32% fall in CSI 300 Index makes valuations attractive ( BT 3 Jun 2008 )

(SHANGHAI) Chinese stocks have fallen so much this year that Aluminium Corp of China Ltd is offering investors twice the profit growth of Alcoa Inc at a lower price.

The 32 per cent slump in China's CSI 300 Index, the steepest decline among the world's 20 biggest equity markets, narrowed the price-earnings gap with the Standard & Poor's 500 Index to 13 per cent from 139 per cent as of the end of last week. Mainland stocks traded in Hong Kong, where no foreign investment limits exist, are 23 per cent cheaper than US shares, data compiled by Bloomberg shows.

The CSI 300 fell after a five-fold gain sparked concern that prices are outstripping earnings prospects as the fastest-growing major economy slows, inflation accelerates and a stronger yuan makes exports less competitive.

'The correction in China provides a good opportunity to get in,' said Mark Mobius, 71, who oversees about US$42 billion of emerging-market equities as executive chairman of Templeton Asset Management Ltd in Singapore. 'Valuations of these companies are very attractive. There's no question that even if you downgrade China growth by a few points, it's still going to be greater than in the US.'

The CSI 300 Index surged 478 per cent in the past two years as China's government adopted measures to make state-owned shares tradable and the economy grew more than 10 per cent every quarter. Chinese gross domestic product, which expanded 11.9 per cent last year, may rise 10 per cent in 2008 compared with 1.3 per cent in the US, economists' forecasts compiled by Bloomberg show.

The rally pushed valuations on Chinese shares to the most expensive among the largest equity markets. It fizzled this year amid concern new stock sales will overwhelm demand and the highest interest rates in nine years will slow profit growth.

Companies in the CSI 300 trade at an average price-earnings ratio of 26.4, down from a record 52.8 in October, weekly data compiled by Bloomberg show. That compares with a ratio of 23.4 for the S&P 500. The benchmark index for American equities last traded at a premium to the CSI 300 in March 2006.

The Hang Seng China Enterprises Index, a gauge of 42 Chinese companies that trade in Hong Kong, became cheaper than the S&P 500 in March and is now valued at 18.1 times profit, Bloomberg weekly data show. Chinese companies list in Hong Kong to lure international investors who face restrictions on mainland shares.

'Selling has been irrational,' said Chen Shide, who manages the equivalent of US$2.3 billion at GF Fund Management Co in Guangzhou, China. 'The current level already holds great investment opportunities in the medium and long term.' Chinese measures to combat the fastest inflation among the world's 10 biggest economies may dent earnings, some investors say. The People's Bank of China raised its benchmark one-year lending rate six times last year to 7.47 per cent, helping slow economic growth to 10.6 per cent in the first quarter.

Inflation rose to 8.5 per cent in April, close to the highest since 1996. The yuan has gained 5.1 per cent this year against the dollar, making exports more expensive. Overseas sales grew 22 per cent in April from a year earlier, down from 31 per cent growth in March.

Valuations have 'gone from very high to still high, that's why we're cautious', said David Darst, who helps oversee more than US$700 billion as chief investment strategist at Morgan Stanley Global Wealth Management in New York. 'We don't think it's time yet to go trying to do too much bottom-fishing.'

Chinese companies' first-quarter profits grew 5.5 per cent. Earnings exceeded forecasts by 4.3 per cent for the 203 with estimates tracked by Bloomberg. By comparison, profits at US companies dropped 16 per cent in the first quarter and trailed analysts' forecasts by 4.4 per cent, according to Bloomberg data.

Net profit at Beijing-based Aluminium Corp of China will rise 20 per cent in the next two years, outpacing the 8.7 per cent growth for New York-based Alcoa, analyst estimates compiled by Bloomberg show. Chalco, as the company is known, is valued in Hong Kong at 14.5 times profit, down from 25.1 seven months ago. Chalco trades at an 11 per cent discount to Alcoa, the world's third-largest aluminium producer. -- Bloomberg