China H-shares remain a compelling buy

June 22, 2015 2:49 PM (UTC+8)

 

We said it before and we’ll say it again: Buy on the dips.

While the majority of the western media claim the recent decline in Chinese stocks is the popping of the bubble, Asia Unhedged continues to view these pullbacks as buying opportunities.

Last week, the Hang Seng China Enterprises Index, which is dominated by financials, tumbled 5.7%, its worst weekly performance since May 2012. But the mainland stocks fared even worse. Insufficient liquidity and a surge of initial public offerings sent the Shanghai Composite Index plunging 13.4% into correction territory.

The A-share decline may have been needed, but it was clearly overdone. However, with the Hang Seng trading at a forward P/E of just more than 9, Asia Unhedged continues to find the H-shares to be the most compelling value proposition among major world stock markets.

Liquidity will probably remain tight for the rest of the month, but we expect that to change with a near-term cut in the reserve requirement ratio (RRR). Economic fundamentals are clearly improving and regulators are creating a favorable environment for stocks to continue growing. In addition, there are strong indications that China is speeding up moves toward full convertibility of its currency on the capital account.

But more than that, China is in the midst of an economic transformation led by smartphone connectivity, big data, and above all by the rapidly changing habits of Chinese businesses and consumers. The entire society is embracing innovation.

E-commerce is growing by more than 40% per year, compared with the 10% growth in the US Does that justify the valuation the market is giving to Chinese Internet startups? We’re not sure, but their prospects seem better than their counterparts in the US.

Considering the Shanghai is a tech-dominated index, we see the Shanghai Composite bouncing back above 5,000.

Already the buying opportunity is beginning to disappear. On Monday, the Hang Seng China Enterprises Index jumped 1.5% to 13,383.68, its biggest gain since June 12. Hong Kong’s benchmark Hang Seng Index rose 1.2% to 27,080.85.

Mainland markets, better known as the A-shares, were shut today for a holiday.

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