Tourist Stocks Drive Longest Rally Since April: China Overnight
Chinese equities in New York gained for a third week, the longest rally in the benchmark index (SHCOMP) since April, on speculation data due this week will signal growth in the world’s second-largest economy is reviving.
The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese companies in the U.S. climbed 0.7 percent to 93.75 last week. Guangshen Railway Co. (GSH) surged the most in a year after the government bolstered rail investment. Home Inns & Hotels Management Inc. (HMIN) and China Southern Airlines Co. (ZNH) jumped as data showed tourism during the Golden Week holiday expanded. Casino operator Melco Crown Entertainment Ltd. (MPEL) posted the biggest premium over its Hong Kong stock in two weeks.
While economists surveyed by Bloomberg predict data due on Oct. 18 will show growth in the three months to September slowed for a seventh quarter, policy makers are more positive. The economy may expand 7.8 percent this year, People’s Bank of China Deputy Governor Yi Gang said in Tokyo on Oct. 12, compared with the government target of 7.5 percent. Prospects the nation’s new leaders, to be nominated on Nov. 8, will act to stimulate the economy is also fueling stock gains, according to Auerbach Grayson & Co.
“The word on the street about China’s September data is that they might be stronger than expected,” Erik Lam, director of Asian equity sales at Auerbach Grayson in New York, said by phone Oct. 12. “All the expectations are so low and that if the numbers get beat we’ll see a nice rally in the stocks. People are thinking the incoming leadership team will demonstrate clear commitment to reform and focus on quality of growth versus quantity.”
China ETF Surges
The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., rose 2.9 percent last week to a five-month high of $36.38. The Standard & Poor’s 500 Index (SPX) dropped 2.2 percent during the period to 1,428.59, the biggest loss in four months.
China’s economy probably expanded 7.4 percent in the three months ended Sept. 30, according to the median estimate of 37 analysts surveyed by Bloomberg. Reports on inflation and industrial production in September as well as property prices are also scheduled to be issued this week.
The AlphaShares Chinese Volatility Index, derived from options on companies trading in Hong Kong, rose 4.6 percent last week to 18.48. It was 15 percent higher than the Chicago Board Options Exchange Volatility Index, narrowing from 23 percent a week earlier, indicating options dealers are charging a lower premium to protect against losses in Chinese companies relative to U.S. peers.
Hong Kong Jump
Stock prices may be already be anticipating positive moves in the economy, Gustavo Galindo, who helps manage $8 billion in emerging market assets at Russell Investments in New York, said by phone on Oct. 12. “China might give us some positive surprises over the next one to three quarters,” he said.
The Shanghai Composite Index (HSCEI) added 0.9 percent last week to 2,104.93. The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong surged 3.8 percent to 10,345.28, the strongest level in five months and the third straight weekly advance.
Guangshen Railway, a Shenzhen-based operator of trains in China’s Guangdong province, gained 7 percent last week to $17.34, the biggest advance since October 2011.
China plans to ramp up work on public transport infrastructure and will offer subsidies and preferential tax treatment to companies in the industry, the government said on Oct. 10 on its website. The Railways Ministry will increase spending on railroad construction to 516 billion yuan ($82 billion) this year, from 496 billion yuan reported a month ago, according to a bond prospectus released on Oct. 10.
Home Inns, the Shanghai-based operator of China’s largest budget hotel chain, posted a 4.8 percent gain last week to a seven-month high of $27.55, capping three weeks of advances.
China Southern, Asia’s biggest airline by passenger numbers, rallied 4.1 percent in a fourth weekly gain to $23.88, the longest stretch of increases for the company since July.
Tourism revenue at China’s major attractions in the eight- day national holiday that started Sept. 30 increased 25 percent from the same period a year ago to 1.77 billion yuan, the industry regulator said on its website on Oct. 7. The number of tourists during the so-called Golden Week climbed 21 percent to 34.2 million.
Chalco Share Sale
Melco Crown, a Hong Kong-based company that runs casinos in Macau, added 3 percent last week to $13.60. Melco’s American depositary receipts, each representing three underlying shares in the company, traded 2.5 percent above its Hong Kong stock, the widest premium since Sept. 28.
ADRs of Aluminum Corp. of China, the nation’s biggest maker of the light metal, gained 1.8 percent last week, a second week of advances.
The Beijing-based company got approval from China’s state- owned Assets Supervision and Administration Commission for a private share sale, according to a filing to the Hong Kong Stock Exchange on Oct. 12.
JPMorgan Chase & Co. anticipates that investment-banking fees from U.S.-listed Chinese companies will rise this year as they make more acquisitions.
Revenue from mergers advisory, acquisition financing and convertible bond underwriting for Chinese companies trading in New York may triple from last year, said Brian Gu, JPMorgan’s head of corporate finance for China. The contribution from Chinese stocks listed in the U.S. to JPMorgan investment banking revenue in China will probably more than double from where it was over the last two years, Gu said.
Short Sellers ‘Taking Advantage’
Lihua International Inc. (LIWA), a Danyang, China-based cable and wire maker, rose 1.4 percent last week to $3.67 in New York, trimming its 23 percent slump this year.
The decline in 2012 is a result of a “handful of fraudulent companies” souring sentiment toward U.S.-listed Chinese stocks, Jianhua Zhu, the chairman and chief executive officer, said in an e-mailed response to questions Oct. 12. Short sellers, people that bet on stock declines, “taking advantage” of that situation is also overshadowing Lihua’s “strong fundamentals,” he said.
Short sellers such as Muddy Waters LLC have alleged that Chinese U.S.-listed companies including Focus Media Holding Ltd. (FMCN) and New Oriental Education & Technology Group (EDU) Inc. have misled the market about their businesses.
Should Buy Shares
Lihua plans to use cash “conservatively and focus on our growth needs,” Chairman Zhu said. The company has a market capitalization of $110 million and had $125 million of cash and near cash items on its balance sheet at the end of the second quarter, data compiled by Bloomberg show.
Lihua should use its cash to buy back shares and pay dividends, Alex Orozco, a research analyst at Tocqueville Asset Management LP in New York, said by phone. Tocqueville held about 2.5 percent of Lihua at the end of the second quarter, he said.
Zhu declined to comment on the possibility of dividend payouts or a share sale.
New Oriental filed an annual report for its 2012 fiscal year ended May 31 to the U.S. securities regulator on Oct. 12 after markets closed.
The company climbed 2.5 percent last week to $17.14, extending a three-week rally. The stock reached $17.95 on Oct. 11, the highest level since July.
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