In This Emerging Market, You Get What You Pay For, and Then Some!
You already know the third-quarter profit reporting season has gotten off to a disappointing start for the S&P 500. On Monday, Citigroup announced a 57% slide in profits for the third quarter. Wow! Citigroup joins a growing list of financial shares reporting tens of billions in losses and write-offs this quarter thanks to the sub-prime credit crunch that began in July.In fact, by some estimates, S&P 500 profits may decline in aggregate this period for the first time since 2002. Standard & Poor’s is forecasting a 1% fall in overall profits from this time last year.However the news isn’t all bad this quarter in all corners of the globe. There’s one red hot market half a world away that’s set to report a 40% surge in profits this year: It’s Hong Kong!
H-Shares Set to Shoot the Lights Out...Again!Lately, I have seen a fair share of media commentary about how China is in a “bubble.” As the story goes, China has gone up far too much already. It’s “way overvalued.” Well, yes and no. You see, there are really two Chinas from an investment perspective. First, there’s the over-hyped, overpriced and rigged game known as China’s mainland A-share markets. Then there’s the Hong Kong-listed H-share market of Chinese mainland stocks.There’s no question the A-share market is in “bubble-land” after more than tripling in the past year alone. That’s a run up in price reminiscent of the “dot-com” era in U.S. tech stocks circa 1999. Of course, many of those dot-com’s are now dot-gone, so be careful with mainland Chinese shares! Of course most investors outside of China can’t get easy access to the A-share market anyway. And that’s a good thing, since the Hong Kong-listed H-shares are still a much better bargain anyway. In fact, Hong Kong still looks very attractive today.While not the bargain it was six months or a year ago, Hong Kong is still drawing investment money from mainland Chinese investors. Global investors are also sending their investment assets to Hong Kong, because it’s a cheaper way to buy into the booming mainland markets.
Despite Big Gains, Hong Kong is Still a Bargain Compared to ChinaIncreasingly Hong Kong has become a destination exchange for Chinese mainland firms to list their shares. By listing in HK, these companies can more easily raise capital from global investors. In fact, the market value of Chinese mainland stocks now accounts for 53% of Hong Kong’s total market value. That’s up from just 16% when Great Britain turned over its former colony to Beijing in 1999.Even after a 40%-plus rally since mid-August, Hong Kong’s main benchmark, the Hang Seng Index, trades at just 19 times earnings. Compare that to a P/E ratio of about 51 times for the Shanghai Composite – and more than 70 for Shenzhen – that’s quite a valuation discount in favor of Hong Kong shares. In fact, according to Bloomberg, “Of the 45 Chinese companies with equities traded both at home, and in Hong Kong, the so-called H shares are about 34% cheaper than their yuan-denominated A shares.”Take China Life for example. The leading insurer in mainland China is valued at 74 times earnings in Shanghai. But in Hong Kong, China Life’s H-shares have a P/E of 40.5. In other words, the H-shares would have to rally 82% to close this valuation gap.
Hong Kong Enjoys Growing Cash Flows from Mainland InvestorsEarlier this year, Beijing began to loosen restrictions on where Chinese citizens could invest their estimated US$2.3 trillion in household savings. Recently, the government announced a pilot program that allows retail investors to trade directly in Hong Kong-listed shares for the first time. As a result, JP Morgan estimates US$60 billion may flow into Hong Kong in the next year. It looks to me like this great-wall of Chinese retail money is already finding its way south.In spite of the major move already this year, Hong Kong can still be considered “undervalued” by some measures. While its P/E ratio of 19 has moved up over the past few years, it’s still far cheaper than Shanghai’s valuation. It’s also in line with the S&P 500’s P/E of 18.
Hong Kong Shares Offer Much Stronger Growth Potential to BootIf you take a look at cash flow, then Hong Kong looks like an even bigger bargain. The Hang Seng Index trades at just 5.2 times cash flow, compared with 12 times for the S&P 500 and 11.5 times for the MSCI Asia-Pacific Index, according to Bloomberg.H-share company profits are also forecast to surge 40% higher this year, compared to 22% earnings growth for emerging markets overall. And if you stick with the S&P 500, you’ll be lucky to see profits grow just 7% or so this year. You get what you pay for!Beijing will have its moment in the global spotlight during next year’s Olympic games. Shanghai is still China’s principle trading hub. But Hong Kong is swiftly becoming the financial gateway to mainland China – as well as mainland China’s gateway to a wider world of more attractive investment choices.
