanding, the pace has slowed for six quarters after peaking at 12.6 percent between April and June in 2007. The world’s third-largest economy may expand 6.7 percent this year, the slowest rate in almost two decades, according to the Washington-based International Monetary Fund.
In the U.S., the economy shrank the most since 1982 in the fourth quarter. The World Bank in Washington said the global economy will contract for the first time since World War II in 2009 as trade falls by the most in 80 years.
The drop in demand around the world is hurting China’s exports. Gross exports accounted for more than 40 percent of the nation’s growth this decade, based on data compiled by the United Nations. Chinese shipments declined by the most in at least 14 years in February, while exports of coal, steel and aluminum plunged at least 40 percent in 2009 from a year earlier.
‘Prefer to See’
“Overseas investors prefer to see evidence of a turnaround in the economy and corporate earnings,” said Gabriel Gondard, Shanghai-based deputy chief investment officer at Fortune SGAM Fund Management Co., which oversees about $7.2 billion.
Paul Chow, chief executive officer of Hong Kong Exchanges & Clearing Ltd., said in an interview last week that the valuation gap between the A and H shares is “determined by the market.” Jonathan Li, a spokesman at Hong Kong’s Securities and Futures Commission, declined to comment.
Zhang Wangjun, spokesman for the China Securities Regulatory Commission, wasn’t reached at his office and didn’t respond to an e-mailed request for comment.
The Shanghai Composite Index, the 896-stock benchmark that tracks both yuan-denominated A shares and dollar-denominated B shares listed on the larger of China’s two stock exchanges, has gained 17 percent this year.
“The A-share market is a closed world,” said Michiya Tomita, a Hong Kong-based fund manager at Mitsubishi UFJ Asset Management Co., which oversees $61 billion. “Valuations are more appropriate in the H-share market because more foreigners are paying attention.”
Reaction Times
Victoria Mio at Robeco Group says mainland investors are quicker to anticipate changes in the local economy and have an incentive to spend their savings on stocks after the central bank cut interest rates five times since September.
“Domestic investors seem to have looked beyond 2009 and are focusing on the recovery that the fiscal and monetary stimulus will bring,” said Mio, who oversees Chinese equities in Hong Kong for Robeco, including A shares. The firm had about $155 billion in assets under management as of Dec. 31, according to its Web site.
Even if China’s economy recovers faster than international investors anticipate, the bigger bargains are still in Hong Kong, according to ING Groep NV’s Uri Landesman.
Investors are “always going to look at the relative valuation, and if they want to play, they’re going to play Hong Kong,” said Landesman, who oversees about $2.5 billion as head of global growth and international equities at ING’s asset management unit in New York. “It’s the more reliable market, the more transparent market. It’s a no-brainer.”
To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Chua Kong Ho in Shanghai at kchua6@bloomberg.net
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