China Stocks: the Case for a Rebound

Gene Linn |

China stocks’ consolidation continued on Thursday to grind on. The opening of China’s National People’s Congress and start of corporate reporting season have not so far brought the hoped-for relief. In yesterday’s column one analyst suggested that liquidity woes might plague the market through the second quarter this year. But there is another view: the current malaise offers a buying opportunity prior to a rebound in a few weeks.

For Thursday though, the picture was not pretty. The Hang Seng Index in Hong Kong inched 0.03% lower to 22,771 in reduced turnover, and the index of Chinese companies fell 0.4% to 11,311.

Since a five-month rally lifted the Hang Seng 24.4% to a 21-month high on January 30, the index has given up 4.4%, promptly retreating from any attempt at a rebound.

Fear not, says Eric Yuen, head of research at Guoco Capital, better times are coming. “Investors should not be too bearish at these levels,: he told Equities.

Yuen’s premise is based partly on the belief that the consolidation is natural and understandable. At the tail end of a big rally, rebounding Chinese economic data softened a bit with PMI numbers for January and February showing that Chinese manufacturing was barely expanding. And in February China’s central bank drained liquidity from the market following rapid new loan and money supply growth in January.

Yuen offers several reasons to think the current consolidation will end soon. One is that and the end of the National People’s Congress later this month new Chinese leaders are likely to announce new policies to stimulate and reform the economy. Another is that with the end of the NPC session and of corporate reporting season considerable uncertainty will be lifted from the market – at a time when the market is at a low valuation in terms of its historical PE ratio.

China’s target of solid 7.5% growth for 2013 is achievable, Yuen said, and in the past consolidations of this type have lasted about two months before a rebound.

“The market should continue to consolidate for awhile, but I tend to believe that next month it will recover,” he said.

To best benefit from a recovery, according to Yuen, investors should avoid cyclicals and focus on banks and properties even though the Chinese government has taken measures to curb rises in property prices. The reason to pick these sectors is that they will likely post impressive earnings in the coming weeks, he said. Bank CMB (CMAKY) already reported a higher-than-expected profit of 20%.

Yuen likes the big boys in these sectors: banks ICBC (IDCBY) and CCB (CICHY) and properties China Overseas Land (CAOVY) and China Resources Land (CRBJY). End

DAILY FIX

Hong Kong Blue Chips: -6, -0.03%, to 22,771, 3-6-13, Hang Seng Index

Chinese Stocks in Hong Kong: -48, -0.4%, to 11,311, 3-6-13, HSCE Index

Shanghai Stocks: -23, -1.0%, to 2,324, 3-6-13, Shanghai Composite Index.

Chinese Stocks in the U.S.: +3.0, 378.2, 3-5-13, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong blue chips ended marginally lower in weaker turnover. However, good U.S. economic data helped exporters and ship builders. Export company Li & Fung (LFUGY) rose 3.6% and ship builder CH Rongsheng (1101, HK) surged 6%. KGI Research

Quotable: "We expect the Hang Seng Index to end higher in March and believe market correction in near term presents a good buying opportunity." Guoco Capital. 3-6-13

Chinese Company to Watch: "JIANGXI COPPER (JIXAY) Mainland infrastructure construction increase which will boost copper demand. Prospective P/E of 8.8x." KGI Asia. 3-6-13

Brokerages and analysts cited here have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.

For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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