In­vestors chase com­mod­ity stocks

Small tech shares out of fa­vor due to fear of tighter reg­u­la­tion, high PE ra­tio and hopes of rise in IPOs

China Daily (Hong Kong) - - BUSINESS - By MENG FANBIN meng­fan­bin@chi­

A rise in IPOs, ex­pec­ta­tions of stricter pol­icy and high PE ra­tio are likely to hurt stocks of small tech­nol­ogy com­pa­nies as both re­tail and in­sti­tu­tional in­vestors in the eq­uity mar­ket are in­creas­ingly fa­vor­ing shares in com­mod­ity com­pa­nies.

Shares in small com­pa­nies in IT, biotech and new ma­te­rial sec­tors that have been in a tail­spin of late, are ex­pected to slump fur­ther, while coal, steel and non­fer­rous metal stocks are tipped to coast on the re­spec­tive com­pa­nies’ bright­en­ing busi­ness per­for­mance.

“In­vestors are chas­ing stocks of listed com­pa­nies with low val­u­a­tions and good per­for­mance, and steer­ing clear of stocks hyped up on con­cepts like ‘tech­nol­ogy-is-fu­ture’,” said Zhan Jian­wen, se­nior in­vest­ment man­ager at China In­vest­ment Se­cu­ri­ties.

The last two years have seen a melt­down of the ChiNext Startup In­dex, which com­prises many small tech stocks. On Fri­day, the in­dex closed at 1734.07, down 57 per­cent from its record high of 4,037.96 on June 4, 2015, when the de­scent from the peak started.

Since June 2015, shares of 230 com­pa­nies on the ChiNext fell more than 50 per­cent; 43 of them tum­bled more than 70 per­cent; and 10, in­clud­ing well-known Dadong Xin­tai Elec­tric and Qtone Ed­u­ca­tion, crashed more than 80 per­cent.

Mar­ket-peo­ple at­tribute some of that melt­down to fears that fi­nan­cial reg­u­la­tions are likely to get stricter. A po­ten­tial crack­down on ac­count­ing frauds and other il­le­gal prac­tices by listed small tech­nol­ogy com­pa­nies is be­lieved to be im­mi­nent.

In ad­di­tion, ex­pec­ta­tions of an IPO flood, and re­stric­tions to pre­empt shad­owy merg­ers and ac­qui­si­tions or M&A aimed at boost­ing weak shares, have hurt the ChiNext In­dex, said Fu Jing­tao, a mar­ket strate­gist with Shen­wan Hongyuan Se­cu­ri­ties.

Reg­u­la­tors have been em­pha­siz­ing that fi­nan­cial mar­kets should serve the real econ­omy, hint­ing at the pos­si­bil­ity that IPOs will con­tinue and may ac­cel­er­ate.

There were 260 IPOs in Shang­hai and Shen­zhen from Jan­uary to July 14, more than the an­nual av­er­age of the last five years. In all, they raised 130.63 bil­lion yuan ($19.38 bil­lion), al­most equalling the pro­ceeds of last year.

Since 2013, the Chi­nese gov­ern­ment has en­cour­aged the de­vel­op­ment of some emerg­ing sec­tors. In­vestors thus came to fancy stocks of com­pa­nies en­gaged in fields like on­line ed­u­ca­tion, on­line lot­tery and man­u­fac­ture of ro­bots.

In the first half of 2015, such stocks surged. “How­ever, there are now more stocks with both rea­son­able val­u­a­tions and good per­for­mance for the in­vestors to choose, mak­ing the ChiNext com­pa­nies with steep val­u­a­tions not a good choice,” said Fu.

The fall in M&A’s of ChiNext com­pa­nies meant that in­vestors are no longer ex­pect- ing M&A-re­lated high growth, more so be­cause in sev­eral cases, the ac­quired com­pa­nies were sub­se­quently found to be rid­dled with bad per­for­mance, Fu said.

In the Jan­uary-May pe­riod, there were an av­er­age 10 M&A’s per month, a far cry from the record 50 per month. Fu fore­cast that M&A’s will de­crease con­tin­u­ously un­til 2020.

“The ChiNext of to­day, how­ever, should not be seen as a sign of weak­ness across the emerg­ing sec­tors. Some of China’s best tech com­pa­nies are listed over­seas,” Fu said.

The price-earn­ings ra­tio of ChiNext stocks had peaked around 150 in 2015, ex­ert­ing a great deal of pres­sure on the in­dex, said Chen Ji­ahe, chief an­a­lyst of Cinda Se­cu­ri­ties.

That pres­sure has pushed the av­er­age price mul­ti­ple to around 40 now. It will con­tinue to find its bot­tom in the com­ing months, Chen said.

In con­trast, coal, steel and non­fer­rous metal stocks have surged for the past sev­eral months, gain­ing mo­men­tum since June.

The 300 Ma­te­rial In­dex rose al­most 20 per­cent to 2454.73 on July 21 from 2047.95 on June 2. The in­dex be­gan its as­cent early last year, and reached 1642.56 on Feb 5, 2016.

The com­mod­ity stocks are hot picks for their low PE ra­tio and com­pa­nies’ good per­for­mance, said Chen. “The higher-thanex­pected 6.9 per­cent GDP growth in the first half of this year and the cen­tral gov­ern­ment’s firm sup­ply-side re­forms like over­ca­pac­ity re­duc­tion have boosted in­vestor con­fi­dence.”

With prices of coal and me­tals ris­ing, prof­its of listed com­pa­nies in those sec­tors have also kept pace, giv­ing an im­pe­tus to their share price rise.

For in­stance, net profit of Ling Yuan Iron & Steel Group in­creased 608 per­cent yearon-year in the first half of the year, ac­cord­ing to its in­terim re­port pub­lished on July 22. Its stock, which bot­tomed out in 2016 at 2.4 yuan, closed at 3.6 yuan in Shang­hai on Fri­day.

How­ever, Shen­wan’s Fu and Cinda’s Chen both think that com­mod­ity stocks have lim­ited up­side po­ten­tial as the con­trib­u­tory fac­tors are al­ready priced in.

“There has been no hot spot re­cently for the mar­ket to chase ex­cept the com­mod­ity stocks,” Chen said, adding that China is al­ready past the pe­riod of re­ly­ing on the de­vel­op­ment of heavy in­dus­try.

So, un­less there are some pos­i­tives like higher ex­ports, fur­ther eco­nomic growth would be dif­fi­cult, Fu said.

The ChiNext of to­day ... should not be seen as a sign of weak­ness across the emerg­ing sec­tors.” Fu Jing­tao, a mar­ket strate­gist with Shen­wan Hongyuan Se­cu­ri­ties


A heavy-duty lorry re­ceives coal load at a yard in Huaibei, An­hui prov­ince. Prices of coal and me­tals have risen this year, boost­ing prof­its and shares of listed com­pa­nies in the sec­tors con­cerned.

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