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China Small-Cap Stock Gains to Trail on Profit: Chart of the Day

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Feb. 21 (Bloomberg) -- China’s small-company stocks may lag behind gains of larger counterparts for the rest of 2012 after the best start in three years on slower economic and earnings growth, according to ICBC Credit Suisse Asset Management Co.

The CHART OF THE DAY shows the ratio for estimated price-to-earnings of the CSI Smallcap 500 Index and the CSI 300 Index of the biggest companies on China’s exchanges dropped to 1.39 on Jan. 27, the lowest since October 2009, according to weekly data compiled by Bloomberg. The multiple was at a record high of 2.2 in December 2010. The small-caps gauge trades at 15.3 times estimated profit, versus 10.2 for the measure of large stocks.

“Smallcaps will underperform” and valuations will fall further, said Hao Kang, a Beijing-based fund manager at ICBC Credit Suisse, a venture between the largest lender in China and Switzerland’s second-biggest bank that oversees about $8.4 billion. “High valuations and corporate governance issues will weigh on smallcaps. I don’t see many investment opportunities.”

Growth in earnings per-share for companies in the small-caps gauge may slow to 23 percent this year from 60 percent in 2011, according to analysts’ estimates compiled by Bloomberg. Li Jun, a strategist at Central China Securities Co. in Shanghai, said profit growth for smallcaps may be less than 10 percent in 2012. The rate for CSI 300 companies is likely to cool to 20 percent from 25 percent, data show. Retailer Shanghai Friendship Group Inc. has the largest market value in the small-caps gauge at 21.6 billion yuan ($3.4 billion), compared with 1.87 trillion yuan for PetroChina Co. in the CSI 300.

The CSI Smallcap 500 has rebounded 9.4 percent this year after tumbling 34 percent in 2011. The central bank last year raised interest rates and reserve requirements to combat inflation, causing a credit crunch for small companies. The CSI 300 has gained 8.3 percent in 2012 after slumping 25 percent last year. The central bank announced on Feb. 18 a reserve ratio cut for the second time in three months to boost growth.

Premier Wen Jiabao may announce a 7 percent or 7.5 percent growth target at this year’s National People’s Congress meetings that convene in March, Fan Jianping, chief economist at the government-run State Information Center said in a Feb. 16 interview. China’s gross domestic product expansion has averaged 10 percent per year in the past three decades.

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net