China Stocks: Is Now the Time to Buy?

Over the last couple of days, I found several articles about Chinese stocks and Shanghai Composite index as such. Most of them declared that China is undervalued and said that now could be right time to buy.

Below are two articles from Finance Yahoo and Tech Ticker:

• The China story has only begun.  The article highlights some interesting cheap Chinese stocks. Aluminum producer Aluminum Corp of China (ACH) and water supply company China Water and Drinks (CWDK.OB).
• You can watch another story about 3 Cheap China Stocks [Giant Interactive (GA), Cogo Group Inc. (COGO) and E-House (EJ)], on Tech Ticker.

I still remember that one year ago many analysts expected China’s bubble would burst after the Olympics. Although this prediction didn't come true, the Shanghai Composite Index is down 60% from October's high. Without question, it has been the worst performing world index during this period.

If I look at the valuation trailing P/E ratio, it is 17.2%. Even more interesting is the FY1 P/E ratio. By dividing the latest price with the forecast EPS for FY1, I found that the FY1 P/E is 14. The valuation of 14 for the country, which continues to grow between 8% - 10%, offers a very nice discount.

Disclosure: None

Comments

[johnthebear:]

Not the time! You should read and try to understand what Michael Pettis said in his article on Sept. 1 "China: Slowing Economy" Here is my response to Mr. Pettis which applies to you as well.

Michael, I agree that anticipated consumption for the Olympics was a major factor in growth to date, so it reasonable to expect a large slowdown in consumer demand as well as commercial demand for supplies etc. in the coming months.

Likewise, you mention huge spending on infrastructure, including massive road building projects. In a communist country it may be very easy to take the land (compared with USA), but it still takes a long time to develop plans and actually begin construction. Then, I wonder about the workers on such projects. I would think they would be taken from the farming areas and paid very little (slave wages with long hours). This suggest relatively little impact for the next 3 years on the urban economy.

You mention they consider cutting taxes. I have difficulty in understanding their economy. Do they have an IRS and full financial reporting? And Jail if you don't pay? What are the relative tax rates for rich and poor people and for business? Hard to figure how much of a cut would make a difference, and how it would relate to the government budget. I assume they can print money pretty fast when they want, just as we can!

As for their government spending habits, their government sounds downright democratic! Then when you add in "strike" in a communist country, it really sounds like they are getting ready for much bigger change!

"I expected there to be a burst in securitization taking place as banks shifted loans off balance sheet." Don't tell them how stupid that would be. Let them screw up like our banks. Did you hear that the Swiss and German banks are going to have to raise their capital ratios? Up from 2.5 to 5 percent. Still low in comparison to our banks. The off-balance sheet theme sounds likely to me, because it is sneaky!

Sounds like they have their own subprime problem with securitization much like ours. Unbelievable, that they cannot learn from our mistakes.

FXI was up 4.47% today, following my theme that what is bad for China is good for John!

I am looking for FXP to more than double from here.

2008 Sep 02 06:25 PM

[johnthebear:]

Sorry, FXP was up 4.47% today, FXI was down 1.85% today. (FXP is a double short of FXI)

2008 Sep 02 06:29 PM

[James Lewis:]

It is not the bottom yet....

However we could be approaching it, the only safe way to buy this market is to wait for a washout. This may come as we approach 'Golden Holiday' here. What worries me is effectively we have been consolidating around 2300 - 2400 recently. I have been looking at potential support for the market for some time at 2195, however a break of where we have been consolidating suggests we could even go lower than 2195. So picking a level is very hard. The Government will not let the market fall below 2000 due to psychological consequences. So this suggest very very strong support in the 2000-2195 zone, best bet would be to track the market and watch how it trades at these levels.

In terms of PE ratios etc, you can not use them with any degree of accuracy because earnings, revenue and profit is all overstated. Their is no transparency what so ever in these companies accounts. Every company has off-balance sheet liabilities. Even the ADR traded in the US do not conform to suitable accounting standards, just the US regulators/exchanges have not wanted to rock the boat.

I disagree with other commentators that China does not have the resources to kick start the economy and growth. On the contrary China has a lot of money it can flood into the economy, the very act will create improved sentiment in the stock markets/property markets. Which in the short term is needed very badly in order to set domestic demand back on the right track.

But long term at some point, China is going to have work off its mistakes of the long term imbalances that exist within its system. It is quite possible that this won't be until the trough of the next business cycle in 2012, however of course it very possible that we have come to the end of the 30 year cycle that started in 1978 and the mistakes of the past will start to manifest. Of course having a huge amount of money saved up for a rainy day, makes rainy days a lot easier to deal with.

2008 Sep 02 11:26 PM