Investors Should Buy China’s H Shares, JPMorgan Says

By Chua Kong Ho

March 25 (Bloomberg) -- Investors should buy China stocks traded in Hong Kong, or H shares, because they have not factored in the outlook for the country’s economic growth, according to JPMorgan Chase & Co.

The Hang Seng China Enterprises Index, which includes shares of mainland companies traded in Hong Kong, has risen 3.4 percent this year, trailing the 28 percent gain in the Shanghai Composite Index, the world’s best performer among 89 benchmark measures tracked by Bloomberg.

“The A-share market has priced in a good amount of the economic recovery, H shares have not,” said Jing Ulrich, chairwoman of China equities at JPMorgan at a briefing in Shanghai today. “Buy H shares.”

China’s so-called A shares, or those denominated in the local currency and largely off-limits to foreigners, have gained on the expectation that the country’s 4 trillion yuan ($585 billion) stimulus package will help reverse an economic slump.

China’s new loans more than quadrupled in February from a year earlier, according to central bank figures. Property sales in Beijing jumped 28 percent in February while those in the southern Chinese city of Xiamen surged fourfold in the first two months as declining prices spurred home purchases, according to property agency DTZ.

Investors should buy Chinese banks and developers that are traded in Hong Kong to gain from the recovery as they offer more value, Ulrich said. Stocks on the Shanghai Composite Index trade at 18.1 times earnings, compared with 10.6 times for the Hong Kong gauge, according to Bloomberg data.

Valuation Gap

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

BNP Paribas SA, which said it turned “bullish” on China in November, today advised investors to cash out some of their gains for other north Asian markets.

“We still remain positive on China over the next 12 months,” said Clive McDonnell, Asian equity strategist at BNP Paribas, in a Bloomberg Television interview. “Short term, China has been the leader and there’s likely to be some rotation.”

Investors should expect a “meaningful rebound” in China’s economic indicators such as the purchasing managers’ index and industrial production for the month of March and April, Ulrich said. The nation has the “amazing ability to pump prime its economy till the results are shown,” she added, which can’t be said of other major countries.

Economic Recovery

Fan Gang, an adviser to China’s central bank, said today in Hong Kong that the world’s third-largest economy will recover strongly in the second and third quarters as the government stimulus package takes effect. The country’s growth slid to the weakest pace in seven years in the fourth quarter as trade slumped due to the global recession.

“Overseas investors don’t believe me when I say the economy has bottomed,” Ulrich said. “I now feel more optimistic than at any time in the past six months.”

JPMorgan’s team of analysts was top-ranked for China research in Institutional Investor’s annual fund manager poll last year.

The brokerage has an “overweight” recommendation on the Hong Kong-traded shares of the nation’s three lenders, Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd., as well as real-estate builder Guangzhou R&F Properties Co.

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