You already know the third-quarter profit reporting season has gotten off to a disappointing start for the S&P 500. On Monday, Citigroup announced a 57% slide in profits for the third quarter. Wow! Citigroup joins a growing list of financial shares reporting tens of billions in losses and write-offs this quarter thanks to the sub-prime credit crunch that began in July.In fact, by some estimates, S&P 500 profits may decline in aggregate this period for the first time since 2002. Standard & Poor’s is forecasting a 1% fall in overall profits from this time last year.However the news isn’t all bad this quarter in all corners of the globe. There’s one red hot market half a world away that’s set to report a 40% surge in profits this year: It’s Hong Kong!
H-Shares Set to Shoot the Lights Out...Again!Lately, I have seen a fair share of media commentary about how China is in a “bubble.” As the story goes, China has gone up far too much already. It’s “way overvalued.” Well, yes and no. You see, there are really two Chinas from an investment perspective. First, there’s the over-hyped, overpriced and rigged game known as China’s mainland A-share markets. Then there’s the Hong Kong-listed H-share market of Chinese mainland stocks.There’s no question the A-share market is in “bubble-land” after more than tripling in the past year alone. That’s a run up in price reminiscent of the “dot-com” era in U.S. tech stocks circa 1999. Of course, many of those dot-com’s are now dot-gone, so be careful with mainland Chinese shares! Of course most investors outside of China can’t get easy access to the A-share market anyway. And that’s a good thing, since the Hong Kong-listed H-shares are still a much better bargain anyway. In fact, Hong Kong still looks very attractive today.While not the bargain it was six months or a year ago, Hong Kong is still drawing investment money from mainland Chinese investors. Global investors are also sending their investment assets to Hong Kong, because it’s a cheaper way to buy into the booming mainland markets.
Despite Big Gains, Hong Kong is Still a Bargain Compared to ChinaIncreasingly Hong Kong has become a destination exchange for Chinese mainland firms to list their shares. By listing in HK, these companies can more easily raise capital from global investors. In fact, the market value of Chinese mainland stocks now accounts for 53% of Hong Kong’s total market value. That’s up from just 16% when Great Britain turned over its former colony to Beijing in 1999.Even after a 40%-plus rally since mid-August, Hong Kong’s main benchmark, the Hang Seng Index, trades at just 19 times earnings. Compare that to a P/E ratio of about 51 times for the Shanghai Composite – and more than 70 for Shenzhen – that’s quite a valuation discount in favor of Hong Kong shares. In fact, according to Bloomberg, “Of the 45 Chinese companies with equities traded both at home, and in Hong Kong, the so-called H shares are about 34% cheaper than their yuan-denominated A shares.”Take China Life for example. The leading insurer in mainland China is valued at 74 times earnings in Shanghai. But in Hong Kong, China Life’s H-shares have a P/E of 40.5. In other words, the H-shares would have to rally 82% to close this valuation gap.
Hong Kong Enjoys Growing Cash Flows from Mainland InvestorsEarlier this year, Beijing began to loosen restrictions on where Chinese citizens could invest their estimated US$2.3 trillion in household savings. Recently, the government announced a pilot program that allows retail investors to trade directly in Hong Kong-listed shares for the first time. As a result, JP Morgan estimates US$60 billion may flow into Hong Kong in the next year. It looks to me like this great-wall of Chinese retail money is already finding its way south.In spite of the major move already this year, Hong Kong can still be considered “undervalued” by some measures. While its P/E ratio of 19 has moved up over the past few years, it’s still far cheaper than Shanghai’s valuation. It’s also in line with the S&P 500’s P/E of 18.
Hong Kong Shares Offer Much Stronger Growth Potential to BootIf you take a look at cash flow, then Hong Kong looks like an even bigger bargain. The Hang Seng Index trades at just 5.2 times cash flow, compared with 12 times for the S&P 500 and 11.5 times for the MSCI Asia-Pacific Index, according to Bloomberg.H-share company profits are also forecast to surge 40% higher this year, compared to 22% earnings growth for emerging markets overall. And if you stick with the S&P 500, you’ll be lucky to see profits grow just 7% or so this year. You get what you pay for!Beijing will have its moment in the global spotlight during next year’s Olympic games. Shanghai is still China’s principle trading hub. But Hong Kong is swiftly becoming the financial gateway to mainland China – as well as mainland China’s gateway to a wider world of more attractive investment choices.
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