China stocks roared above a previously formidable barrier Thursday as Europe finally announced a comprehensive plan to solve its debt crisis. One brokerage, however, warns investors not to go overboard.
Hong Kong’s Hang Seng Index, which features many large Chinese companies, edged above the strong 19,000 resistance level Wednesday after Chinese Premier Wen Jiabao indicated China would at some point loosen its tight money policy. Then after European leaders announced they would cut Greece’s debt and shore up regional banks to withstand loses on the debt, the Hang Seng surged ahead.
The index ended Thursday up 3.3% at 19,689 in heavy turnover. The index of Chinese companies jumped 5.1% to 10,566.
BOCOM International, the brokerage arm of China’s Bank of Communications, said in its daily website commentary that a technical rebound may continue in anticipation of a loosening of Chinese economic policy.
“However, investors should not over-estimate the rebound magnitude of HSI (Hang Seng Index) as China is facing a ‘dual-fall’ in GDP growth and CPI,” said the brokerage arm of China’s Bank of Communications. “While the valuations of most sectors have reached their historical low, some sectors encounter the risks of lower profitability.”
Even rock-bottom valuations are not cheap for Chinese companies that face weakening earnings per share in coming quarters, BOCOM International said. “Investors are advised to ‘focus on stocks instead of the broad market’….”
The brokerage also said China probably would not reverse its tight money policy until three or four months after inflation drops. That would likely be in December or early next year. In addition, Europe must still work out tough details to implement its debt solution plan.
In the meantime, BOCOM International likes the banking and coal sectors. The Agricultural Bank of China (ACGBY) just announced better-than-expected results and enjoyed a rise of 43.6% in profits for the first three quarters of this year. Its current dividend yield is 5.1%.
In the coal production industry, tight supply has supported domestic Chinese coal prices, with peak consumption coming in the current quarter. BOCOM International rates Yanzhou Coal (YZC) a “Buy.” End
DAILY FIX -- Sharply Higher in Strong Turnover
Hong Kong Blue Chips: +622, +3.3%, to 19,689, 10-27-11, Hang Seng Index
Chinese Stocks in Hong Kong: +516, +5.1% to 10,566, 10-27-11, HSCE Index
Shanghai Stocks: +0.3%, 2,436, 10-27-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: +10.3, to 391.9, 11:28 am 10-27-11, Bank of New York Mellon, ADR Index-China
Insight: The Hong Kong market surged in strong turnover after European leaders announced a comprehensive solution to the region's debt crisis. Chinese property developers jumped higher: China Resources Land (CRBJY) +13%. KGI Research
Quotable: "HK market rebound could persist on the progress of EU Summit and the expectations of Chinese policy fine-tuning." BOCOM International. 10-27-11
Chinese Companies to Watch: "Taking into account the undemanding valuation of railway stocks, we maintain our positive view on CSR Times Electric (3898.HK) and China South Locomotive (CSRGY) and other advanced railway manufacturing companies." Haitong Securities. 10-27-11
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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
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