China H-Shares to Drop 30% in 2013, Societe Generale Says

August 10, 2013 Leave a comment

China H-Shares to Drop 30% in 2013, Societe Generale Says

Chinese companies traded on the Hong Kong stock market will slide the most in five years in 2013 as an economic slowdown weighs on profits and banks curtail credit, according to Societe Generale SA.

The Hang Seng China Enterprises Index will drop to 8,000 by year-end, said Guy Stear, Hong Kong-based head of Asia research at Societe Generale. That’s 16 percent below yesterday’s close and would extend the gauge’s 2013 decline to 30 percent, the biggest tumble since 2008. China’s manufacturing will contract this year, while bad loans will keep rising until late 2014, Stear said.“Short-term cyclical declines and credit pressures are the two factors which make us negative about Chinese equities,” Stear said in an interview on Aug. 7. “When non-performing loans start to go up that’s going to be something that weighs quite seriously on the equity market.”

The H-share gauge slumped 17 percent this year through yesterday as growth slowed in the world’s second-biggest economy and the government spurred a credit crunch in June by clamping down on risky lending. China’s gross domestic product will rise 7.5 percent in 2013, which would match the government’s target and be the weakest increase since 1990, according to economists surveyed by Bloomberg.

Non-performing loans at lenders including Industrial & Commercial Bank of China Ltd. rose 20 percent to 526.5 billion yuan ($86 billion) on March 31 from a year earlier, accounting for 0.96 percent of total lending, China Banking Regulatory Commission data show.

Borrowing Costs

The People’s Bank of China injected 20 billion yuan ($3.3 billion) of liquidity this week, compared with 136 billion yuan in the five days ended Aug. 2. Reverse-repurchase agreements have been auctioned for the first time since February to alleviate a funding squeeze that saw a measure of interbank lending in June surging the most in seven years. A crackdown on illegal capital inflows and shadow banking, as well as measures to cool home prices, have contributed to increased borrowing costs.

Recent manufacturing and services data showing signs of improvement in the economy is a “temporary blip in a trend which is still unfortunately going lower,” Stear said. “It would be very difficult to believe that we’re having a cyclical economic recovery in the midst of the credit issue. I can’t think of a single case in any economy where that’s been the case.”

Manufacturing unexpectedly strengthened in July, while the services industry accelerated for the first time since March, signs of stabilization amid a two-quarter slowdown in economic growth. The Hang Seng China Enterprises Index (HSCEI) yesterday traded at 7.09 times estimated earnings, compared with 13 times for the MSCI Asia Pacific Index.

Although Stear is bearish on H-shares for the rest of 2013, he sees potential for outsized gains next year as attractive valuations draw investors back into the stocks.

“As we get into the end of this year there’s going to be great opportunity to buy,” he said. “Many investors are fairly negative about the Chinese equity market, which means that the bounce, when it comes, could be quite impressive.”

To contact the reporter on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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