The Shanghai Composite, the broadest measure of the Chinese domestic market, rose 0.9% on Friday to 2,880.49 setting a new record for 2009. The index is up 54.7% YTD and is up 64.7% since November 4, 2008. Valuations improved considerably since last November. Chinese A shares are trading now at 28.8 times earnings versus 12.9 just eight months ago. So the question is this: is a China bubble growing?
Seasoned investors know that China ADRs (American Depository Receipts) don't follow the Shanghai Composite very closely, but are influenced by the overall American market sentiment. If anything, Hong Kong listed H shares of Chinese companies and ADRs are compatible. And if you think of the huge discrepancy between Shanghai and Hong Kong listed China shares, e.g. different valuations of the same company listed on two different exchanges, than you know that Shanghai is not the best barometer that American investors should look at.
Just a quick example: shares of Huaneng Power (NYSE:HNP) sells for Yuan 7.52 in Shanghai (SHA:600011) but is only $HK5.38 (Yuan 4.7476) in Hong Kong (HKG:0902). Same company same shares. And if you draw a chart between 0902.HK and HNP, it become obvious that Hong Kong is the benchmark for American investors to look at.
Now the question western investors should ask is this: are my Chinese ADRs overvalued? Is there a bubble growing?
The answer lies in the following two charts. At Chinavestor we separated NYSE and NASDAQ listed Chinese stocks since they have different stock characteristics. This gives investors a better visibility deciding when and what stocks to focus on.
As the NYSE listed China stocks price/PE chart proves, the resurgence in China stocks are in line with improved earnings. All the gains registered in your stocks are underlined with strong earnings, so here is no bubble at all.
According to the NASDAQ listed China stocks price/earnings chart above, NASDAQ listed Chinese ADRs are CHEAP! While their stock price improved considerably since 3/2/2009, their P/E ratio remained intact. Think of NASDAQ China Index heavy weights, Baidu.com(NASDAQ:BIDU), NetEase (NASDAQ:NTES) and Shanda (NADAQ:SNDA). These three companies make up well over 50% of the cap weighted index. Bidu went from $137.22 to $295.92 from 3/2/09 to 7/17/09. NetEase from $20.45 to $35.19 while Shanda from $30.76 to $53.58. Yet this was all justified by robust earnings.
So if you want to join the China stock wagon, pick up some NASDAQ listtings because this is there value lies right now.