Chinese investors bargain-hunting for China shares, just not in China

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27/01/2016 03:23

* Hong Kong-listed China shares have long traded at discount 
    * Hong Kong "H-share" index at P/E of 6, cheapest since 2001 
    * ETFs, Stock Connect show China money flowing to Hong Kong 
    * Support measures put artificial floor under mainland 
stocks 
 
    By Samuel Shen and Pete Sweeney 
    SHANGHAI, Jan 27 (Reuters) - Chinese stock investors are 
finally seeing value in domestic shares, but there's a twist: 
instead of wading back onto battered onshore exchanges, they've 
gone shopping for bargains in Hong Kong. 
    By doing so they are exploiting a long-standing market 
distortion that means the average share price of a dual-listed 
Chinese company is currently 40 percent lower in Hong Kong than 
in Shanghai or Shenzhen  .HSCAHPI . 
    The Hang Seng China Enterprises Index  .HSCE  now trades at 
an average price-to-earnings (PE) ratio of slightly more than 6, 
much cheaper than broader Asian markets, which trade around 13, 
and the cheapest the HSCE has traded since December 2001. 
    The index of so-called H-shares is also trading below book 
value, meaning the average company's shares are pricing the 
business below its accounting value. 
    "Investing in Hong Kong stocks is the right choice, because 
the Hang Seng's current valuation is near historic lows; the 
kind of opportunity which has generated handsome returns 
previously," said Zhu Haifeng, a 31-year-old investor in Hubei 
province, in central China. 
    Zhu, who left his construction business to become a 
full-time stock investor, told Reuters he had boosted his Hong 
Kong equity exposure this year by roughly 70 percent to more 
than 6 million yuan ($912,100), while slashing his exposure to 
onshore stocks.  
    His Hong Kong portfolio, focused on dividend-yielding  
shares in mainland companies such as China Shenhua Energy 
 1088.HK  and Television Broadcasting Ltd  0511.HK , now 
accounts for roughly 65 percent of his total equity exposure, he 
said.  
    Zhu is not alone. A number of measures show mainland money 
flowing into Hong Kong stocks, in part an unintended consequence 
of Beijing's extraordinary efforts to prop up its imploding 
domestic market.      
    The E Fund Hang Seng China Enterprises Index ETF  510900.SS  
for example, an onshore exchange-traded fund managed by a quota 
system tracking the HSCE, has seen huge inflows from Chinese 
investors this year.  
    Even as the HSCE has slumped roughly 15 percent 
year-to-date, the ETFs' assets under management have jumped 15 
percent during the period, to 5.7 billion yuan. 
    And the number of fund units, which eliminates the effect of 
price fluctuations on fund value, has surged 37 percent this 
year, to 6.8 billion units, making it the second-largest ETF in 
Shanghai by that measure.   
    Yang Jun, fund manager at E Fund Management Co Ltd, said 
that typically ETFs grow in assets when the market is rising, 
but that has not been the case with HSCE Index ETF so far this 
year. 
    "Unit prices may be declining, but assets under management 
are growing rapidly," he said.  
    In another sign of change, the flow of money into Hong Kong 
from China via the Hong Kong-Shanghai Stock Connect pilot 
programme exceeded flows from Hong Kong into Shanghai last week 
for the first time since April. 
      
    POLICY DISTORTIONS  
    The long-running price difference between Hong Kong and 
mainland exchanges reflects vastly different regulatory regimes 
- China's closed capital account means its markets are driven by 
sentiment among the domestic retail investors who dominate 
there, while open Hong Kong is more driven by international 
money managers and follows moves in global capital markets. 
    Fund managers had expected the gap to narrow or vanish with 
the launch of the Stock Connect in 2014, but it has persisted 
and even widened since then, with prices further distorted by a 
mainland rally that took off in late 2014 and burst in mid-2015. 
    The discount has been aggravated by Beijing's attempts to 
halt the massive onshore stock crash in August, in which a 
"national team" of investors poured money into sliding onshore 
markets to prop up key indexes. 
    Analysts say that put an artificial floor under the market 
when many company share prices were still extremely expensive 
compared with international peers. 
    For example, even after falling nearly 50 percent from its 
summer peak, the average company listed on the ChiNext growth 
board in Shenzhen  .CHINEXTC  is still pricing at more than 60 
times earnings, compared with around 20 for the Nasdaq 100 
 .NDX .  
    Some analysts argue that investor concern over tumbling 
onshore markets and China's slowing economy have also hurt 
shares in Chinese companies listed in offshore markets beyond 
Hong Kong. 
    The MSCI China Index  .MSCICN , for example, which focuses 
on offshore listed Chinese firms, now enjoys a PE of around 10, 
much cheaper than the Wall Street benchmark S&P 500 index 
 .INX , which stands at 18. 
    Andy Rothman, investment strategist at Matthews Asia, argued 
that the time was ripe for a stock-picking approach towards 
China. The Matthews Asia China portfolio, which is focused on 
quick-growth consumer plays, was still priced at a reasonable 13 
times earnings, he added. 
    "While the overall market both in (domestic) A-shares, and 
to a lesser extent in Hong Kong can be expensive, there are 
plenty of individual stocks which are reasonably priced," he 
said.             
    Not everyone is convinced these low prices represent 
bargains, however, given the worldwide equities sell-off. 
    "It's true that valuation of Hong Kong shares is low, but 
they're exposed to global capital markets, where the general 
mood is 'risk-off'," said Yang Hai, analyst at Kaiyuan 
Securities. 
($1 = 6.5782 Chinese yuan renminbi) 
 
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GRAPHIC-Chinese A-shares vs developed and emerging stocks    http://reut.rs/1O7tzpR 
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 (Reporting by Pete Sweeney and Samuel Shen; Additional 
reporting by Saikat Chatterjee in Hong Kong; Editing by Alex 
Richardson) 
 ((pete.sweeney@thomsonreuters.com; +86 158 0188 9934; Reuters 
Messaging: pete.sweeney.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA MARKETS/HONGKONG