Shanghai B Shares Poised to Catch Shenzhen on Hong Kong Move

Chinese B shares, created in 1992 for foreign investors, have soared to a two-year high in Shenzhen on speculation that more companies will seek to list in Hong Kong, where companies are awarded higher valuations. Their Shanghai-traded peers, which have lagged behind, may join the bonanza.

China International Marine Containers Group Co., the world’s biggest container maker, and China Vanke Co., the nation’s largest publicly traded property developer, announced plans to move their stock listings from Shenzhen to Hong Kong, where the Hang Seng China Enterprises Index trades at 8.8 times estimated profit.

Investors seeking to get in before the next announcement have fueled a 49 percent rally the past five months in the Shenzhen B-Share Index, which tracks foreign-denominated listings in China’s second-biggest bourse, outpacing the Shanghai B-Share Index’s 28 percent surge. The Shanghai gauge is valued at 8.8 times estimated profit, compared with 12.6 for the Shenzhen index, data compiled by Bloomberg show. Shenzhen has traded at an average 3 percent premium to Shanghai the past five years.

“Shanghai’s B shares will eventually catch up with Shenzhen’s,” Li Jun, a strategist at Central China Securities Co. in Shanghai, said by phone on Feb. 4. “Shanghai’s B-share companies can move trading to Hong Kong as well.”

Higher Volume

The Shanghai B-share index gained 0.7 percent at the close today while the Shenzhen gauge rose 1.1 percent. The benchmark Shanghai Composite Index added 0.6 percent.

Some $7.3 billion of Hong Kong shares changed hands each day on average in the past year, 73 times the combined amount of B shares in Shanghai and Shenzhen, data compiled by Bloomberg show. B shares, traded in U.S. or Hong Kong dollars, were created to give companies a way to raise funds from international investors who had previously been banned from buying A shares.

“Shanghai is cheap,” Hao Hong, Bank of Communications Co.’s Hong Kong-based China strategist, wrote in a Feb. 5 e-mail. “The stocks have moved, but not as dramatically as Shenzhen.”

The Shenzhen B-share index’s valuation has jumped 27 percent since CIMC announced its stock conversion plan on Aug. 15. CIMC started trading its B shares in Hong Kong Dec. 20. The stock closed at HK$16.08 today, 66 percent higher than the B shares’ last price of HK$9.70 on Nov. 29.

Vanke Conversion

Vanke will seek shareholder and regulatory approval for its conversion, the company said in a Jan. 18 statement. Investors who choose not to swap their stock will get cash. The developer’s B-shares have jumped 22 percent since the announcement, as its yuan-denominated A shares rose 19 percent.

Livzon Pharmaceutical Group Inc., a drugmaker based in the province of Guangdong, announced its stock conversion plan on Jan. 31, boosting its B shares by 24 percent.

Gains in Shanghai’s B shares may not match Shenzhen because they are mostly companies that are state controlled, Zhang Qi, an analyst at Haitong Securities Co., said in a phone interview from the city on Jan. 31. His firm is China’s second-largest publicly traded brokerage.

Forty-seven of the 53 companies in the Shanghai B-Share Index are majority owned by state-controlled enterprises, according to shareholder data compiled by Bloomberg. More than 25 percent of government-run enterprises are unprofitable and productivity growth has trailed non-state firms by about 66 percent the past three decades, the World Bank said in a February 2012 report.

‘Big Names’

“Global investors don’t like these smaller and poorly-run companies,” Zhang said. “What they care about are big names like Vanke and CIMC.”

The Shanghai B-Share Index has a market capitalization of $15.5 billion, 30 percent less than the value of the Shenzhen B-Share Index, according to data compiled by Bloomberg. The Shenzhen gauge also tracks 53 companies.

The B shares of Shanghai-listed INESA Electron Co. have climbed 36 percent in the past six months and trade for 43 times reported profit. The company was the first to offer B shares in 1992, when it was known as Shanghai Vacuum Electron Devices Co. INESA doesn’t plan to buy back or move its stock to Hong Kong, Hu Huijie, the company’s representative for securities affairs, said by phone on Feb. 4.

Bank of Communications’ Hong says all Chinese companies may move their B shares to Hong Kong as the stock loses its relevance to international investors. The China Securities Regulatory Commission introduced the qualified foreign institutional investor program in 2002 that allows overseas investors access to more heavily traded A shares.

Quotas Raised

The regulator more than doubled available QFII quotas to $80 billion in April. That amount can be increased, CSRC Chairman Guo Shuqing said at a conference in Hong Kong on Jan. 14. Mainland Chinese equities have a market capitalization of $3.24 trillion, compared with $18 trillion in the U.S., data compiled by Bloomberg show.

An average of $100.1 million of Shanghai and Shenzhen B-shares changed hands each day in the past year, 0.6 percent of the average for A shares, the data show.

“As more and more companies leave the B-share market, you’ll see less incentive for the remainder to stay,” Hong said. “The opportunities are still with the Shenzhen B shares, but Shanghai being a laggard will eventually resolve as well.”

Before it's here, it's on the Bloomberg Terminal.