Stand by Your Man-ifold: Auto, coal and power present bargains

THE SHANGHAI COMPOSITE Index, the benchmark indicator for China’s A shares, fell another 1.8% yesterday to 2,513.22, ending the holiday shortened two-day trading week 2.2% lower.

And continued corrections are a likelihood with a second half floor of 2,000 points seen for the index, a level which experts agree is a strategic one at which to enter the market.

Widespread low P/E ratios in several sectors, notably power producers, automakers and coal firms, also present a variety of bargains.

Lackluster performance by one of China’s biggest lenders proved a major drag on the bourse yesterday.

Bank of China, on of the country’s Big Four state-owned banks, saw its convertible bonds drop on the first day of trading, which raised general concerns over lenders’ overall ability to raise funds.

The bank’s six-year convertible bonds ended at 99.92, lower than their par issue price, a performance which hints at investors' low confidence in the lender’s earnings-growth prospects.

Bank of China’s shares lost 2% on the day.

Also tugging the market lower are continued worries over an imminent IPO of the only remaining unlisted lender among the Big Four – Agricultural Bank of China.

The anticipated flotation, originally estimated to raise around 30 bln usd for ABC, is expected to be the biggest listing of all time, anywhere.

Roughrider: This year has been one to forget for the benchmark Shanghai Composite

However, the mega-lender is having trouble convincing analysts that it can garner that many proceeds, and may have to settle for a downward adjustment come listing day.

This less bullish IPO outlook for one of China’s biggest banks, along with the weak response to Bank of China’s bonds, combined to prompt A-share markets to let off steam this week, which took a break from trading from Monday to Wednesday in observance of Dragon Boat Festival.

Metal shares also shed value on deteriorating commodity prices on the back of Thursday's sluggish US economic data.

Aluminum Corp of China (Chalco) lost 3.3% and Jiangxi Copper also fell by the same percentage.

Capital market performance across the de facto border in Hong Kong was more upbeat.

The Hang Seng index rose 0.7% Friday to 20,286.71, gaining 2.1% for the four-day trading week.

This marked the brightest weekly showing in more than two months.

A notable exception was Henderson Land, which lost 1.1% yesterday after the government said Thursday that it is looking into the cancellation of residential property unit sales at a luxury project.

2,000 Good Buy-in Level

Coal counters in favor again? Photo: Andrew Vanburen

Mainland press cited analysts as saying the Shanghai Composite is likely to lose more steam before making another sustained bull run.

The index could lose another 20% to around 2,000 points sometime in the second half, but most market watchers see this psychologically important level as the base threshold, and advise investors to jump in at this level for the best profitability prospects.

Several counters in the auto, power, coal and property sectors have price-to-earnings ratios between 10-15 times, and their share prices are generally expected to fall even further in the coming months.

Automakers also stand to benefit from the recent extension of a purchase subsidy program.

“The market will likely continue to shed value in the coming months, but we don’t see it breaking through the 2,000-point threshold. Therefore, accumulation in these stocks can begin at any time,” an analyst was cited as saying.

See recent Hong Kong shares report here

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