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 转贴 ：Bubble, bubble again - Irrational exuberance of China’s |
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aiguo
头衔: 海归上尉
声望: 学员
加入时间: 2005/09/08
文章: 69
海归分: 9390
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作者：aiguo 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
Recently, China’s A share stocks have been on fire – particularly those blue chips. Their current valuations make me wonder whether the market is rational or not.
The A Share Index has risen 103.59% year to date and 108.82% in the past 12 months. The average P/E for these stocks was 23x, based on consensus estimates, which is very high by any standard. Indeed, even with a consensus healthier market such as Hong Kong, their average P/E would still be 15x in 2006. The combined Shanghai and Shenzhen markets capitalization has reached US$1 trillion, in addition, some 3.3 million new accounts have been opened since early 2006.
It is true that the story of China’s economic growth potential is very attractive in the long run, considering the historic under-valued equities, non-tradable share reform and the increasing investment on the equity market. However, there are a few macro and micro concerns that investors need to consider before putting such faith in these counters:
First, if we look at the history performance of Chinese equities, using large-cap-A-Share stocks as a proxy, one would realise that it is indeed underperformed the market previously, indeed the A-share small-caps have enjoyed a valuation premium for a long time, though A-share large-caps are usually more defensive when the market weakens. However, China’s large-cap-A-Share stocks are becoming expensive recently. For example, China Merchants has reached 38.27 of P/E and 4.59 of PB, which is three times more expensive than that of Citibank and HSBC; while with an incredibly high P/E of 45.56, Kweichow Moutai’s investors still expect more. Indeed, even if we compare with other emerging markets such as India’s 22.5x, Russia’s 12.6x and Brazil’s 10.7x of PE, it still would not change the fact that most of China’s large-cap-A-Share stocks are overvalued. The question we need to ask is, will the growth of these already expensive stocks be sustainable, and can we expect all investors being confident about further increasing of share prices despite the high risk? Simply put, it would be rather difficult to expect investors keep confident on the market with liquidity driven growth – if it maintains at current price.
Secondly, while it is true that Chinese companies’ profitability and corporate governance are continuously improving, and higher quality state-owned enterprises are being listed domestically, it is wrong to assume that China’s equity market is improving significantly in such a short period, fundamentally the risk premium of Chinese equities remain relatively high and Chinese companies just show moderately increasing EPS growth. For example, the EPS growth China’s IT and materials sectors were -46% and -11% respectively in 2005. Consumer staples, real estate, and financials reached EPS growth of 5%, -1%, and -7%, respectively.
Indeed, price wars in many sectors would probably happen in 2007 due to a substantial increase in the production capacity and limited consumption and export, particularly in the consumer staples and home appliance industries. In addition, China’s low costs industrial and consumer goods sectors may subject to export tightening in 2007, if EU and US finally decides to raise non-custom tariffs to Chinese producers. From this perspective, the fact that China’s economy will slow down in 2007, the extent of upward revision in average EPS growth is rather limited, is not too surprising, even though there is still room to growth for some individual stocks.
Thirdly, even if China’s consumption growth is a great long-term macro story, whether the investment on Chinese equities market are the biggest beneficiaries of it is doubtful. Some of the stocks could be great companies, but not likely all of them. However, it seems the market is pricing in perfection for all the large-cap-A-share stocks. Why am I so sceptical about the stocks’ long-term outlook? The key reason is that the equity market in China is still in its initial stage of development, with no strong regulatory acts such as Sarbanes-Oxley act and lack of long-established players with strong financial muscle. For example, share prices of over 70% of China’s listed companies are still underperformed, and most of them are middle to small-cap companies. The rapidly changing cost and competitive environment, while creating a lot of opportunities, could also easily derail the development of such small companies. A lot of companies, such as Mengniu, TCL, and China Construction Bank, have been very successful in the past few years, but whether they could sustain such performances in the long run, in the face of rising competition and a rapidly changing environment, is doubtful. In particular, with the China market becoming much more promising, one would expect the multinational companies to take it more seriously. The strong balance sheets and global sourcing/pricing capabilities of these foreign companies could make life very difficult for the local players, if they want to do so. Indeed, just looking at the earnings history (after IPO) of three companies, they have been listed between mid-1990s and recent years, one can appreciate the fact that unlike public companies in the developed markets, the earnings profile of China’s public companies are no less volatile than that of multinational companies in general. The fact that they are in different industries with different types of ownership (Mengniu and China Construction Bank being an SOE, TCL a collective enterprise) probably makes this conclusion more representative of the general picture in China.
In short, the risk profile of buying already expensive public company in China these days is not necessarily smaller than it is speculating with a gambling mindset, even though their valuations might imply so
作者：aiguo 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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 转贴 ：Bubble, bubble again - Irrational exuberance of China’s -- aiguo - (5824 Byte) 2006-12-22 周五, 16:01 (982 reads)
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