Premium to S&P at May High as Outlook Brightens: China Overnight

Chinese equities climbed in New York to their highest valuation relative to U.S. stocks since May as rising retail sales and expanding industrial production signal the world’s second-largest economy is reviving.

The Bloomberg China-US Equity Index of the most-traded Chinese companies in the U.S. added 0.5 percent to a five-month high of 96.21 yesterday. China Petroleum and Chemical Corp. posted the longest rally since 2003 and PetroChina Co. climbed after Goldman Sachs Group Inc. boosted their price targets. Twelve-month non-deliverable yuan forwards weakened the most since Aug. 15 after the currency rose beyond 6.25 per dollar in Shanghai for the first time in 19 years.

Companies on the China-U.S. gauge trade at 19 times estimated earnings, the highest valuation in five months and the most expensive relative to stocks on the Standard & Poor’s 500 Index since May, data compiled by Bloomberg show. Speculation of a Chinese recovery has been driving the gains and was reinforced by data released yesterday showing industrial production rebounded last month from a three-year low in August and retail sales climbed the most in six months.

“We’re seeing a whole set of good data and people expect fourth-quarter growth to pick up,” Michael Ding, lead portfolio manager of the China Regional Fund at U.S. Global Investors, which oversees $2.2 billion of assets, said by phone from San Antonio yesterday. “This will benefit industrial raw materials and equipment companies the most.”

China ETF Gains

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., rose an eighth day for its longest stretch of gains since January 2009, adding 0.3 percent to $37.45. The S&P 500 Index slid 0.2 percent to 1,457.34 after Google Inc. reported third-quarter profit and sales that missed estimates.

China Petroleum, Asia’s largest oil refiner also known as Sinopec, rose 0.5 percent to $105.31 in New York, the highest level since May 2. Its 11-day rally was the longest since June 2003.

The 12-month price estimate of Sinopec’s American depositary receipts was lifted by Goldman by 9 percent to $121, according to a report yesterday, citing lower oil prices and attractive valuation. The bank maintained a buy recommendation on the stock.

Crude for November delivery was little changed at $92.1 a barrel on the New York Mercantile Exchange. Futures have declined 6.8 percent this year.

Gas Price Reform

PetroChina, the nation’s largest oil producer, climbed 0.7 percent on its fourth day of gains to $141.22, the highest since May 7.

The Beijing-based company is the biggest beneficiary of China’s natural gas pricing because it has the largest reserves among domestic peers, Banerjee wrote in the report. Goldman raised the ADR’s price target to $142 from $130, reiterating a neutral rating.

China’s top economic planner has indicated it may relax price controls on natural gas and fuels in the second half, PetroChina President Zhou Jiping said at a post-earnings briefing on Aug. 23.

The Chinese economy expanded 7.4 percent last quarter from a year earlier, the statistics bureau said yesterday. That matched the median projection of 43 analysts surveyed by Bloomberg. The growth pace for the first nine months was 7.7 percent, and the government has a full-year target of 7.5 percent.

‘Green Shoots’

Industrial production increased 9.2 percent last month, rebounding from a three-year low of 8.9 percent in August, and retails sales advanced the most in six months at 14.2 percent, yesterday’s data showed.

There has been increasing amount of evidence of “green shoots” from industries including transportation, commodities, exports, property, retail and manufacturing, according to a report yesterday from Ting Lu, China economist at Bank of America Corp. China’s third-quarter GDP may be a trough, although it may take another couple of quarters for growth to significantly recover.

Yanzhou Coal Mining Co., China’s fourth-largest coal miner, advanced 2.4 percent to a two-month high of $16.84. China Life, the nation’s largest insurer, gained 2.2 percent to $43.94 after posting a 5.7 percent tumble, the biggest slump in seven months, on Oct. 17. Its ADRs traded 0.2 percent below the Hong Kong stock, narrowing from a 3.4 percent discount a day earlier.

Ctrip.Com Jumps International Ltd., the nation’s largest online travel agency, surged 6.4 percent to $19.86, the highest close since May 17. The company traded at 16.8 times its estimated 12-month profit. The multiple had dropped to 10.3 on July 17, the lowest since 2005.

“The valuations in Chinese stocks are mostly still relatively low and have upside potential,” U.S. Global Investors’ Ding said. “Any further downside in corporate earnings won’t be as bad as what we saw in the first half.”

Baidu Inc., owner of China’s most-popular search engine, sank 1.5 percent to $113.18, retreating from a two-week high, after Google’s third-quarter earnings report. Qihoo 360 Technology Co., a Beijing-based software developer which started a search engine in August, dropped 2.6 percent to $21.66.

The Shanghai Composite Index jumped 1.2 percent yesterday to a one-month high of 2,131.69. The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong climbed 1.4 percent to 10,636.25, the highest level since May 4.

China’s yuan strengthened 0.07 percent to 6.2503 per dollar in Shanghai yesterday, according to the China Foreign Exchange Trade System. The rate touched 6.2446 earlier in the day, rising beyond 6.25 per dollar for the first time in 19 years. Twelve-month non-deliverable forwards dropped 0.23 percent to 6.3665, declining the most since Aug. 15.

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