Is the Chinese Market Overvalued?

Most US investors would consider mainland China stock market overpriced. That is because stocks are valued traditionally in PE ratio. According to the latest information available, the average PE ratio of Chinese stocks are at 42.8, based upon 2006 results. Using the same analysis, stocks in the Shanghai Shenzhen 300 Index have a PE ratio of 37.2.

However, if one looks at the valuation using the 2007 1Q results, one would see an entirely different picture. Out of the 1364 companies reported so far, the average earnings per share went UP 78.1%. I have also seen reports using aggregate earnings, those earnings have gone up over 45%.

With the strong economy, many Chinese companies are turning out record profits. Bao Steel last week reported a 154% earnings increase. China Life Insurance (LFC), CITIC Bank all reported record earnings. Most people do expect continued earning growth for 2008.

In conclusion, I think the Chinese stock market has gone up too much too fast. But based upon the traditional PE analysis, the market is not overvalued but rather than fairly valued. Just because the market may go down tomorrow, it does not mean it is a market bubble, because the earning fundamentals are very strong.

Comments

[huangjin:]

Chinese accounting standards are reason enough to declare the market overvalued.

2007 May 09 09:02 AM

[izomax:]

U.S. investors can say whatever they want but A-shares index is going up to 10,000 by 2008.

Those who don't board the wagon don't know what they are missing.

2007 May 09 11:00 AM

[Daniel Su:]

based on CCTV-9 Biz today, during the month of April, 5 million new brokerage acccounts were open, the number is more than last two years new accounts combined.

2007 May 10 12:08 AM

[Daniel Su:]

Based on CCTV 9 Biz today interview, former deputy CEO of Shanghai stock exchange Fang Winghai recommended investors be cautious, and get out of stocks gradually, citing new investors do not know how to value stocks, and valuation is not sustainable.

2007 May 10 12:14 AM

[Curt Smith:]

This morning China has announced changes to floating the yuan and to cool their markets. Any thoughts on what this means to ADRs and the FXI?

tnx curt

2007 May 18 07:32 AM

[investor88:]

Raymond says earnings fundamentals are very strong, but the fact is that stock prices are collapsing as if there is a bubble. It is not easy to reconcile, ie either there is indeed good value as Raymond thinks or there is in fact a equity bubble. Until we can be clear about what is actually going on, I think it may be too early to take up large long positions on China stocks.

2008 Sep 03 08:19 AM