There is not much to be happy for as far as Chinese stock trading goes today. Most of Chinese ADRs are giving up gains of previous days, such as Baidu.com after yesterday's $25 rally. As the following summary table shows, the China ADR index (CAI), a broad measure of the performance of Chinese ADRs, lost 23.48 points today and is down 25.8% year-to-date (YTD).
|
Index |
Date |
Value |
Today |
YTD |
|
CAI |
6/26/2008 |
742.01 |
-23.48 |
-25.80% |
|
CYI |
6/26/2008 |
738.81 |
-23.49 |
-26.12% |
|
CQI |
6/26/2008 |
819.78 |
-23.35 |
-18.02% |
|
TOP MOVERS |
6/26/2008 10:00 |
|
Symbol |
Price |
Change |
Change% |
|
|
|
|
|
|
GSH |
22.62 |
$0.31 |
1.39% |
|
ACH |
29.59 |
$0.27 |
0.92% |
|
NCTY |
22.69 |
$0.06 |
0.27% |
|
GA |
12.83 |
$0.06 |
0.47% |
|
SOLF |
20.30 |
$0.05 |
0.25% |
|
|
|
|
|
|
COGO |
9.59 |
$0.00 |
0.00% |
|
ICAB |
25.55 |
$0.00 |
0.00% |
|
LTON |
1.82 |
$0.00 |
0.00% |
|
SVA |
3.55 |
$0.00 |
0.00% |
|
KONG |
4.05 |
-$0.01 |
-0.25% |
|
|
|
|
|
|
CTRP |
46.26 |
-$1.78 |
-3.71% |
|
CHL |
67.29 |
-$1.84 |
-2.66% |
|
SOHU |
71.25 |
-$1.86 |
-2.54% |
|
CHA |
55.56 |
-$2.00 |
-3.47% |
|
CN |
53.65 |
-$2.21 |
-3.96% |
|
|
|
|
|
|
YZC |
89.43 |
-$2.23 |
-2.43% |
|
TSL |
35.67 |
-$2.42 |
-6.35% |
|
SNP |
96.31 |
-$3.66 |
-3.66% |
|
PTR |
130.64 |
-$4.80 |
-3.54% |
|
BIDU |
326.99 |
-$5.10 |
-1.54% |
In a difficult market environment like today, I like to look at technical tools to sharpen my trading intelligence. As the following Overbought Oversold, or simply OBOS, indicator highlights, the following stocks look interesting.
Chalco or Aluminum Corp. of China (ACH) is way oversold and is ripe for a potential comeback. This comeback is purely technical as fundamentally the stock looks weak: Chaclo just announced a soft outlook for the rest of the year based on soft alumina, the primary material for making aluminum, prices. By the way Chalco is the third largest alumina maker on the planet and soft alumina prices, due to over capacity, are hurting China's largest alumina and aluminum maker.
China's offshore drill specialist, CNOOC Ltd. (CEO), is another stock that looks interesting. The stocks made a shy comeback on strong oil prices yet it will be capped by China's regulatory environment. Beijing has imposed a windfall tax on oil producers, a progressive tax that reaches 40% above $60 a barrel of crude. As the following screenshot from Google finance reveals stocks price of CNOOC correlates very closely to BP plc. and other oil majors. And while there is no windfall tax on the British company, profit for CEO is severely hurt - a fact that is not reflected in stock prices of CEO yet. Looking at the P/E ratio for these oil majors, CEO looks expensive again. P/E for BP is only 11.52 while CEO is trading at a 18.09 price to earnings ratio. In other words I see a significant downside risk at CEO as we speak.
Another Chinese stock that catches my eye is Huaneng Power (HNP), China's largest independent energy producer. The size of the arrow on the OBOS indicator is just screaming, a derivative of current price vs. stock price a week ago. The arrow is then embedded into a blue band, representing the trading envelope or a typical trading range for a stock. What's interesting is not only the 18.29% drop since June 19, a drop of almost 20% in just five days - but more so the rationale behind it.
The first contradiction comes from the fact that Huaneng has started to fall after Beijing announced to favorable factors for the company:
-
freeze of thermal coal prices thus shielding HNP from sky high raw material prices
-
4.6 percent increase in electricity prices, a regulatory change that adds 4.6% to the top line of the company in an instant.
So seemingly favorable changes effective as of June 20 have sent the stock tumbling. One may argue that the size of electricity retail price increase, a notable 4.6%, is smaller than the market anticipated. Others may argue that HNP gained 17% between May 13- June 20 (link to chart here) and so a pullback is just part of the game.
For me, Huaneng presents a buying opportunity - a buy into weakness. The stock lost almost 20% when regulatory changes added both to her top and bottom lines. I think HNP is ready to take off and a 20% return within 6 months is absolutely viable.
The first contradiction comes from the fact that Huaneng has started to fall after Beijing announced to favorable factors for the company:
-
freeze of thermal coal prices thus shielding HNP from sky high raw material prices
-
4.6 percent increase in electricity prices, a regulatory change that adds 4.6% to the top line of the company in an instant.
So seemingly favorable changes effective as of June 20 have sent the stock tumbling. One may argue that the size of electricity retail price increase, a notable 4.6%, is smaller than the market anticipated. Others may argue that HNP gained 17% between May 13- June 20 (link to chart here) and so a pullback is just part of the game.
For me, Huaneng presents a buying opportunity - a buy into weakness. The stock lost almost 20% when regulatory changes added both to her top and bottom lines. I think HNP is ready to take off and a 20% return within 6 months is absolutely viable.
And finally Asia's largest refiner, Sinopec (SNP), is a stock that draws your attention. Stock price have pulled back from a week ago and as the following Google finance chart shows is down 35% since January 2, 2008. And while we have just argued that HNP is representing a buying opportunity, interestingly enough stock prices of Sinopec and HNP correlate very closely to each other. This chart represents a YTD time period but if you want to do some homework yourself, go and see how closely these two stocks correlate in a 5 day, 1 months or 3 months chart.
This correlation was well understood by the fact that both companies are victims of the same regulatory environment. In Huaneng's case coal prices have followed world prices - fueling profitability of Yanzhou Coal (YZC) but hurting HNP. The problem for end users in china is that prices are set by the government. So while HNP had to pay top price for the coal the company was unable to pass high raw material prices to customers. the result was a disastrous 2008 Q1 as electricity providers were squeezed out of profits.
Sinopec is in the same shoe. The company pays top price for crude oil yet has to sell refined gasoline and diesel at a low, state set price. The result is that Chinese refineries have been bleeding heavily and only government subsidies eased their pain somewhat. It's worth mentioning that Sinopec has a significant oil production segment as well, a segment that is subject to the windfall tax, imposed on CEO - see article above.
But seems as if stock markets have been numb to react differently to the latest significant regulatory changes taking place in China. While refined gas and oil prices increased 16% and 18% respectively, the rise is still lacking behind the rise of crude oil. From this respect Sinopec is still bleeding and this is unlikely to change before the Olympic games in Beijing later this year. On the other hand Huaneng got a boost from increasing electricity prices and more importantly from the price cap of coal. Taking into account the different regulatory changes for SNP and HNP, we think HNP has a significant upside potential.