Date
20 September 2019
CITIC Securities advised clients to sell the shares of People’s Insurance Company (Group) of China Ltd., saying they are “significantly overvalued” and have a downside of more than 50 percent. Photo: CITIC Securities
CITIC Securities advised clients to sell the shares of People’s Insurance Company (Group) of China Ltd., saying they are “significantly overvalued” and have a downside of more than 50 percent. Photo: CITIC Securities

Mainland investors over-react to negative brokerage call

China’s A shares slumped 4.4 percent on Friday last week, after the nation’s largest brokerage issued a rare “sell” rating.

CITIC Securities Co. (600030.CN) advised clients to sell the shares of People’s Insurance Company (Group) of China Ltd. (PICC) (01339.HK, 601319.CN), saying they are “significantly overvalued” and have a downside of more than 50 percent.

CITIC Securities is as an affiliate of the Ministry of Finance, and as such, the sell rating is believed by some to be an implied warning from the authorities against over-speculation on A shares.

In fact, the brokerage was the underwriter of PICC’s A shares just three months ago, another reason why the negative call was considered fishy.

CITIC Securities analysts said PICC’s fair price is between 4.71 and 5.38 yuan (70.05 and 80.02 US cents), implying a downside of 53.9 percent. The brokerage cited the insurer’s high P/B and P/E as evidence of it being significantly overpriced.

Taking a closer look, there is nothing unusual about CITIC’s call.

PICC Group listed at 3.34 yuan per share in Shanghai in November last year.

The shares quickly zoomed to a high of 12.89 yuan, or about three times higher than the IPO price. It’s therefore reasonable for CITIC to issue a note of caution against the high market valuation.

Compared to the company’s Hong Kong-listed shares that closed at HK$3.8 per share last week, the A shares were trading at a huge premium.

Still, the sell rating on PICC has dragged down financial stocks and the overall market.

In fact, almost all Chinese brokerages tended to offer just “buy” ratings in the past. That has made the sell rating on PICC rare. Globally, it is common to have reports offering widely different ratings on the same company; that’s why we call it a market.

China is set to further open up the financial markets as part of its commitments in the ongoing US-China trade talks.

That means leading global brokerages will play a bigger role in the A-share market. Mainland investors must start getting used to negative broker reports as there are likely to be more of them in the future, especially from foreign houses.

This article appeared in the Hong Kong Economic Journal on March 11

Translation by Julie Zhu

[Chinese version 中文版]

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RT/CG

Hong Kong Economic Journal columnist