Two alternative routes into the Chinese market

published 15 June 2007

It's been business as usual in China's domestic stockmarket over the past few days. A recovery of around 10% since the jitters of early June means it has almost doubled in 2007, and it is still on a p/e of 43. Fortunately, not all Chinese stocks are this expensive. The Chinese domestic market is largely closed to foreign investors, and "it is difficult for domestic money to get out of China", says Wilfred Sit of Mirae Asset Global Investment Management in Barron's. So there are "billions trapped in the market", pushing up prices. With the Shanghai market rocketing, mainland Chinese shares traded in both Shanghai and Hong Kong sell for vastly different prices in each market. The Shanghai-listed A-shares' of Bank of China command a 39% premium over the Hong Kong-listed H-Shares'.

Or take the case of three similar meat producers, say Chua Kong Ho and Daniel Hauck in the International Herald Tribune. The first goes for 146 times earnings on the mainland, another costs 26 times in Hong Kong and the third, People's Food Holdings, 11 times in Singapore. H-shares are on an average p/e of 20, while China-based firms listed in Singapore, known as S-chips (smaller and deemed somewhat lower in quality than H-shares) cost about 15 times earnings.

In Hong Kong, the overall market is set for gains of another 10% this year amid earnings growth of 17%-20%, thanks to China's hot economy, Khiem Do of Baring Asset Management told Barron's. Attractive H-shares or Hong Kong-based China plays include coal producer China Shenhua Energy (1088, HKD24.90), and Sinofert (297, HKD5), a leader in the domestic fertiliser market, whose market share is expanding, reckons Jing Ulrich of JP Morgan Chase. Hugh Simon of Hamon Investment Group likes China Travel (0308, HKD3.72), a beneficiary of growing domestic and foreign tourism, while Dynasty Fine Wines (0828, HKD3.30) is a play on rising consumption. These fast-growing stocks have 2007 p/es in the 20s. Meanwhile, Singapore-listed People's Food Holdings was recently tipped as a buy by UBS.