25 October 2016
As more people shop online, some traditional retailers have seen their sales take a hit. Photo: Xinhua
As more people shop online, some traditional retailers have seen their sales take a hit. Photo: Xinhua

Look for potential takeover targets among A-share firms

China’s stock markets held up well on Tuesday, with the Shanghai benchmark index edging up 0.26 percent to 3,651 points. However, turnover on Shanghai and Shenzhen bourses dropped further, as it fell 7.3 percent from the previous day to stand at a combined figure of 874.3 billion yuan. 

Banking stocks saw some profit-taking, while property and infrastructure stocks outperformed on the back of government policy support.

Software plays were also in good demand, with Inspur Software Co. (600756.CN) and China National Software & Service Co. (600536.CN) posting limit-up gains.

The Central Urban Work Conference was held for the first time in 37 years. The conference has spelt out guidelines for city planning, housing, population scale, infrastructure and public facilities.

Urban development initiatives may again become an engine for the nation’s economy.

Property and building materials firms have fared well in recent days.

The cement sector gained 2.7 percent on Tuesday as Fujian Cement Inc. (600802.CN) surged 5.0 percent, BBMG (601992.CN) rose 4.1 percent, and Anhui Conch Cement (600585.CN) climbed 2.8 percent.

China Vanke Co. (000002.CN), the nation’s largest property developer, remains suspended from trading. A suspected hostile takeover attempt is yet to end. 

Speculation over share purchases by some parties drove up Vanke’s share price sharply earlier. Investors should look for similar targets for possible short-term gains.

Some analysts believe investors should bet on companies with core assets, fragmented shareholding structure but undervalued share prices.

Companies in which major shareholders have less than 20 percent stake and whose stocks are trading at PE multiples of less than 30 can be considered as potential acquisition targets.

There are 37 such companies among listed A-share firms. Of the 37 firms, 18 are covered under the Shanghai-Hong Kong Stock Connect program.

Inner Mongolia Yili Industrial Group’s (600887.CN) biggest shareholder owns only 8.7 percent stake in the company, which has steady profit growth and may also benefit from the nation’s new two-child policy. The stock has already soared 24 percent since December.

In another case, Dashang Group (600694.CN), in which the biggest shareholder has 8.8 percent stake, has surged over 40 percent since December.

China launched a pilot program in 2012 to replace business tax with value-added tax, in a bid to make the tax system fairer. However, local governments are worried as business tax has been a major revenue source for them.

Currently, service, construction, property, financial sectors have yet to start the tax reform. The industries might face higher tax levy after the reform. Given the worries about the possible impact, the scheme has been quietly suspended.

Meanwhile, the online shopping boom has exerted great pressure on offline shops. The central government has been promoting an “Internet Plus” strategy, and shown very limited support for the offline stores.

The National Development & Reform Commission, China’s top economic planning body, has highlighted that online shopping and express delivery sectors have created new jobs. However, the firms could deal a blow to the traditional retailers.

Closures of traditional stores may prompt Beijing to unveil new supportive measures.

Changchun Eurasia Group (600697.CN) and Silver Plaza Group (600858.CN) both hit the daily up-limit Tuesday, while Pang Da Automobile Trade (601258.CN) rose 3 percent.

Some mainland brokerages believe the Shanghai benchmark index could rise to as high as 5,000 points next year given the recent positive market sentiment.

This article appeared in the Hong Kong Economic Journal on Dec. 23.

Translation by Julie Zhu

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal

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