Date
23 July 2017
China's industrial giants dominate the Shanghai Composite Index and have been among its steepest decliners this year, helping drag the gauge down 17 percent. Photo: CNSA
China's industrial giants dominate the Shanghai Composite Index and have been among its steepest decliners this year, helping drag the gauge down 17 percent. Photo: CNSA

Why Chinese stock market is pricier than it looks

The gap between profit forecasts and actual earnings in China is getting wider.

Firms in the Shanghai Composite Index reported earnings per share for the past year that were 33 percent below what analysts had predicted 12 months ago, according to data compiled by Bloomberg.

The gap, which this month widened to the most since 2009, far outstrips the difference between projections and actual earnings in the United States, and is more than double that of Chinese companies in Hong Kong.

Bloomberg said China’s industrial giants are being squeezed as the government reorients the economy around services, leaving excess capacity that translates into volatile earnings.

Those stocks dominate the Shanghai Composite and have been among its steepest decliners in 2016, helping drag the gauge down 17 percent, it said.

As to why analysts didn’t anticipate the scale of the shift, Foundation Asset Management (HK) Ltd. said in a market where short-selling is almost impossible, there’s little demand for negative research and strategists face more pressure to present an optimistic outlook.

“The transitioning of the economy from exports to consumer, that’s a painful adjustment that occurs over a number of years,” said Ben Surtees, a London-based fund manager at Jupiter Asset Management Plc. “Analysts aren’t capturing the changes that are occurring.”

Of Shanghai Composite companies that reported annual earnings since the end of March and for which Bloomberg compiled estimates, 68 percent missed projections.

PetroChina Co. Ltd. (00857.HK, 601857.CN), the nation’s biggest oil and gas producer, posted its first-ever loss in the first quarter amid falling oil prices. At Zijin Mining Group Co. Ltd. (02899.HK, 601899.CN), China’s largest gold mining company, net income sank 85 percent.

While fund managers from Ample Capital Ltd. to Comgest Far East Ltd. say they’ve learned to discount analysts’ figures or calculate their own, the consensus matters when trying to compare valuations across the world’s equity markets.

Shanghai shares trade at 12.6 times projected earnings over the next 12 months, versus a multiple of 16.2 on a trailing basis, which uses the results companies actually posted. The MSCI All-Country World Index is valued at 15 times estimated profits.

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