There are many issues surrounding the underperformance of Chinese stocks and A shares (domestic) with the FT pointing out that, “While China’s gross domestic product has quintupled since 2000, the Shanghai Composite rose just 50 per cent, barely keeping pace with inflation.” Today, the China Securities Journal reported that China’s 2493 listed companies reported a combined profit of CNY1.50 trillion in the first nine months this year, down 2.07% y/y despite total revenue up 6% y/y to CNY17.74 trillion. (MNI)
At these levels, investors may believe that Chinese stocks are cheap with the Shanghai Composite valued at 12x last year’s earnings and PE of 9.8. However, there are reasons for such low valuations. Here’s a summary list of some of the problems that need to be addressed (FT):
• Corporate profits are falling with SOE’s reporting a 10 decline in profits in first 5 months 2012.
• Domestic Chinese investors are staying away with clients opening 38% less stock trading accounts on average this year (using May data).
• Average annual portfolio turnover is 700% as speculation is dominant.
• Chinese mutual fund turnover is 300% compared to 100% in developed markets.
• Investor pool is shallow with little access by pension and insurance funds.
