FOREIGN FUNDS, including notable powerhouses BlackRock and Morgan Stanley, are turning their attention to bargain basement prices on the Hong Kong bourse.
If intensified, this could reinvigorate the moribund Hang Seng Index and pump new capital into the market, said a Chinese language piece in the Shanghai Securities Journal.
It is little surprise that the big players are turning their attention to the Special Administrative Region’s securities market as shares on the SAR bourse’s benchmark Hang Seng Index have fallen from nearly 25,000 points in November of last year to 18,824 as of market close on Wednesday.
This represents a fall of nearly 33% for the stated period.
However, the foreign treasure-hunters are apparently focusing most of their attention on the 40 component stocks on the Hang Seng China Enterprises Index (HSCEI), often referred to as the "H-Share Index."
Launched in 1994, it tracks the performance of China-based firms listed in Hong Kong and has fallen a notably more precipitous 39.1% over the past 10 months.
The HSCEI is a freefloat capitalization-weighted index comprised of H-Shares listed on the Hong Kong Stock Exchange and included in the Hang Seng Mainland Composite Index.
It is nothing new that major funds are scouring the world for bargains, Shanghai Securities Journal said.
But the fact that such notable names are focusing on Hong Kong – with such a wealth of investment options lagging at or near 52-week low territories – could inject a breath of vitality into the Hong Kong Stock Exchange.
The fact that the HSCEI – which also has firms cross-listed on the benchmark Hang Seng Index – fell over 20% since August of this year is making its H-shares even more appealing to potential investors.
To put things in even clearer perspective, the Hang Seng Index over this period fell by 15%, and 28 of the 40 HSCEI component shares are currently stuck at historic lows with many among them being banks.
Data obtained from the Hong Kong Stock Exchange showed that last week a small number of overseas investment institutions including Morgan Stanley and BlackRock began buying up an increasing volume of low-priced shares in Hong Kong, including bargain valuations in the machinery and pharmaceutical sectors as well as some counters with strong growth potential in telecommunications and energy-saving environmental technology.
The newspaper said that two H-shares that have been of particular interest of late have been construction equipment maker Changsha Zoomlion (HK: 1157; SZA: 000157) as well as Shanghai Pharmaceuticals (HK: 2607; SHA: 601607).
Zoomlion is obviously a direct beneficiary of government-supported infrastructure development in the PRC.
Meanwhile, Shanghai Pharma has much to gain from Beijing’s ongoing desire to boost self-developed drugs and upgrade the country’s health care system.
Zoomlion’s H-shares in April hit historic highs, but began a downward spiral soonafter thanks to the mass exodus of major institutional investors, Mainland China's nearly 900 bln yuan-strong Social Security Fund and other well-known global funds who all began paring down their holdings following the Japan earthquake and global market declines.
This caused the Hunan Province-based firm’s valuation to plummet from 22.95 hkd in April to just 9.64 at Wednesday close, with 101.9 bln hkd in market value evaporated in the process.
This has caused Zoomlion to be one of the biggest listed laggards in its sector this year, the newspaper said.
However, further confusing the equation was the fact that Zoomlion recently published interim results showing net profit rose a respectable 10.13% in the January-June period.
Meanwhile, the first quarter gross margin increased 3.63 percentage points year-on-year to 32.54%, improving again in the second quarter to 33.35%.
An analyst with Masterlink Securities (Hong Kong) said the main products of Zoomlion enjoy clear and robust growth prospects and the company has been improving product structure to boost profitability.
The analyst added that stronger cost controls for capacity expansion have prompted Masterlink to upgrade Zoomlion’s EPS estimates for 2011 and 2012 to 0.95 hkd and 1.23, respectively, with P/E ratios of 12 times and 9.27 times expected.
Perhaps this is what Morgan Stanley was thinking when it bought three chunks of Zoomlion’s shares totaling 12.87 mln shares in total beginning Sept. 8.
Shanghai Pharma’s shares paint a similar picture.
In May they hit historic valuation lows, but last week added 10%, with Morgan Stanley buying five tranches between Sept. 7-14 totaling 530,000 shares.
The recent announcement of the State Council’s energy conservation and emission reduction program has also attracted the attention of overseas funds to the Hong Kong exchange.
In likely related developments, Liu Yang, also known as “China’s Lady Buffett,” publicly stated last week that her fund management firm -- Atlantis Investment Management (HK) -- was bullish on the PRC’s recycled metal sector, and market data also shows that BlackRock bought 1.66 mln H shares of major power producer Shanghai Electric Group (HK: 2727; SHA: 601727) on Sept. 12.
Time will only tell if these big players are in for the long haul, or will head to greener pastures the moment they are happy with the rebounding valuations of their new holdings.
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