2016-10-20

Overvalued Stock Market Has Companies Queuing For Listing

Liang Yufeng (Doctor of Economics, Fudan University, China Europe International Business School EMBA. Orient Securities served as director of the Institute for many years, in 2014 founded the Institute Shanghai Yi Investment Consulting Co., Ltd. and Shanghai Yi Jing Department of Asset Management Co., Ltd.) discusses China's distorted price signals caused by government intervention.

Like the property market, China's stock market is bifurcated at the moment, but in a role reversal, it is the blue chips which are lagging. Bank stocks in particular have very low P/E ratios and they're pulling the Shanghai market's P/E ratio to 15. Remove the banks and the P/E rises to 36. Remove the financial sector and it hits 42. Based on the most recent earnings reports, 70 percent of stocks trade with a P/E above 50, while only 11 percent have ratios of 25 or less.

There are several anomalies which underline this market distortion. Even though the market seems to be in the doldrums, there are more than 800 companies queued up for an IPO. This anomaly points to the market being over, not under, valued.

Another anomaly is the worse a company's fortune gets, the higher its stock price goes. The IPO waiting list reflects a strong demand for listings, so companies are doing backdoor listings. When a firm starts circling the drain and is headed out the door, its share price recovers as speculators see another potential backdoor listing in the making.

M & A activity is high as well, as companies look to turn low P/E assets into high P/E assets through the magic of perception. Many companies have launched their own investment funds and private equity funds in order to leverage their high stock valuation.

Another anomaly is insider selling. Normally in a bear market, large investors will take the opportunity to acquire undervalued shares. Instead, Chinese large shareholders are dumping their holdings.

iFeng: A股价格体系扭曲程度全球罕见 需破除三大迷思

3 comments:

  1. The MSCI CHINA INDEX has just a 25.97% stake in financial companies, and yet the index P/E is 13.67, so it would not be that bad even without financials. This index captures large and mid cap representation across China H shares, B shares, Red chips and P chips. I guess the most over-values companies are small-cap then?

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    1. Right, he's talking about A-shares specifically. A broader index of Chinese companies would not be as overvalued. The latest A-H share premium report is here. Financials are 36 percent of the A-share Shanghai Composite Index, the index he's referencing. Small caps are the most overvalued; the ChiNext has a P/E ratio of 78.

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    2. Thanks for that information!

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