Goldman Says Chinese Stocks Appeal as Valuations Bottom

Chinese stocks are becoming attractive with the decline in equity valuations and corporate profit growth poised to level out, according to Goldman Sachs Asset Management.

“We are probably at the trough of the earnings and valuation cycle,” Alina Chiew, head of Greater China equity at the New York-based bank’s asset management arm, told reporters in the city yesterday. “It’s a very interesting time to get into it.”

While the Hang Seng China Enterprises Index (HSCEI), which tracks stocks trading in Hong Kong, slumped 7 percent this year to yesterday, member company earnings rose 1.7 percent in the three months through March 29, the first uptick since June, data compiled by Bloomberg show. The Bloomberg China-US Equity Index (CH55BN) of 55 Chinese stocks in the U.S. has dropped to 12 times estimated earnings, almost 50 percent below its valuation in March 2012.

Profit growth will probably retreat to about 15 percent to 20 percent, from around 20 percent to 30 percent, Chiew said.

The Hang Seng China gauge gained 2 percent at the close today. The Shanghai Composite Index (SHCOMP) of domestic Chinese stocks added 1.6 percent.

The Shanghai gauge has lost 0.8 percent this month after the government reported economic growth slowed to 7.7 percent in the first quarter, after rising to 7.9 percent in the last three months of 2012. Quarterly expansion is down from as high as 12.4 percent in 2006, before the global financial crisis.

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The Shanghai Composite trades at nine times estimated earnings, from a valuation as high as 33 in September 2007, data compiled by Bloomberg show. Close

The Shanghai Composite trades at nine times estimated earnings, from a valuation as... Read More

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Source: TPG/Getty Images

The Shanghai Composite trades at nine times estimated earnings, from a valuation as high as 33 in September 2007, data compiled by Bloomberg show.

‘Bumpy Ride’

“The market needs to wean itself off expectations of double-digit growth out of China,” Chiew said. “Investors should adjust the fair valuation that they are willing to pay. The key to investing in China is being able to ride out the cycle over the medium term and forget the bumpy ride in between.”

Raw materials producers may be negatively affected as the government reorients China’s economy away from investment and exports and toward domestic consumption, she said.

Companies that are less dependent on economic growth for earnings including technology, media, drug, environmental protection and alternative energy stocks will outperform this year, according to Du Meng, China’s best-performing fund manager this year.

Du’s China International Emerging Momentum Fund has returned 29 percent this year, ranked No. 1 among China’s 785 mutual funds, according to data compiled by Bloomberg.

The Shanghai Composite trades at nine times estimated earnings, from a valuation as high as 33 in September 2007, data compiled by Bloomberg show. The MSCI Emerging Markets Index (MXEF) has a multiple of 10 times forward profit, and has retreated 2.1 percent in April.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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