China plays keep Hong Kong investors smiling
Monday, August 20, 2001
biz.scmp.com
REUTERS
China stocks remain the darlings of Hong Kong investors as economic growth on the mainland - though not entirely immune from the global slowdown - is the most resilient in Asia.
Despite a steady slide in Hong Kong markets, Chinese enterprise growth and restructuring plays are luring investors and should become more attractive after China joins the World Trade Organisation, according to fund managers and analysts.
Many of the 100-plus Hong Kong-listed China firms have posted relatively strong interim results helped by their exposure to robust mainland growth rather than stagnant overseas growth.
Hong Kong's H-share index, which tracks 54 mainland enterprises, mostly state-owned firms involved in traditional industries, has shed 26 per cent since early June, cutting into a 60 per cent rise in the first six months of the year.
The correction, prompted by Beijing's crackdown on capital outflows, has produced appealing valuations that had also promoted the revival in buying interest, analysts said.
"China's economic data remains more robust, more resilient than elsewhere," said Adrian Fu, China fund manager for Investec Asset Management, which oversees US$400 million in the region. "You really still have no choices but to buy the domestically-orientated stocks," he said.
Julian Mayo, managing director of specialist emerging markets fund manager iRegent in Hong Kong, said: "Some of the stocks in Hong Kong are beginning to look cheap again because they have fallen quite a long way."
The H-share index boasts an average price to earnings (PE) ratio of 7.24 times forecast 2001 earnings, according to Reuters 3000 Xtra.
The red-chip index of 47 offshore-incorporated, China-backed firms trades at a PE of 10.8 times after dropping 25 per cent since early June. That compares to a PE of 13.7 times for the Hang Seng Index.
The H-share index is still up about 20 per cent in the year to date - the third best performing index in Asia after the B-share markets in Shenzhen and Shanghai. H shares and red chips have rallied about 7 per cent in the past week amid a slew of decent earnings reports from large Chinese firms.
Buying was focused on stocks of power producers, toll-road operators, oil firms and wireless carriers - all firms that derive most of their revenue from the mainland, where the economy is expected to grow 7 to 8 per cent this year.
"Oil firms, property companies and power stocks will remain rather defensive as they have little exposure to exports," said Charles Cheung, head of China research at Salomon Smith Barney.
Shares of Legend Holdings, the country's largest personal computer (PC) producer, have rebounded strongly last week as PC demand in China remained robust despite sluggish overseas markets.
Legend posted a 447.7 per cent surge in earnings for the first quarter to June 30 as domestic sales jumped and margins widened. Its shares surged 5.7 per cent on Wednesday and another 1.2 per cent to HK$4.225 on Thursday, closing on Friday at the same price.
"We like Legend," said Jason Cheung, head of China research at Nomura Securities.
Even so, Legend shares have not been insulated from the technology stock fallout - they have shed more than 50 per cent on the year.
Cellular carriers China Mobile and China Unicom enjoy strong subscriber growth, but are overvalued in the eyes of many fund managers despite dropping about 40 per cent this year.
China Mobile is now cheaper after disappointing the market on Thursday with interim earnings growth of 58 per cent. Its stock shed 16.23 per cent in the last two sessions to close the week at HK$29.15. China Unicom shares shed 4.4 per cent on Friday to close the week at HK$10.85.
Denway Motors is the star among Hong Kong-listed Chinese car-makers - its Honda Accord sedans made in the southern city of Guangzhou enjoy strong demand. Its shares have more than doubled in the past year.
But fund managers warn to steer clear of light truck manufacturer Qingling Motors and minibus maker Brilliance China, which are suffering from fierce competition and are cutting prices to boost flagging sales.
Analysts said the main China plays to beware of were those with clear exposure to global markets - such as petrochemical firms, which were reeling from high raw material costs and falling product prices, and airlines, laden with international routes.
Jilin Chemical, Shanghai Petrochemical, Yizheng Chemical Fibre, and China Eastern Airlines have issued interim profit warnings, blaming flagging overseas demand.
Despite China Eastern's warning, some investors are betting on the long-term prospects of the Shanghai-based airline as well as China Southern Airlines - which has more domestic routes and therefore less international exposure.
Both are restructuring and merging with other smaller airlines - and investors see them becoming more profitable following the industry overhaul.
There are similar revamp tales in the oil and gas sector, and some red-chip conglomerates have also whipped up buying interest.
Integrated oil giants PetroChina and China Petroleum & Chemical have announced aggressive, multi-billion dollar cost-cutting schemes.
Fund managers like them because they trade attractively at below 5.5 times historic earnings.
China-backed conglomerates China Resources Enterprise and China Merchants Holdings are retooling themselves into more focused groups in preparation for China's World Trade Organisation entry.
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Published in the South China Morning Post. Copyright © 2001. All rights reserved. |
