China's Yuan Stocks to Beat H Shares This Quarter on Liquidity, UBS Says

China’s yuan-denominated stocks may outperform H shares listed in Hong Kong for the next three months as liquidity and earnings improve, UBS AG said.

The price-to-earnings multiple for A shares, as the yuan stocks are known, are 1.2 standard deviation below the 10-year average, while the two-year compound earnings growth rate is “among the highest in history,” UBS’s Hong Kong-based strategist John Tang wrote in a report. He also said earnings downgrades will be “limited” in the second half.

China’s domestic stock markets are the worst performers in Asia this year, with the CSI 300 Index tumbling 29 percent amid government efforts to curb property speculation and cool lending. The Hang Seng China Enterprises Index, a measure of 40 H shares, has lost 13 percent in the same period. The CSI 300 gauge, tracking A shares traded Shanghai and Shenzhen, rose 1.3 percent as of 10:22 a.m. local time.

“A shares could be a better play than H shares in a decelerating second half,” Tang wrote, citing the outlook for liquidity given the low level of non-tradable shares unlocking, “less tight” bank lending, increasing regulatory support and improved clarity on banks’ refinancing.

The CSI 300 is valued at 14 times this year’s earnings, down from a high of 22 times in January, according to data tracked by Bloomberg. The Hang Seng China Enterprises is trading at 11.7 times, compared with a high of 16 times at the start of the year.

Pacific Sun Investment Management Ltd. and GF Securities Co. are less optimistic, saying further declines may be in store for Chinese stocks.


Credit Suisse Group AG also said Chinese stocks will be “range-bound” because a shift to increased reliance on consumption to drive the nation’s economic growth will benefit companies that have a “very marginal index weighting,” according to a report by analysts Vincent Chan and Peggy Chan.

Tang last month advised investors to return to Chinese stocks traded in the domestic and Hong Kong markets because of their valuations and the outlook for growth. The brokerage favors bank and technology shares, Tang said in a Bloomberg Television interview on June 14.

Around 54 percent of A shares’ first-half profit guidance indicate year-on-year net profit growth of more than 50 percent, while another 22 percent signal earnings growth of between 30 percent and 50 percent, the strategist said in the report today.

Materials, capital-goods and technology companies have provided “especially strong” profit forecasts while developers are the weakest, he said.

To contact the reporter on this story: Shiyin Chen in Singapore at; Richard Frost at

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