China Valuation Not Cheap When Banks Are Excluded

China No Longer Appears Cheap

China Equity FVMR Snapshot

Standard Chartered: A Look at Fundamental Valuation

Remember that FVMR stands for Fundamentals, Valuation, Momentum, and Risk. Those are the factors that we look at to get an understanding of the market. This China Equity FVMR Snapshot is an aggregation of 1,698 Chinese companies listed as China A-, B-, and H-shares.

Fundamentals: China has lower profitability compared to the world

The return on equity (ROE) of China is about 11% versus the world, which is at 13% ? a slightly lower ROE. It seems to be tough to be a Chinese Telecom company at the moment as the sector has the lowest expected ROE of only 3.9% in 2017. Consumer Staples is at the other end of the spectra with ROE of more than 15%.

Overall, the Chinese market has a lower dividend payout ratio (DPR) versus the world. Chinese companies only pay out about 30% of earnings as dividends, while the global average is about 40%.

Valuation: Financials weighing down rest of market

The overall Chinese market trades slightly above the world on 2017 price-to-earnings (PE) and slightly below on 2017 price-to-book (PB). However, the Chinese banks have a quite big impact on the overall market metrics, as you can see, China ex Banks PE on 2017 earnings is at 25.1x versus 17.6x when banks are included. Looking at PB, the Chinese market trades at 1.9x, but when we exclude banks the market trades at 2.5x which is above the world.

China no longer appears cheap when we exclude banks.

Momentum: China has underperformed the world by more than 10%

As noted above, China is expected to grow earnings faster than the world. Telecom is expected to have the fastest earnings per share (EPS) growth at 222.5%, however, this is due to a low base as EPS fell by 76% in 2016. The Energy sector also comes from a slight decline in earnings in 2016, which is expected to be more than offset in 2017.

Earnings in the Utilities sector fell by about 20% in 2016 and are expected to fall a bit further in 2017.

China has underperformed the world by more than 10% in the past one year in terms of price performance. Only the Telecom sector has had a better price performance in the past one year. In the past two weeks, only Financials and Energy have had a better price performance than the world average.

The worst performing sector in the past two weeks was Health Care.

Volatility: Relatively low among utilities, financials

Gearing in China has fallen in the past 12 months and is now below the world average. Consumer Staples is the only net-cash sector in China at the moment. Utilities has the highest gearing, followed by Real Estate.

The Chinese market has been more volatile than the world. In the past one year, Utilities has been the least volatile sector and Telecom was the most volatile. However, in the past 3 months, Telecom was the least volatile sector and Financials was the most volatile.

Article by Dr. Andrew Stotz, Become A Better Investor

About the Author

Dr. Andrew Stotz, CFA
Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company providing institutional investors with ready-to- invest portfolios in Asia that aim to beat the benchmark through superior stock selection. The company also provides buy- and sell-side clients with financial models to value any company in the world and World Class Benchmarking to determine what companies are financially world class. Previously, as Head of Research at CLSA, Andrew was voted No. 1 Analyst in Thailand in the Asiamoney Brokers Polls for 2008 and 2009. He was also voted No. 1 Analyst in Thailand in the 2009 Institutional Investor magazine All-Asia Research Team Report. Andrew earned his PhD in finance at the University of Science and Technology of China in Anhui province, with a focus on answering questions raised by fund managers and analysts during his career about picking stocks and managing portfolios. In addition, Andrew has been a lecturer in finance for 22 years at various universities in Thailand. Since 2013, he has been the president of the CFA Society of Thailand. He is also the author of How to Start Building Your Wealth Investing in the Stock Market.