China stocks got a brief respite on Thursday from the current slump, but are not likely to rebound any time soon. One analyst suggests investors consider cash-rich Chinese toll road stocks as the market downturn slides into 2012.
After sinking 10.8% since October 28, Hong Kong’s Hang Seng Index fell a further 200 points in early trading Thursday before bottom feeders entered the market and pushed the index higher. The Hang Seng ended with a 0.4% gain at 17,935, and the index of Chinese stocks rose 1.0% to 9,566. Turnover was near the year-low, reflecting a lack of momentum.
The market will stay weak for awhile, according to Peter So, managing director and co-head of research at CCB International. “For the short term the market is overcrowded by deteriorating economies in Europe and the United States,” he told Equities.
He is not as concerned, however, by Wednesday’s sharp drop in China’s preliminary November manufacturing PMI.
“It’s understandable because it’s hard for Chinese factories to get orders at the end of the year (after the holiday season rush),” he said. And he added that small and medium-sized enterprises, which make up a significant part of China’s manufacturing sector, are struggling to get funding at the present time.
Overall though, So expects there will be no rebound in China stocks this year. Global economic problems and a weak Chinese property sector will drag the market down, he said.
Investors commonly turn to defensive telecoms and utilities in downturns, but So recommended another alternative: Chinese toll road operators. They feature strong cash flows, and he said two of the strongest belong to Hopewell Highways (HHILY) and Anhui Expressway (AUHEY).
There is hope for China stocks, So said. “After Chinese New Year (January 23) people will become more optimistic about the Chinese economy,” he said.
By that time China will begin stimulating lending by reducing banks’ required reserve ratios, according to So. RRRs were raised repeatedly in late 2010 and early 2011 to fight inflation, and inflation rates are now beginning to fall. Easier credit will help banks, basic materials producers and consumer companies, So said. End
Hong Kong Blue Chips: +71, +0.4%, to 17,935, 11-24-11, Hang Seng Index
Chinese Stocks in Hong Kong: +90, +1.0% to 9,566, 11-24-11, HSCE Index
Shanghai Stocks: +0.1%, 2,398, 11-23-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: -10.3, to 357.2, 11-23-11, Bank of New York Mellon, ADR Index-China
Insight: Following a steep decline in the U.S., Hong Kong blue chips opened lower and at one time were down 200 points. But after almost three weeks of losses, bargain-hunting set in and lifted blue chips to a small gain at the end of the day. Turnover was thin, reflecting weak momentum. Chinese properties rebounded: China Resources Land (CAOVY) +4.3%. Cement producers also rose: CNMB (3323 in Hong Kong) +5.9%. KGI Research
Quotable: “The short-selling turnover ratio was only 17.6%, which reflected that the market had begun to stabilize at 17,800 and investors were not willing to short-sell stocks.” Core Pacific Yamaichi. 11-24-11
Chinese Company to Watch: BYD (BYDDY) “The Ministry of Science and Technology, Ministry of Finance, Ministry of Industry and Information Technology and NDRC had published the Notice of Further Promotion and Development of New Energy Vehicles in 25 cities in November 10…. We believe electric vehicles are the ultimate direction for the auto industry. As a leading battery maker, we believe BYD (1211.HK) will be one of the major beneficiaries.” Haitong Securities. 11-24-11
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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