China stocks valuations are temptingly low – Hong Kong’s Hang Seng Index has an FY11 PE of only 9.5X. But valuations have been attractive all year, and yet stock prices nosedived in the last two months. Investors might wonder if stock prices have reached a point low enough to lead a rebound.
No, according to the 4Q11 Strategy Report just released by BOCOM International. In this sentiment-driven and liquidity-driven market the valuation yardstick is “quite useless,” according to the report. That means that if bad news surfaces the market could drop even more.
The biggest potential source of bad news would be a default by Greece on its debt. Apparently, the recent sell-off has priced in the threat of a global recession, but not the possibility of a Greek default, BOCOM said.
There might be a technical rebound, the brokerage said, after a 20% swoon since early August. But there won’t be a sustained recovery until the overhang of possible Greek default is eliminated.
Meanwhile BOCOM’s advice is to “stay defensive.” Among its recommendations:
*China Mobile (CHL). This defensive stocks star has lost only 2.7% in value this year and has a dividend yield of 4%.
* Guangshen Railway (GSH) – The company has delivered a net profit growth of 47.2% YoY in the first half of 2011 and has a dividend yield of 5.5
*Zhaojin Mining (1818) – Although the price of gold plunged in the last week, the fundamental outlook for higher prices has not changed. “Zhaojin Mining is the best proxy for gold price within all the listed gold stocks on the Hong Kong Stock Exchange.”
* Tencent (TCEHY) – BOCOM likes “the internet sector on its anti-cycle defensiveness
and attractive valuation.” End
DAILY FIX — Hong Kong Market Closed Due to Typhoon
Hong Kong Blue Chips: -119, -0.7%, to 18,011, 09-28-11, Hang Seng Index
Chinese Stocks in Hong Kong: -17, -0.2% to 9,277, 09-28-11, HSCE Index
Shanghai Stocks: -1.1%, 2,356, 09-29-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: -10.2 to 361.2, 09-28-11, Bank of New York Mellon, ADR Index-China
Insight: The Hong Kong market shut down Thursday due to a typhoon. KGI Research
Quotable: “…(I)f the overall turnover cannot increase accordingly, we did not see the market can turn around.” Core Pacific Yamaichi. 9-28-11
Chinese Company to Watch: “Yingde Gases should outperform the market given the defensive nature of its business model. Yingde Gases, the largest independent on-site industrial gas supplier in China, has outperformed the market with a drop of 2.5% quarter-to-date versus the 19% decline for Hang Seng Index.” Guoco Capital. 9-28-11
Brokerages and analysts cited 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
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