China A-shares

Key Points:
The China A-shares market can present investors with a unique investment opportunity, as it differs in several aspects from the H-shares and red chips market, a market comprised of Hong Kong-listed Chinese companies. In particular, its sector weightings differ significantly
The valuation of the CSI300 index (a proxy for the China A-shares market) has reached an extremely attractive level
The market will give investors exposure to China’s economic growth story.The latest shift towards accommodative policy in both monetary and fiscal policies will set the Chinese equity markets for a rally, keeping a three-year investment horizon in mind .
The Chinese equity market is one favoured single-country equity market, keeping a three-year investment horizon in mind.
Use the Hang Seng Mainland 100 (HSML 100) index as a benchmark for the Chinese equity market. This benchmark comprises of both H-Shares and Red Chips, which are Hong Kong-listed Chinese companies. While these companies give exposure to the Chinese economic fundamentals, A-shares is a different asset class altogether, exhibiting some different characteristics and opportunities. In this article, we will look at the investment opportunities that lie in the China A-Shares market.

WHAT IS UNIQUE ABOUT THE A-SHARES MARKET?
The fundamental difference between the A-shares and H-shares or red chips market is the opportunities that exist to invest in them. A-shares stocks are only listed on the Shanghai and Shenzhen Stock Exchanges whereas H-shares stocks are listed in the Hong Kong Stock Exchange.

Due to regulatory restrictions in mainland China, foreign investors cannot freely invest in the A-shares market. There are currently only three types of investors who are qualified to invest in this market: Chinese citizens or companies, investors with a Qualified Foreign Institutional Investors ("QFII") status or investors with a Renminbi Qualified Foreign Institutional Investors ("RQFII") status.

Using the China Securities Index 300 (CSI300) index as proxy for the China A-Shares market.

Table 1: Summary of Differentiating Characteristics
A-Shares H-Shares Red Chips
Benchmark Index CSI300 Index HSML100 Index
Exchange Shanghai /Shenzhen Hong Kong Stock
Currency RMB HKD
Incorporated Mainland China Outside of Mainland China

Apart from being more restrictive, the A-shares market presents a whole different opportunity. First of all, stocks are denominated in its local currency (yuan) which means that investors will be exposed to currency movements, which is beneficial if you are expecting an appreciation of the yuan. Secondly, although some companies have dual listings in Hong Kong, the A-shares universe is much more fruitful and broad, comprising of over 2,000 stocks.

Finally, the sector allocation in the A-Shares market, as measured by the CSI300 index, differs significantly from that of the HSML100 Index. As we can see from Chart 1, the HSML100 index is heavily weighted in the financials, energy and telecommunication services sectors. On the other hand, the CSI300 index has a significantly larger weighting towards industrials and materials; this weighting reflects the Chinese economy’s actual GDP composition more accurately. Furthermore, we can also note that the CSI300 Index is more weighted towards the consumer sector, with consumer discretionary making up 8.1% of the index, as opposed to 5.0% for the HSML100 index. This means that A-shares investors will have a greater exposure to China’s domestic consumption story, which we expect will become increasingly important to the Chinese economy in the coming years.

CHART 1: SECTOR ALLOCATION OF THE A-SHARES AND H-SHARES/RED CHIPS MARKET



RECENT DEVELOPMENTS
As mentioned earlier, there are heavy restrictions in investing into the China A-Shares market. There will be some time before investors can freely invest directly into Chinese equity markets, but in the recent years and even months, we have seen some major steps made towards liberalising the Chinese currency as well as the equity markets.

QFII
One of the ways to invest in Chinese equities is via obtaining a QFII quota. The QFII quota was introduced in 2002 and since then 117 institutions have successfully received a license and quota. Up until 20 January 2012, US$22.2 billion worth of investment quota has been approved. However, the quotas under the QFII program are currently capped at US$30 billion.

Despite the fact that there are still some major obstacles, further efforts to liberalise the capital markets were seen by the introduction and approval of the first batch of RQFII quotas.

RQFII
RQFII is another way to invest in Chinese equities. The significant batch of RQFII quotas approved since end-2011 is a sign that China has intent to open up its capital markets further to foreign investors. 21 institutions and 20 billion yuan worth of RQFII quotas have been approved since end-2011. However, not only does the RQFII differ from the QFII program in its currency (RQFII uses Renminbi as opposed to US dollars), there is also a restriction of up to 20% that can be invested in equities using the RQFII quota, unlike the QFII quota. Nonetheless, we can observe the move as a signal that China will gradually liberalise its capital markets and liquidity for foreign investors will improve over time.

SEIZE THE OPPORTUNITY WHILE VALUATIONS REMAIN ATTRACTIVE!

Investing in the A-Shares market will expose investors to the same macroeconomic fundamentals of the Chinese economy as the H-Shares or Red Chips will. As we outlined in the article, Prepare for a Chinese Rally, we expect that resilient economic growth and a shift towards accommodative policy in both monetary and fiscal policies will set the Chinese equity markets for a rally, keeping a three-year investment horizon in mind. These two points are just as applicable to investing in the A-shares market.

