China Stocks Cheapest to Analyst Targets After Slump

(Bloomberg) -- Chinese stocks are trading at the steepest discount in the world compared with analysts’ price targets after this month’s 16 percent slump in the nation’s benchmark stock index. Companies in China’s Shanghai Composite Index trade 13 percent below analysts’ combined price targets, the biggest gap among the world’s 10 largest markets, data compiled by Bloomberg show. The gauge rose 5.8 percent in the past six days even as Premier Wen Jiabao said the economic recovery isn’t stable yet, China Construction Bank Corp.’s chairman warned of asset bubbles and policy makers advised industries such as steel and cement to curb overcapacity. Robeco Hong Kong Ltd.’s Victoria Mio bought Chinese shares that were “punished unreasonably” during the sell-off. Barton Biggs of Traxis Partners LP said the market is poised to rally because policy makers will keep economic stimulus measures in place. Morgan Stanley predicted stocks may jump 36 percent in 12 months as profits climb faster than in the rest of the world.

“The market has overreacted,” said Mio, a senior portfolio manager at Robeco, which managed $158 billion worldwide as of December. “The recent decline is very healthy. It drives away speculators.” The Shanghai Composite fell 2.9 percent to 2,860.69 at the close. The measure also dropped for a fourth week.This month’s slump stopped a rally that had sent the Shanghai Composite up 103 percent from a November low on prospects the government’s 4 trillion yuan ($586 billion) stimulus program and a record amount of new loans will ensure the economy grows at least 8 percent this year.

Bullish on ICBC
The Standard & Poor’s 500 Index has climbed 51 percent from a 12-year low in March. Companies in the U.S. equity benchmark are trading 6 percent below analysts’ target prices on average, Bloomberg data show. The Bombay Stock Exchange Sensitive Index in India, the second-largest emerging market after China, has jumped 93 percent from its March low and its companies are priced 2.6 percent above analysts’ targets, the data show. Industrial & Commercial Bank of China Ltd., the world’s largest by market value, is trading 33 percent below the average price target of analysts. The Beijing-based lender posted higher-than-estimated second-quarter profit and has a “buy” rating from 25 of 30 analysts tracked by Bloomberg. The shares slipped 0.6 percent yesterday, while the Shanghai Composite lost 0.7 percent to 2,946.40.
Shanghai-based Baoshan Iron & Steel Co., China’s largest steelmaker, may jump 32 percent, according to the average of 15 price targets. New York-based Goldman Sachs Group Inc., which raised its forecast this month, expects the shares to more than double.

‘Significantly Higher’
China Railway Construction Corp., the builder of more than half the nation’s railroads, is trading 31 percent below analysts’ target price. Per-share earnings for the Beijing-based company may rise 47 percent this year and 34 percent in 2010, according to analysts’ projections.China’s stock market is “going to go significantly higher,” said Biggs, who runs Traxis, a New York-based investment firm. “We’ve seen the worst.”Industrial & Commercial Bank, Baoshan Iron & Steel and China Railway Construction dropped at least 12 percent this month as concern deepened China’s government will restrict investment and new loans, slowing the pace of an economic recovery and forcing speculators who borrowed money to buy shares to exit the market. Mainland investors opened about 11.3 million new stock trading accounts this year, up 6 percent from the same period in 2008, according to data from the nation’s clearing house.

World-Beating Rally
Chinese banks, which extended a record 7.4 trillion yuan of new loans in the first half of 2009, reduced credit growth to the lowest level in nine months in July, according to the People’s Bank of China. The government plans to tighten capital requirements for financial institutions, three people familiar with the matter said last week.“They just want to turn that credit tap off which many policy makers blame for this blowout in equity valuations,” Stephen Green, head of China research at Standard Chartered Bank in Shanghai, said in an interview on Bloomberg Television.

While banks can provide 300 billion yuan to 400 billion yuan of new loans a month, that “may not be enough for the market to be reassured that’s enough to keep pushing prices higher,” Green said.The Shanghai Composite’s gain since Nov. 4, the biggest among world equity benchmarks, sent its valuation to 31 times reported earnings over the past 12 months, according to Bloomberg data. The MSCI Emerging Markets Index, a 22-country benchmark, trades for 18 times profit.

‘Over-Heated’
Stocks in China and Asia’s emerging markets climbed too far, too fast given forecasts for a weak global economic recovery, according to Bank Julius Baer & Co.’s Christian Gattiker. The chance of a double-dip recession is increasing because of risks related to ending global monetary and fiscal stimulus, Nouriel Roubini, the New York University professor who predicted the financial crisis, said this week. “The whole thing is a bit over-heated,” said Gattiker, the head of research and strategy at Bank Julius Baer, which oversees about $131 billion and has been reducing holdings in Asian developing nations to buy in markets including Japan that lagged a global rally in stocks this year.Guo Shuqing, chairman of China Construction Bank, said this week that excess cash in the banking system has led to bubbles in capital markets. The Beijing-based bank is China’s second- largest lender.

Wen’s Warning
The government will maintain its fiscal and monetary policies because the economy faces many “uncertainties,” Premier Wen said this week, according to a statement published on the government’s Web site. Prospects of a delayed tightening in banks’ reserve-requirement ratios, loan quotas and the benchmark lending rate will help stocks rally, said Jonathan Garner, the London-based chief Asian and emerging-market strategist at Morgan Stanley.

The People’s Bank of China raised its reserve-requirement ratio for lenders seven times in 2007 before the Shanghai Composite peaked in October of that year. The central bank scrapped lending quotas in November 2008 and has kept interest rates at a four-year low of 5.31 percent.“We don’t think policy is going to meaningfully tighten from here on, probably until the summer of 2010,” Garner said. Jerry Lou, his colleague in Hong Kong, predicts the Shanghai Composite will climb to 4,000 in the next 12 months.

Profit Growth
The index still trades for two-thirds the price-to-earnings ratio of 52 at its peak in October 2007, and profits are growing faster than developing nations as a group. Morgan Stanley estimates that earnings in China will gain 15 percent this year and 20 percent in 2010, compared with a 15 percent drop for MSCI’s emerging-market index. Companies in the S&P 500 may report a 14 percent decline in profits this year, according to analysts’ estimates compiled by Bloomberg.Traxis’s Biggs said the global economy is rebounding and that Chinese exporters will get a boost from recovering demand in the U.S. and Europe, China’s two biggest customers. The U.S. recession ended in June because of the government’s economic stimulus and a rebuilding of inventories by businesses, according to Jan Hatzius, chief U.S. economist at Goldman Sachs. German services and French manufacturing unexpectedly expanded in August, reports showed last week.

Export Markets
“The U.S. and Europe are huge export markets for Asia,” Biggs said in an interview. “What happens in those economies is important.”China stock funds received $480 million in the week to Aug. 26, recovering from their worst week since the first quarter of 2008, as investors projected higher exports to developed markets, EPFR said in an e-mail.Leuthold Weeden Capital Management, which invests in China through Hong Kong-listed shares, mutual funds and exchange- traded funds, has a record 11 percent of its core and asset allocation portfolios in China securities after increasing holdings in June. The firm has no plans to reduce its investment in China after the market’s retreat, said Eric Bjorgen, who helps oversee about $3.6 billion as a money manager at Minneapolis-based Leuthold.

“We see a major opportunity there and it’s one that we expect will outperform over the intermediate and longer term,” said Bjorgen. “We’re in bullish mode.”