Another way to check the valuation of Hong Kong stocks

September 11, 2015 18:14
Don't just look at the numbers to get a handle on the markets. Watch what those in the know are doing. Photo: Bloomberg

The historical price-earnings ratio for the Hang Seng Index dropped to 8.5 times and the Hang Seng China Enterprise Index's P/E ratio fell to 6.5 times, both record lows.

However, the market remains divided on whether Hong Kong shares are cheap.

Many have discussed earnings quality, growth prospects, the percentage of financial stocks, and so on.

German stock market guru Andre Kostolany once said: “Most people stare at stock charts when they read the newspaper, but what's inside the newspaper is more important to me.”

The stock market rout has dominated newspaper headlines recently.

But you may be shocked when you turn to the inside of the paper.

There were announcements of initial public offerings in Hong Kong almost every day over the past week, even though the HSI plunged to 21,500 points from 28,000 points.

New listings include a separate one for the electronics business of China State Construction Engineering Corp. (601688.CN).

China Datang Corp. also intends to spin off its electronic project subsidiary and to raise up to US$800 million.

Chuangmei Pharmaceutical Co. Ltd., Bi Feng Tang (Group) Holdings and the Sun Fook Kong group have all submitted applications for a listing in Hong Kong.

Big shareholders know the best about their company's value.

Why would they sell assets after a market crash?

It’s quite clear that they know whether the market valuation is cheap or expensive.

They have far more knowledge of inside information and the industry outlook than average investors.

Still, many companies continue to sell or issue shares during market turmoil.

Meanwhile, some stock investors have flooded into the market, as they believe the market is too cheap.

What a funny picture!

The media avidly report on the ranking of Hong Kong among its global peers in raising capital.

It’s a big deal if the stock exchange fails to secure the championship.

But only financial professionals and major shareholders benefit from record high levels of capital raising.

The market will become really cheap when there are no IPOs.

No entrepreneurs like to sell shares.

They would rather give up listing plans or halt any plan to issue or sell new shares.

Instead, they would launch big share buyback schemes.

Some big shareholders would increase their stakes or even take the company private.

Stock valuations are always relative.

A P/E of 10 times might still be expensive for old-economy stocks, while 20 times might be reasonable for new-economy plays.

We find that those companies that are still willing to seek listings at current price levels are from sectors that lack growth momentum, such as electronics and infrastructure, or those grappling with intensifying competition, like restaurants and pharmaceuticals.

By contrast, we have not seen any new listings in the internet or gas sectors.

Is that a sign that old-economy stocks are still expensive, while new-economy stocks are already attractive?

The rule of thumb is to look at the historical valuation level of your stocks.

If they have already fallen to historical lows without major changes in fundamentals, you can continue to hold and buy more.

Joke time.

Joe Wang, a doctor of biochemistry in the United States, changed his career to become a talk show actor.

He was invited to perform in the famous David Letterman Show.

Wang said his son asked him why he has to learn two languages, Chinese and English.

“When you become the president, you will have to sign legislative bills in English,” Wang said, pausing before he added, “and talk to debt collectors in Chinese!”

China’s economy is not yet that bad, and there are always good stocks during different economic cycles.

This article appeared in the Hong Kong Economic Journal on Sept. 11.

Translation by Julie Zhu

[Chinese version中文版]

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Columnist at the Hong Kong Economic Journal