What Are China Stocks Worth? Singapore Shows 65% Less (Update1) http://www.bloomberg.com/apps/news?pid=20601109&sid=aVyApTyKFC4Q&refer=home By Chua Kong Ho and Daniel Hauck June 11 (Bloomberg) -- What's a Chinese meat producer really worth? On the mainland, investors pay 147 times earnings to own Fortune Ng Fung Food (Hebei) Co. Hong Kong-listed China Yurun Food Group Ltd. trades at 26.7 times profit. And in Singapore, People's Food Holdings Ltd. is valued at 11.7 times earnings. ``There is not that big a difference in their businesses, so there shouldn't be such a difference in their prospects and valuations,'' says Greg Lesko, who helps manage $900 million at New York-based hedge fund Deltec Asset Management. Trading restrictions are partly responsible for the variations. That has sparked a search for more rational price-to- earnings valuations in Chinese equities. To some investors, even Hong Kong is looking overvalued. Increasingly, they are finding the most sensible multiples in one market: Singapore. ``Fair valuation has got to be several multiples lower,'' said Robert Doll, who oversees $1.15 trillion as chief investment officer of global equities at BlackRock Inc. in Plainsboro, New Jersey. ``To the extent there's a good barometer, Singapore's probably the place to go.'' China's benchmark CSI 300 Index would need to fall as much as 54 percent to come in line with the price-to-earnings ratio of Hong Kong's Hang Seng China Enterprises Index, which tracks shares of 41 mainland companies listed in the city. The CSI 300 would have to drop 65 percent to match the average multiple for Chinese shares traded in Singapore, according to calculations by Bloomberg. Government Restrictions The different valuations stem partly from restrictions that limit foreign investment on China's mainland and curtail Chinese citizens' ability to invest overseas, making it difficult to arbitrage shares listed on multiple exchanges. The government limits foreign investment in local-currency securities to $10 billion. Only 52 international institutions have government permission to invest on the mainland. Individual Chinese investors are opening brokerage accounts at the rate of about 300,000 a day this quarter, helping drive the CSI 300's 96 percent climb in 2007, the biggest gain in dollar terms among 90 benchmarks tracked by Bloomberg. Over time, the valuations on the mainland will have to come in line with other markets, said Jim Rogers, who started buying Chinese shares in 1999 and is the New York-based chairman of Beeland Interests Inc. ``Eventually, all the Chinese shares will sell for the same price everywhere,'' Rogers said. ``But that cannot happen until the currency is convertible and there's free arbitrage opportunities.'' Emerging Portfolio Data Concern that shares on both the mainland and in Hong Kong are overvalued has prompted some international investors to abandon the markets. International funds focused on China had the biggest net outflow in the five weeks ended June 6 of any 35-day period since Cambridge, Massachusetts-based Emerging Portfolio Fund Research Inc. began tracking the weekly data on China in 2002. Global investors pulled money out as China's central bank chief, Zhou Xiaochuan; Li Ka-shing, Asia's richest man; and former Federal Reserve Chairman Alan Greenspan raised concerns about the surge in mainland share prices. Funds invested in the so-called H-shares listed in Hong Kong and the yuan-denominated A-shares on the mainland had a net outflow of $2.62 billion during the five weeks ended June 6, the fund-research firm said. For the full year, investors have taken out a net $3.09 billion from China funds. `Advance is Inevitable' Domestic investors have been shrugging off the warnings about China's stock market. The CSI 300 took less than a month to erase a 9.2 percent plunge on Feb. 27 that was sparked by the government's approval of a special task force to clamp down on illegal share offerings. China's move on May 30 to triple the stamp duty on share trades only temporarily cooled the rally, with the CSI 300 sliding 16 percent over a four-day period. The index has climbed 12 percent since, as the central bank's Deputy Governor Wu Xiaoling said last week that China's economic growth means ``the stock market's advance is inevitable and long-term gains in the Chinese market are inevitable.'' China, the fastest growing of the world's 10 largest economies, expanded at an 11.1 percent clip in the first three months of 2007, more than economists forecast. `I've Made Mistakes' Tan Jiong, 33, a security guard in Shanghai's Lujiazui financial district, invested 90,000 yuan ($11,737), equivalent to about half of his savings, in local stocks in March. He said he was ``extremely upset'' by the government's decision to triple the stamp duty but decided to maintain his holdings. ``To sell now would be admitting I've made mistakes, which I can't reconcile myself to,'' Tan said. Global investors on average buy Chinese shares at lower prices than Tan, even for companies with similar businesses. Last week's 0.9 percent advance left the CSI 300 valued at 43.4 times its members' average profit. The index today added 2.5 percent to 3931.86. Hong Kong's Hang Seng China Enterprises Index traded at 19.8 times average earnings at the end of last week. The PrimePartners China Index, a measure of 25 of the biggest and most actively traded Chinese companies listed in Singapore, was valued at 15.2 times earnings, largely in line with the Morgan Stanley Capital International Emerging Markets Index, a benchmark for 25 developing markets, according to data compiled by Bloomberg. Inner Mongolia Linyi, Shandong-based People's Food Holdings, China's biggest meat processor, trades in Singapore at a price-to- earnings valuation 56 percent cheaper than Hong Kong-listed shares of Nanjing-based China Yurun Food, the nation's largest pork product producer and a seller of ham and sausages. Hebei Province-based Fortune Ng Fung Food, which produces beef and is listed in Shanghai, has a price-to-earnings ratio about 13 times higher than People's Food. The company raises cattle in Hebei Province and Inner Mongolia and sells fresh beef and ready-to-eat packaged food. ``Investors pay less attention to Chinese shares in Singapore, which could explain why People's Food has a lower valuation'' than China Yurun, said Tiffany Feng, an analyst at Guotai Junan Securities in Hong Kong. She has a ``buy'' rating on China Yurun. The valuation for Fortune Ng is ``unjustified for a food stock,'' she said. Singapore's China-based companies, known as S-chips, are typically smaller than their Hong Kong-listed peers. The top half of the Singapore-listed China companies had an average market value of S$2 billion ($1.3 billion), compared with S$111 billion for the H-shares of companies traded in Hong Kong, according to a report last month by Zurich-based UBS AG, the world's biggest money manager. `Surely be Closed' ``The H-share companies are usually large market- capitalization companies, with strong brand names and market positions,'' said Mark Tan, who helps oversee $3 billion in Asian equities at UOB Asset Management in Singapore. ``There has also been some perception that Singapore-listed China companies are of lower quality than those in Hong Kong.'' The difference in pricing between the H-shares and S-chips should narrow given the similar operating environment in China, Min Lan Tan, UBS's Singapore-based strategist, wrote in last month's note. ``We have purchased S-chip shares on their attractive valuations,'' said Templeton Asset Management's Mark Mobius, who oversees $30 billion in Singapore. ``Over the long term, if the fundamentals of the two groups are at par the gap will surely be closed.''
I must have made a half dozen posts on the crazy premium that the stocks in Shanghai and going for in the last few months, nice to see the finacial press finally catching on The pop in the yen might be augering a little turmoil to come in the markets in the next week or two. Short EEM puts here, currently unhedged.