22 October 2016
Evergrande Real Estate, led by chairman Hui Ka-yan (above), has been aggressively diversifyig its business lately. Photo: HKEJ
Evergrande Real Estate, led by chairman Hui Ka-yan (above), has been aggressively diversifyig its business lately. Photo: HKEJ

Why Chinese companies are heading back to A shares

There is no such thing as a “fair” stock price, whether it’s 50 or five times P/E.

Price levels merely express the market view on the stock.

In fact, there are many factors that affect stock prices. Different investors have different views.

Unlike developed markets, emerging markets are semi-closed in which investors have totally different views on whether one stock is worth buying or not.

The widening price gap between dual-listed A/H shares has prompted some mainland companies to list in the mainland for higher valuation.

Previously, a number of US-listed Chinese internet stocks have opted for privatization and re-listing as A shares after falling out of favor with domestic institutional investors and after being targeted by short-sellers.

Stake deal

Evergrande Real Estate Group has agreed to buy a stake in Shenzhen-listed property firm Calxon Group for 3.6 billion yuan (US$554 million), a move widely seen as paving the way for a backdoor listing in the mainland after Dalian Wanda Commercial Properties and Yongda Auto.

Foreign investors see Evergrande as highly leveraged. In recent years, the company has been diversifying its business.

With its size, Evergrande may have become too big to fail.

Return to A shares

China has been trying to lure more well-known mainland companies to return to A shares while mainland authorities are encouraging companies to go overseas at the same time.

Most companies that seek re-listing as A shares usually have more satisfactory valuation or brand awareness at home.

Hong Kong remains the first choice for Chinese companies willing to face scrutiny by global standards but very few would like to do so.

Investors could bet on companies that re-list as A shares or those with low P/E ratios and market value above HK$10 billion (US$1.29 billion).

I personally prefer China Mobile (00941.HK), ZTE Corp (00763.HK), and Kingsoft Corp (03888.HK).

Results preview

About 90 percent of Hang Seng China Enterprises Index constituent companies will release their first-quarter earnings this week.

Heavyweight stocks such as banks could struggle given the gloomy economic outlook.

Meanwhile, commodity and infrastructure stocks have had considerable gains, which are already reflected in their share prices.

These stocks may face profit-taking pressure in the short term.

Turnover disappoints

Market turnover dropped to HK$55.9 billion on Monday, a sign that investors are staying on the sidelines.

They are waiting for a number of policy decisions. The US Federal Reserve will publish a statement after its policy meeting on Thursday which would offer some hints about the pace of future rate hikes.

Investors should not be too aggressive given the uncertain fundamentals.

The Hang Seng Index is trading above the 10-day, 50-day and 100-day moving average for the first time this year.

Whether it can break the 20,800-21,800 range bears watching.

This article appeared in the Hong Kong Economic Journal on April 26.

Translation by Julie Zhu

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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