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Exploring China's stock market
EXACTLY a year and a fortnight ago, this column noted the possibilities of investors returning to Chinese stocks as its top leadership met for its Third Plenum. At the meeting, a "decisive role" for markets was called for.
At that time, we surveyed the H-Share market, which contains a number of Chinese finance and commodities giants listed in Hong Kong. Some of these stocks, like beer producer Tsingtao Brewery, have been available to foreign investors for more than 20 years.
The landmark Shanghai-Hong Kong Stock Connect launches on Monday - a trading link between the relatively closed market of China and the open economy of Hong Kong.
The much-anticipated move has caused widespread excitement. The Shanghai Stock Exchange Composite Index has rallied 20 per cent from lows of 2,000 points this year to about 2,500 points.
Investors will be able to directly invest in companies traded in the 24-year-old Shanghai Stock Exchange, which contains some of China's largest companies.
They can now get a piece of 568 China A-Share companies.
Singapore investors will have to watch out for currency risk when investing in the Chinese market. A-Shares are denominated in the Chinese yuan, while H-Shares are denominated in the Hong Kong dollar, linked to the US dollar. This will affect capital gains and dividends if converted back to the Singapore dollar.
Foreign currency movements are complex and depend on the relative economic strength of the two countries being compared, interest rates, capital flows, and government policy, among other things.
In the short term, the US dollar has been strengthening against the Singapore dollar, giving Singaporean investors holding Hong Kong stocks a boost. The Chinese yuan has also been strengthening.
So what exactly are the companies investors can buy?
Among the largest companies are oil and gas giants PetroChina and Sinopec (China Petroleum and Chemical Corp), as well as mega-banks such as the Industrial and Commercial Bank of China, the Agricultural Bank of China and the Bank of China.
These companies are valued at well over S$100 billion each, dwarfing most of Singapore's blue chips.
For example, PetroChina, which explores, develops and produces crude oil and natural gas, is valued at 1.4 trillion yuan, or about S$300 billion. This currently makes it more valuable than DBS, UOB, OCBC, SingTel, Wilmar International, Thai Beverage, Keppel Corp, CapitaLand, Singapore Airlines, StarHub, SPH, CapitaMall Trust and ComfortDelGro combined.
The company takes up 6.8 per cent of the Shanghai Composite Index. It is 97.6 per cent owned by China National Petroleum Corp, though outside investors are welcome to a tiny slice. PetroChina is trading at about 10 times earnings, with an indicated gross dividend yield of over 4 per cent.
These big companies are well-known to international investors. Many are held by funds, which are likely to have committed resources to vet these companies. They are also listed on the Hong Kong market.
Investors new to the Chinese market could feel more comfortable buying them. These companies will also have investor relations websites in English that make evaluating the company easier. Newswires such as Bloomberg and Reuters often report on these companies' earnings.
Also, investors need to be aware of the alternatives. Analysts note that stocks in China tend to have a lot of debt, and have poorer-quality cash flows. This makes the companies not as financially strong as companies listed in neighbouring Japan.
The small-cap diaries
What could be more fascinating from the observer's point of view are the A-Share market's smaller companies. These are companies that will not get much attention in mainstream financial news outlets.
They might not be suitable investments, but they sure make for interesting case studies.
These companies are still giants by Singapore standards. The Chinese companies with the lowest market capitalisation that investors can trade in are valued at half a billion to a billion Singapore dollars, which would qualify them as a mid-cap stock here.
The smallest among these "small-caps" include:
- Pig farm Hunan New Wellful, which exports pigs to Hong Kong and Macau and reports sales of a billion yuan a year;
- Sichuan-based Chengdu Xuguang Electronics, which makes electronic vacuum components;
- Jiangsu Lianhuan Pharmaceutical, which makes drugs treating hypertension, rashes, high cholesterol, among other ailments;
- Department store owner Xinjiang Youhao, which has 15 department stores, 36 supermarkets, 11 electrical equipment stores, and eight food courts;
- Explosives maker Anhui Leimingkehua, whose employees, we learn from its website, earn an average of 60,000 yuan a year.
Figuring out these small-cap stocks is a process not for the faint-hearted. The first hurdle an investor faces is up-to-date and reliable information in English.
Firstly, you might not be able to find much information using search engine Google. Rather, you have to use the dominant Chinese search engine, Baidu. Once you find the company website, you have a bit more access to information. But you are more likely to be bombarded by corporate buzzwords than anything substantive.
Investors could go to the Shanghai Stock Exchange website. Unfortunately, it is far more informative in the native Chinese language than in its English version.
To look for company disclosures, investors who can read Chinese have to go to this link:
Those looking for quarterly financial statements can go to this one:
Readers familiar with financial statements will be able to understand them, once you pick up the relevant accounting descriptors in Chinese.
Even without putting your hard-earned money at risk, investors can still find it illuminating to dig around in the A-Share market.
You might find insights even among the smaller companies.
China is an incredibly big and diverse market and no generalisations can be made. But every nugget of information disclosed by listed firms can give investors a better clue as to what is going on in its economy.
Issues with disclosure
For example, a cursory glance at Xinjiang Youhao's financial statements shows that revenues fell almost 20 per cent year on year to 5.6 billion yuan for the first nine months of the year, earnings per share fell 75 per cent to 0.258 yuan.
"The company expects 2014 full-year net profit to fall 60 to 90 per cent compared to a year ago," it told investors. This is because of a profit decline in a real estate development subsidiary, as well as expenses related to the addition of new stores, the company said.
As for the pig exporter, Hunan New Wellful, we learn from its third-quarter statements that the company expects to make a loss for 2014 to the tune of 33 to 43 million yuan.
This is because of prices fetched by live pigs plunging in the first half of the year, leading to heavy losses for its pig breeding business, the company said.
Meanwhile, over at the explosives company Anhui Leimingkehua, revenue and profit seem to be rising at a steady, double-digit percentage clip.
However, in the first-half report, we learn that the outlook for the company, whose explosives are used in mining operations, is challenging. This is due to a sharp fall in coal prices. Ultimately, due to information disclosure issues, it might not be advisable to play with individual stocks in China yet. There are plenty of exchange-traded fund (ETF) options to give diversified, low-cost exposure.
The Shanghai market is also too heavily skewed towards financials. But its liberalisation is a start. The sheer scale of even the smallest companies there offer a glimpse of China's promise.
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