China’s Stocks Rise on Earnings Growth Prospects, Valuations

Tuesday, 25 Jan 2011 09:52 PM

 

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Jan. 26 (Bloomberg) -- China’s stocks rose, with the benchmark index rebounding from a four-month low, on speculation recent losses may have been excessive relative to the outlook for earnings growth.

Kweichow Moutai Co. and Wuliangye Yibin Co., makers of baijiu liquor, led gains for consumer staples producers. A gauge of banks, insurers and developers, the best performing group in the CSI 300 Index this year, climbed to the highest in a week. Changsha Zoomlion Heavy Industry Science & Technology Development Co. surged 1.1 percent after Nomura Holdings Inc. rated the company “buy,” citing the outlook for profits and the prospects for a “sharp recovery” in exports.

“The market wants a rebound after excessive declines,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “The Chinese Lunar new year will boost food prices. This is bad for inflation but at least good for consumer staples.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, added 10.2, or 0.4 percent, to 2,687.58 at 9:36 a.m. The CSI 300 Index rose 0.6 percent to 2,954.74. China’s markets will be closed from Feb. 2 to 8 for the Chinese new year holiday.

The Shanghai Composite has lost 15 percent since a Nov. 8 high after the central bank raised the reserve requirement ratio for banks and interest rates to counter inflation. The People’s Bank of China ordered commercial lenders on Jan. 14 to set aside more reserves, adding to six similar increases last year. The central bank also raised interest rates twice in 2010.

The Shanghai stocks gauge is valued at 12.5 times estimated earnings, the lowest since January 2009, weekly data compiled by Bloomberg show. China’s economic growth is expected to slow to 9 percent this year, from 10.1 percent in 2010, according to median estimates of Bloomberg surveys. That’s still about triple the projected rate of U.S. expansion.

Investor ‘Pessimism’

A gauge of consumer staples in the CSI 300 jumped 0.8 percent on speculation rising food prices will boost earnings. Kweichow Moutai, the biggest maker of baijiu, advanced 0.8 percent to 171.99 yuan. Wulianye Yibin surged 1.1 percent to 31.93 yuan.

Freezing weather in China’s south has led to an increase for China’s farm-produce prices in the week ended Jan. 23 from the previous seven days, Xinhua News Agency said late yesterday, citing the Ministry of Commerce. It’s the fourth consecutive increase for the gauge, according to Xinhua.

Meat and egg prices rose because of the approaching Chinese New Year holiday, with mutton gaining 1.4 percent on week, eggs 1 percent, beef 0.8 percent, pork 0.7 percent and chicken 0.2 percent, the news agency reported.

Consumer Valuations

China’s consumer and tourism stocks have dropped to levels where buying opportunities have emerged, Citic Securities Co. said in a report yesterday.

The median valuation of major consumer companies has fallen to 23 times estimated earnings for this year and 20 times for 2012, analysts led by Zhao Xueqin wrote in a report. The consumer companies are expected to have a compound annual growth rate of more than 30 percent for earnings over the next three years, they said.

The gauge of financial companies in the CSI 300 rose 0.5 percent. Bank of Communications Co., the fifth-biggest lender, added 0.6 percent to 5.52 yuan.

Chinese stocks may rebound, as the widest gap in four years between benchmark gauges for equities and industrial metals signals excess “pessimism” for the nation’s shares, according to Xinhu Futures Co.

The nation’s equities have been moving in tandem with global commodities since the Asian nation led a global recovery in 2009. The correlation between the two asset classes rose to a record high in November, according to Bloomberg data.

Commodities Indicator

“Commodities are going to stay in a bull market as the global recovery continues to stoke demand,” said Jiang Lin, an analyst at Xinhu Futures in Shanghai. “Investors might be overly pessimistic about China’s stocks and the economy, and once the government relaxes tightening, stocks will have decent gains.”

The Shanghai Composite has dropped 4.7 percent this year, adding to a 14 percent decline in 2010. The London Metal Exchange LMEX index comprising copper, aluminum, lead, tin, zinc and nickel reached a three-year high on Jan. 12, after rising 24 percent last year.

China is planning to let foreign investors trade index futures for the first time, enabling them to mitigate risks in a stock market that is the worst-performing in Asia over the past year.

Qualified foreign institutional investors, or QFIIs, will have to keep the daily value of futures contracts within the investment quota already approved by the State Administration of Foreign Exchange, according to draft rules published on the China Securities Regulatory Commission’s website yesterday. The CSRC didn’t say when the final version of the rules will be released or when the rules will be effective.

--Irene Shen. Editors: Allen Wan, Richard Frost

To contact the Bloomberg News staff on this story: Irene Shen in Shanghai at ishen4@bloomberg.net.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net.

© Copyright 2014 Bloomberg News. All rights reserved.

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