Bears and bulls lock horns over China's blue chips

SINOPEC Engineering Co

12/12/2017 06:00

By Samuel Shen and John Ruwitch 
    SHANGHAI, Dec 12 (Reuters) - Kweichow Moutai, the Chinese 
drinkmaker made famous when Richard Nixon drank its fiery 
sorghum liquor on his historic state visit to Beijing in 1972, 
has been the toast of the mainland's blue chip stock rally, 
surging 93 percent this year. 
    The stock's eye-popping rise prompted an editorial last 
month by Xinhua news agency, a government mouthpiece, that 
singled out Moutai as an example of a major stock vulnerable to 
value-destructive speculation. 
    While even the drinkmaker agreed its rally was too hot, the 
pointed warnings had limited market impact, knocking barely 10 
percent off the stock's gains for the year, with the rally 
resuming as investors scooped up what they saw as a bargain. 
    And despite words of caution about a stock bubble from 
official channels and some market participants, other 
institutional investors argue a wider blue chip rally could last 
well into next year as China's investor base widens. 
    "Moutai's current valuation is not a deviation from 
fundamentals," said Jacqueline Zhang, Emerging Markets Equity 
analyst at U.S.-based investment manager OppenheimerFunds, whose 
China fund remains one of Kweichow Moutai Co Ltd's  600519.SS  
top 10 shareholders. 
    "No doubt, Moutai is the most profitable liquor company in 
the world. The uniqueness of its assets merits the premium." 
    Although OppenheimerFunds slashed nearly one-fifth of its 
holdings in the firm last quarter as its stock price hit levels 
double that at the beginning of the year, it maintains that 
Moutai is not overpriced. 
    More broadly, the blue-chip index  .CSI300  is up about 22 
percent this year, though it's been a bumpy ride higher. 
         
     
    The SSE50  .SSE50 , which investors have dubbed China's 
Nifty 50 index, has far outperformed the broader stock market 
 .SSEC  this year, but posted its worst weekly loss in almost 12 
months in the last week of November. Index heavyweights 
including Moutai, insurance giant Ping An  601318.SS  and 
automaker SAIC Motor saw heavy selling. 
    Several large investment firms concur that while prices of 
some large Chinese firms are in bubble-like territory, fresh 
investment flows from foreign funds looking to partake in 
China's rapid growth will push share prices even higher. 
    Shi Bin, the head of China equities at UBS Asset Management 
in Hong Kong, said this year's sharp rise in blue chips reflects 
a normalization of previously depressed valuations. 
    He expects China's inclusion next year into global index 
provider MSCI's benchmarks will channel more money into China's 
large-cap stocks, pushing prices higher. 
    Dutch firm NN Investment Partners has stayed put through the 
volatility, having picked Chinese businesses it believes have 
strong underlying fundamentals.  
    "Some investors are taking profits, especially where the 
valuations are quite full," said Ashish Goyal, NNIP's head of 
emerging markets equity. "But many of these companies are still 
great businesses and will continue to do well operationally." 
    Shane Oliver, the Sydney-based head of investment strategy 
at AMP Capital, which invests in Chinese securities and operates 
a mutual fund venture with China Life, believes a cash rotation 
out of blue-chips and into the broader market is due, given the 
higher return on equity for Chinese small- to mid-cap firms. 
     
    TROUBLE BREWING 
    Moutai's stock had surged as much as 115 percent until Nov. 
16, when the company itself warned investors the price rise had 
been too rapid. The selloff that ensued wiped out 110 billion 
yuan of market value from Moutai's peak.  urn:newsml:reuters.com:*:nL3N1NN1B1 
    Even after the recent correction, Moutai trades at more than 
30-times earnings compared with just around 13 times two years 
ago. It commands a market capitalization exceeding 800 billion 
yuan ($120.98 billion), dwarfing oil giant Sinopec  600028.SS , 
and top insurer China Life  601628.SS . 
    Gu Weiyong, the chief investment officer at Shanghai-based 
money manager Ucom Investment, said a rise in borrowing costs 
following Beijing's crackdown on shadow banking is likely to 
make sectors valued at 30-50-times earnings seem too expensive. 
    Like OppenheimerFunds, state-backed China Securities Finance 
Corp and Singapore's state investment firm GIC have pared their 
Moutai holdings, exchange filings show, while others, such as 
UBS, have no plans yet to reduce their stakes, citing 
longer-term gains. 
    For the bears, however, a continuation of the exuberance 
into next year will only lead to more pain.  
    "The blue-chip bubble may be inflated bigger in 2018, before 
bursting," said Sun Zheng, strategist at China Development Bank 
Securities. 
     
($1 = 6.6145 Chinese yuan) 
 
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China blue chips outperform broader market    http://reut.rs/2jm4sK7 
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 (Editing by Vidya Ranganathan and Sam Holmes) 
 ((samuel.shen@thomsonreuters.com;  +86 21 6104 1789; Reuters 
Messaging: samuel.shen.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA MARKETS/BLUECHIPS