Tuesday, June 12, 2007

China Stock Valuations

Would you pay 147 times earnings for a company in today's market? In mainland China, Chinese investors are doing just that. Fortune Ng Food (Hebei) Co. is trading at that level. China Yurun Food Group Limited, a Hong Kong listed company in the same industry trades at 26.7 times earnings. In Singapore, People's Food Holdings Ltd. trades at 11.7 times earnings. As Greg Lesko of Delta Asset Management notes,
there is not that big a difference in their businesses, so there shouldn't be such a difference in their prospects and valuations.
According to Bloomberg, China's benchmark CSI 300 Index would need to fall as much as 54% to come in line with the price-to-earnings ratio of Hong Kong's Hang Seng China Enterprises Index, which tracks shares of 41 mainland companies listed in the city. The CSI 300 would have to drop 65 percent to match the average multiple for Chinese shares traded in Singapore, according to calculations by Bloomberg.

China government regulations are contributing to the overvaluation of Chinese shares.
Individual Chinese investors are opening brokerage accounts at the rate of about 300,000 a day this quarter, helping drive the CSI 300's 96 percent climb in 2007, the biggest gain in dollar terms among 90 benchmarks tracked by Bloomberg.
Jim Rogers, chairman of Beeland Interests Inc, notes:
Over time, the valuations on the mainland will have to come in line with other markets. Eventually, all the Chinese shares will sell for the same price everywhere. But that cannot happen until the currency is convertible and there's free arbitrage opportunities.
China's equity markets certainly seem to have moved into bubble territory. In the second quarter of this year, Chinese investors are opening brokerage accounts at the rate of 300,000 a day.

One way to invest in these markets and to limit the potential downside risk is through investments in structured notes. A related post on this type of investment can be found here.


What Are China Stocks Worth? Singapore Shows 65% Less
By: Chua Kong and Daniel Hauck
June 11, 2007

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