H-Shares/Red Chips

The one fundamental difference important for investors is the market’s valuations. The HSML100 index is also trading at an extremely attractive level after its forward 12-month PE dipped below the 10.2X level, which is one standard deviation below its historical mean. Since the start of the year, the Chinese equity market has already embarked on a rally; however, valuations are still attractive as the HSML100 index’s 12-month forward PE was at 9.8X (as of end-February 2012), a 3.6% discount from the 10.2X level.


A-Shares

Some investors may already be aware that the A-shares market has historically been at a significant premium to the H-shares or red chips market. One of the reasons explaining this premium is due to the dominance of retail investors in the A-shares market, whereas other markets are dominated by institutional investors. The investment restrictions which bar foreign investors from participating, firstly limits the possible investors into the A-shares market. Secondly, there is a limited range of investment options open to people in mainland China, which is what pushes retail investors towards equity markets in order to park their money, pushing up the valuations of A-shares stocks.

As we can see in Chart 3, at its peak in 2007, the CSI300 index’s forward PE was trading at a 74% premium to the HSML100 index’s. However, the good news is that, in the recent two years, the two indices’ valuations have been converging. CSI300 index’s valuation is currently trading at a 9% premium (as of end-February 2012) to the HSML100 index’s, a significant decline from the historical average of 28%.


The tightening gap between the two indices’ valuations indicates cheapness of the A-shares market. Since the reasons which push A-share valuations at a premium will persist in the market as long as the market remains restricted, we should continue to see the market priced at a premium. Furthermore, in the past, when the premium between the two indices contract to such levels, the CSI300 index market has seen a steeper subsequent upside (compared to the HSML100 index).

CHART 2: A-SHARES TO H-SHARES AND RED CHIPS PREMIUM


On the other hand, as we can see in Chart 3, using a similar analysis as we did in evaluating HSML100 index’s valuations, we can see that the CSI300 index’s forward 12-month PE has dropped below its historical mean since 2010. Since then, it pierced through the 12.2X level towards the end of 2011, which is one standard deviation below its historical mean. Even though the index has rebounded along with other equity markets around the globe, valuations are still trading at a 12.5% discount from the 12.2X level (as of end-February 2012).

CHART 3: ESTIMATED MARKET VALUATION OF THE CHINA SECURITIES INDEX 300 (CSI300) INDEX


Apart from looking at the market’s PE ratio, it is also appropriate to look at the market’s estimated Price-to-Book ratio (PB) and estimated Return on Equity (ROE). Since the CSI300 index is composed largely of capital-intensive activities and financial institutions, such as companies in the materials and industrials sectors, PB is a suitable measure for its market valuation.

Intuitively, since PB is a valuation measure and ROE is a profitability measure, these two measures should be moving together since you would be willing to pay more for a more profitable company. If we look at Chart 4 however, we can observe that the PB of the CSI300 index has been steadily declining since the end of 2009. But this does not seem to merely represent a retreat from previously overvalued companies, because at the same time we saw ROE increase rapidly. Up until end-February 2012, the estimated ROE reached 19.4%, inching closer to the highest levels seen in 2008. The divergence in PB and ROE is a rare phenomenon which further indicates the attractiveness in the A-shares market valuation.

CHART 4: COMPARING PROFITABILITY WITH VALUATIONS OF THE A-SHARES MARKET



In conclusion, not only will the China A-shares market be supported by economic growth fundamentals and a shift towards accommodative policy, its valuation has also reached extremely attractive levels, if we consider PE, PB and ROE measures. According to our estimates, as of end-February 2012, the estimated PE for the CSI300 Index is at 10.3X and 8.3X for 2012 and 2013 respectively, significantly lower than its fair value of 15X.

RenRen below IPO offer price.

