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China Market Strategy - UBS Investment Research - Part. 3

The purpose of the three reports in this series is to examine the current rally in A-shares, and its effect on H-shares. In this first report, we argue that a bubble is in the making and that A-shares are heading towards higher levels of overpricing.

Where China shares are going ? #3--Further re-rating in H-shares

  • H-shares are rationally priced
Since the start of 2007, A-shares have gone up 50%, while H-share performance has stayed flat. We believe foreign fund managers are concerned over the Abubble, and are being cautious about H-shares.

  • Re-rating in H-shares is due
We highlight the positive effect of the 2005 non-tradable share reform and recent positive themes, such as earnings surprises, asset injection and industry/group consolidation. We believe a further re-rating could bring the H-index to a range of 10,000-13,000.

  • We recommend buying H-shares
The discount of H- to A-shares for dual-listed issues has widened to 45% from a low of 20%. An expected gradual opening up of QDII flows could boost H-shares. We also suggest investors take a look at B-shares. We have done a screening based on large cap H-share companies with deep discounts and red chips that could tap mainland liquidity.

  • H-shares to diverge from A-shares
On a three-month basis, A- and H-share correlations do not look high. H-shares are more correlated with Hong Kong and with US stocks than with A-shares. However, we note that after the 2001 A-share bubble peak, H-shares decoupled from A-shares.

Suite dans le document PDF ci-dessous

Vendredi 25 Mai 2007

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