‘Shanghai’ in Name Adds $45 Billion in Value Amid Bubble Concern

‘Shanghai’ in Name Adds $45 Billion in Value Amid Bubble Concern

Zhang Guangdi has watched the market value of his Shanghai International Port Group Co. (600018) shares jump 130 percent since Aug. 22, when China’s commerce ministry said the government approved a free-trade zone in Shanghai. The 67-year-old retiree says he’ll probably sell the 2,935 yuan ($480) stake when the zone, part of Premier Li Keqiang’s plan to liberalize yuan trading and relax government regulation, opens at the end of this month. The port operator is valued at 25 times profit, a 121 percent premium versus the Shanghai Composite Index (SHCOMP), according to data compiled by Bloomberg.“The stock isn’t cheap,” Zhang said as he monitored price moves with about 50 other traders at a Shanghai Securities Co. outlet in the city’s financial district on Sept. 12.

Shares with the word Shanghai in their names, including those linked to the free-trade zone, led gains in Chinese equities since Aug. 22 amid record volumes. The companies have added $45 billion of market value, more than Vietnam’s entire stock market, in a 27 percent rally that’s almost five times bigger than the 5.7 percent gain for the benchmark index. Shanghai Dragon Corp. (600630), a maker of underwear and suits, and Shanghai Haibo Co., a taxi company, jumped at least 28 percent.

While Barclays Plc predicts the free-trade zone will help turn Shanghai into a global hub for finance and shipping, Bank Julius Baer & Co. says the rally is unjustified because the government hasn’t announced details and any boost to profits may take years to materialize. The surge spurred at least five companies, including Shanghai Port and Shanghai Zhenhua Heavy Industries Co. (900947), to tell the exchange they had no explanation for the gains.

Bubble Warning

Andy Xie, the former World Bank economist who warned of a bubble in Chinese stocks in 2007 before the Shanghai Composite plunged a record 65 percent the following year, says the rally in free-trade stocks is another speculative mania.

“These concept stocks are of course a bubble,” Xie, one of the 50 most influential people in global finance according to this year’s ranking by Bloomberg Markets magazine, said in a phone interview from Hong Kong on Sept. 12. “The free-trade zone will take a long time to develop and earnings will show only years down the road.”

Gains in companies linked to the free-trade zone have fueled the benchmark index’s rebound from a four-year low in June as economic data showed better-than-anticipated growth in exports, industrial production and retail sales. The measure has dropped 29 percent during the past four years, erasing about $160 billion of market value, as the nation’s economic expansion slowed to 7.5 percent from as much as 11.9 percent in the first quarter of 2010.

Opening Ceremony

Premier Li is trying to transform China, where per-capita incomes are 88 percent lower than in the U.S., into a services-led economy from an exporter reliant on a managed currency. Shanghai is a “pilot area” for China’s economic reforms, Li said during a research tour of the city in March, according to state-run China.org.cn.

An opening ceremony for the 29-square kilometer (18-square mile) free-trade area will probably take place at the end of this month and will be officiated by Li, two people with knowledge of the matter said last week. The zone is located in the eastern side of the Pudong New Area along the Yangtze River.

While a draft plan seen by Bloomberg News shows the free-trade zone may liberalize 19 industries from banking to shipping and allow freer convertibility of the yuan, the government hasn’t published details of what the area will offer or how long it may take for the policies to be implemented.

Double Happiness

“We are not recommending stocks on the free-trade zone because we are not sure what kind of benefits they will get,” Kelvin Wong, an analyst at Bank Julius Baer, which manages about $325 billion, said by phone from Hong Kong on Sept. 11.

While equities linked to the free-trade zone may face a “correction,” they will probably rally for several years before large investors dump the shares, said Zhu Yaomin, a 57-year-old retiree who’s been investing in shares for two decades.

“I am not worried that these stocks have bubbles,” said Zhu, puffing on a Double Happiness-brand cigarette and wearing plastic slippers in a room reserved for investors with at least 2 million yuan of assets at an outlet of Changjiang Securities Co. in eastern Shanghai. “It’s not exaggerating to say that such an investment theme can carry on for, say, three years.”

Biggest Gains

Shanghai’s free-trade zone may compete with similar areas in Tianjin, a port city southeast of Beijing, and China’s southern Guangdong province, which is studying a plan to set up a regional free-trade zone with neighboring Hong Kong and Macau.

“At the end of the day, it’s more like the left hand giving to the right hand,” Arthur Kwong, the head of Asia Pacific equities at BNP Paribas Investment Partners, which manages about $658 billion, said in a Sept. 11 phone interview. “There’s no new business created for the country, so it’s grabbing business from neighboring cities.”

The best stocks since Aug. 22 have been companies linked to the free-trade zone, making up 19 of the top 25 performers on the Shanghai Composite, according to data compiled by Bloomberg. Twelve of those companies had record trading volumes during the past 10 days.

Shanghai Port was the biggest contributor to gains in the benchmark index since Aug. 22, even as the company said in a Sept. 5 statement it can’t quantify the impact of the free-trade zone on earnings. The rally lifted its market value to $24.2 billion, almost twice that of Dubai-based DP World Ltd., which operates more than 65 terminals in six continents. Carol Gu, a press official at the Shanghai port, declined to comment.

Volumes Surge

Shanghai Pudong Development Bank Co. (600000) has risen 28 percent since Aug. 22, providing the second-largest boost to the Shanghai measure. About $2.2 billion of the shares changed hands on Sept. 10, the most on record and about 10 times the daily average for the past year. Shen Si, Shanghai Pudong Bank’s board secretary, didn’t answer four office and mobile calls.

Shanghai Dragon has surged 28 percent, sending its shares to 71 times reported earnings, according to data compiled by Bloomberg. Shanghai Haibo gained 54 percent. Both companies declined to comment.

Shanghai Waigaoqiao Free Trade Zone Development Co., which said in an exchange statement Aug. 29 that it will build distribution centers in the Shanghai area, surged by the 10 percent daily limit for 12 straight days after a trading suspension ended on Aug. 30.

Expo Losses

The city’s companies have rallied before on local investment developments. Tourism and transport-related shares surged in the months before Shanghai’s 2010 World Expo on speculation a flood of tourists would boost earnings. The stocks peaked two weeks before the six-month trade exhibition began.

Shanghai Jinjiang International Hotels Development Co. tumbled 42 percent in about 10 weeks after reaching a record in April 2010. Shanghai Haibo plunged 46 percent during the same period after advancing 58 percent during the previous six months.

The leaders of this year’s rally have already slipped from their peaks. Shanghai Port dropped 15 percent from its Sept. 11 high, including a 10 percent plunge yesterday. Shanghai Pudong Bank retreated 12 percent in the past three days.

Chinese investors “tend to be short-term oriented and overreact to good news,” Oliver Rui, a professor of finance and accounting at China Europe International Business School in Shanghai, said by phone on Sept. 12. “They are buying anything with the name Shanghai in front of it and remotely connected with the free-trade zone. This rally has gone too far.”

To contact the Bloomberg News staff on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net; Richard Frost in Hong Kong at rfrost4@bloomberg.net; Allen Wan in Shanghai at awan3@bloomberg.net; Weiyi Lim in Singapore at wlim26@bloomberg.net

About bambooinnovator
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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