"RenRen" in mandarin means every people.
Renren Inc,is listed under Technology sector in the American Depository. It was an Internet Information Providers.
Renren Inc. operates a social networking Internet platform in China. Its platform enables users to connect and communicate with each other; share information and user-generated content; play online games; listen to music; and shop for deals. Other social commerce site; Nuomi.com, a social Q&A Website focused on the auto industry; Game.renren.com, an online games center;and Jingwei.com, a professional and business SNS Website.
It also develops and operates Web-based games.
The company was formerly known as Oak Pacific Interactive and changed its name to Renren Inc. in December 2010. The company was founded in 2005 registered as xionei.com and is headquartered at Jing An Center in Beijing, China.
The company's founder and chairman CEO is Mr. Joseph Chen ,aged 41.
On the 4th of May 2011,the company announced that it has priced its initial public offering of 53,100,000 American depositary shares ("ADSs"), each representing three Class A ordinary shares of the Company, at US$14.00 per ADS, with a total offering size of US$743.4 million, assuming no exercise of the over-allotment option by the underwriters. The ADSs will begin trading on the New York Stock Exchange on May 4, 2011 under the symbol "RENN."
Upon listing its shares price surged 28.6 percent in their debut.
Renren's offering comes amid a grab for hot social media companies, including Twitter, Facebook, Groupon and Zynga, which are propped up by multibillion-dollar valuations of their shares trading on the secondary markets.
High valuations for other social networking companies, combined with the fact China is the world's biggest Internet market, were expected to help Renren attract investors.
Investors in Renren seemed to brush aside recent concerns dogging the company, including questions about its internal financial controls, the resignation of its audit committee chairman and the tight control and censorship of the Chinese government. If Renren fails to comply with Chinese government Internet regulations, its websites could be shut down, according to the risk factors section of its prospectus.
According to the revised filing, Renren's monthly unique log-in user base grew by only 5 million, or 19 percent, in the first quarter of 2011 -- not the 7 million, or 29 percent, it previously reported.Could this be the reason for the dismal performance of its share prices due to misleading reporting for the sake of jacking up the IPO price?
Renren had net revenue of $76.5 million in 2010 and about 117 million activated users as of March 31, 2011. It had about 31 million monthly unique log-in users in March 2011.
Last Friday's closing price is a bearish spinning doji.The bears are in full control of this counter and any sign of retracement will be met with hammering.
For the month of June,it's already a confirm bear so no point buying at the moment.Maybe towards the end of the month when the whole scenerio stabilizes,one can move in.
Better be safe than be sorry.Sometimes when it's cheap we tend to buy not being aware of the timing,but when the price goes down further we might got panic and will liquidate the moment there's slight premium from our cost or maybe cut-loss.There is no difference whether one buy at a lower or higher price if the timing is right.
Triple Witching Day of the Dow on 17/6/11.
Economic Calender:Consumer Sentiment,Leading Indicators.
Asian markets Index Future Expiry:9 market days to go.

9:30am:--Very bullish 80.0 points opening gap up.
10:30am:--Hourly high,bearish pullback with shooting stars.
11:30am:--Bearish Harami.
12:30noon:--Triple witching stars near the morning session MAV support line.
1:30pm:--Pullback to near days low,a morning star in the offing.
2:30pm:--MAV resistance line breakout.A sudden unhealthy spike touch the bull pivot resistance to be met with a bearish engulfing.
3:30pm:--A double intraday support at the bearish pivot support line.
4:00pm:--A bearish techincal weekend pullback.
A disastrous Triple Witching month for the Dow Index.I presume this must be the half yearly window-dressing to spruce up new positions for the next onslaught.
There were two bullish inverted hammer short covering Wednesday's giant pullback.
Moody's again warned that it may downgrade its ratings on France's three largest banks because of their exposure to the Greek economy.Hopefully the market will go against the mood.
Another event which ought to be noted is during mid-September when the presidential bankers held their annual retreat at Jacksonville.From past records,a week before this meeting a market crash is imminent contrary to the anniversary of the October crash.

China and Myanmar junta dam project.

The Shweli dam is China's first build-operate-transfer hydropower project with Myanmar's military government, which crushed the biggest pro-democracy protests in nearly 20 years.
Under the agreement with Myanmar's Electric Power Ministry, China's Yunnan Joint Power Development Co are to operate the power station for 40 years.
Chinese companies would also receive 80 percent of the revenue generated.

Shweli 1, being built in the ethnic Palaung village of Man Tat near the Chinese border, is the first of a string of hydro projects under construction largely for the export of power to China.

The report cited documents from the Electric Power Ministry showing that electricity from the project would also be transmitted to military factories and mining operations within Myanmar.
China, one of Myanmar's few allies and major trading partners, has been under pressure to use its influence to convince the junta to negotiate with pro-democracy activists.
Beijing has called for restraint, but opposes U.N. sanctions against Myanmar and is loath to compromise its interests there, which aside from power generation include timber and natural gas.
Suspension bridge over the Shweli River built by 209th Engineers.

Special Force Burma.

Tracking the Dow on Friday,06/08/10.(10 market days to Index/options Expiry)

3 market days to start of Moslem Ramadhan,fasting month.
9:30am:--A bearish 50.0 points gap down. Nonfarm payrolls for July fell 131,000, which is far worse than the decline of 87,000 that had been expected.

10:30am:--A technical rebound to fill the opening gap but managed half candle's body only,with bearish hammer.

11:30am:--The morning session bottom was established.The unemployment rate remained at 9.5% .

12:30noon:--Hoovering near morning session lower,double bottom with indecision doji spin.

1:30pm:--Bearish inverted hammer.Stocks remain under stiff pressure.

2:30pm:--A technical rebound is now at the bear resistance pivot.Usually at this time there'll be some Federal news.Retail investors remain cautious about getting back into the stock market.

3:30pm:--The MAV resistance line being pierced through.Bullish harami.

4:00pm:--A bullish engulfing closing.Trade on Friday was mostly dictated by the government's official monthly jobs report.

It's the usual gimmicks of wiping off the weeks gain taking advantange of the negative economic news mostly occuring during the first week of the month.

Despite Friday's negative closing,the Dow is holding on at the bullish zone,quite near to penetrating the bull pivot resistance line.

There'll be another attempt to find a new index high for the month.

Friday's candle's long lower shadow is also a bit of a concern.