Market Trend Analysis: April Not So Cruel

By Gary Chin
During the month of April, equity markets continued to rebound across the board. The Shanghai Stock Exchange Composite Index (SSE) rose 4.4% in April and has risen spectacularly 36.1% year-to-date.  This time, the Halter USX China Index outperformed its China-listed counterpart by rising 18.1% during April but continued to lag on a year-to-date basis with an increase of 16.7%.

On average, U.S.-listed Chinese equities on the NYSE rose 20.4% for the month and 15.2% year-to-date, while NASDAQ listed securities increased 25.1% for April and 21.0% year-to-date.  NYSE Amex members gained 40.4% during April and 40.0% year-to-date.  OTCBB listed Chinese securities rose 27.2% during the month and 34.1% on average year-to-date.  The valuation gap remains between U.S.-listed Chinese equities traded on senior exchanges (NYSE, NASDAQ) versus OTCBB listed securities, with very attractive risk/reward profiles.

Valuations Still Attractive
Despite their run-up in April, U.S.-listed Chinese stocks continue to trade at attractive valuations. On the NYSE, the average trailing P/E was 8.7X, the average price-to-book was 1.6X, and the average enterprise value-to-EBITDA ratio was only 2.2X.  The forward P/Es for NYSE listed companies in 2009 are higher than trailing, at 20.0X.
NASDAQ listed Chinese equities have an average trailing P/E of 12.3X, a forward P/E of 19.7X, an EV/EBITDA of 6.6X, and a price-to-book of 1.9.
On the NYSE Amex, trailing P/Es were negative as most equities on this exchange were unprofitable.  However, the average price-to-book was 1.7X, and the average enterprise value-to-EBITDA ratio was 9.4X.
Despite an increase of 27.3% for OTCBB listed companies during April, these stocks trade with an average trailing P/E of 6.7X and an average EV/EBITDA of 2.9X.  The average price/book of 25.4X in our proprietary database was skewed by one outlier but the median was 0.5X, so valuations still appear very compelling.  (Calculations are based on the full universe of Chinese OTC issuers tracked in our proprietary database.)
More Evidence Points toward a Recovery
Key first quarter economic data showed that China’s aggressive stimulus policy has been working.  As a result, Goldman Sachs raised its real GDP forecasts for 2009 to 8.3% (versus 6.0% previously) and for 2010 to 10.9% (up from 9.0%).  Fixed asset investment in urban areas, China’s capital spending benchmark, rose 30.3% year over year in March, which was up from 26.5% growth in the first two months of 2009.  In addition, China’s industrial production rose 8.3% in March, better than the 3.8% gain in January and February.  Bank lending continued to soar in March to 1.89 trillion Yuan, contributing to 4.58 trillion Yuan in the first quarter of 2009.  Retail sales in March surged 14.7% compared to the year earlier, and were up 15% in the first quarter of 2009, driven by strong discretionary spending.  Car sales hit a monthly record in March and home purchases and air travel rebounded from declines late last year.  Finally, China’s money supply jumped 25.5% in the first quarter versus a year earlier.

It appears that investors’ appetite for risk has returned.  During this recent recovery, the smaller, less liquid equities that were beaten down the most during the past year have performed the best.

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