2010-07-07 09:38

SHANGHAI - Mainland stocks rose, with the Shanghai Composite Index leading Asian equity markets higher, as investors speculated recent losses were excessive.

The Shanghai Composite, Asia's worst performing index in the first half, rose 1.9 percent, led by Jiangxi Copper Co and Aluminum Corp of China Ltd. Joincare Pharmaceutical Group Industry Co paced gains by drugmakers, China's worst performers in the past month.

Equities are trading at their lowest levels relative to earnings in 18 months after the Shanghai index slumped 26 percent this year on concern government efforts to curb inflation and property speculation will slow the economy. The rebound is a boost for Agricultural Bank, which is seeking $20.1 billion selling stock in Shanghai and Hong Kong and may price its shares on Tuesday.

"Stocks have dropped to a level where valuations are attractive to bargain hunters, who expect the government to ease tightening policies to counter an economic slowdown," said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. "We estimate that the initial public offering (IPO) price of Agricultural Bank will be at about a 10 percent discount to prices of listed big banks. That'll leave room for a possible first-day gain."

The Shanghai Composite, the bigger of the mainland's two exchanges, advanced 45.48 to close at 2409.42, the most since June 21. The CSI 300 Index added 2 percent to 2562.90. The measure tracks yuan-denominated stocks, known as A-shares, in Shanghai and Shenzhen. Declines have sent the CSI 300's valuation to 14 times this year's earnings, down from a high of 22 times in January, according to data tracked by Bloomberg.

The price-earnings multiple for A-shares is 1.2 standard deviation below the 10-year average, while the two-year compound earnings growth rate is "among the highest in history", according to UBS AG.

Around 54 percent of A-share companies' first-half guidance indicate year-on-year net income growth of more than 50 percent, UBS Hong Kong-based strategist John Tang wrote in a report on Tuesday.

Stocks have slumped this year as authorities intensified a crackdown on property speculation after announcing the economy expanded at an 11.9 percent annual pace in the first quarter, the most since 2007.

Kenneth Rogoff, the Harvard University professor, said China's property market is beginning a "collapse" that will hit the nation's banking system.

As China's economy develops, "especially at the speed it's growing, it's going to have bumps", Rogoff, former chief economist of the International Monetary Fund, said in Hong Kong.

Equity market declines aren't stopping Agricultural Bank from pushing ahead with its listing. Chairman Xiang Junbo is taking his bank public after almost 50 companies worldwide shelved IPOs in the past three months amid concern that the end of government stimulus and widening budget gaps from Greece to Spain will curb the global economic recovery, data compiled by Bloomberg show.

Beijing-based Agricultural Bank expects to set a final IPO price on Wednesday. The company is selling 22.2 billion shares in Shanghai at 2.52 yuan (37 US cents) to 2.68 yuan each, implying a price-to-book ratio of 1.56 to 1.65 times for that tranche, according to Hong Yuan Securities Co.

The bank is offering 25.4 billion shares in Hong Kong at HK$2.88 to HK$3.48 apiece, representing 1.55 to 1.79 times 2010 book value as estimated by the IPO's underwriters.

Related readings:  China's stocks drop to 15-mth low Monday  China stocks to rebound 25% in H2: CITIC  China stocks continue downward trend Wednesday  Asian stocks fall; worst quarter since Lehman

China's biggest banks announced as much as $54.5 billion in fundraising after extending record loans last year.

An index tracking Chinese healthcare stocks jumped 3.2 percent, the biggest gain since May 24 and the most among the 10 industry groups on the CSI 300. The healthcare index is the worst performer in the past month, falling 17 percent.

Credit Suisse Group AG said Chinese stocks will be "range-bound" because a shift to increased reliance on consumption to drive the nation's economic growth will benefit companies that have a "very marginal index weighting," according to a report by analysts Vincent Chan and Peggy Chan.

Hang Seng gains

Hong Kong stocks rose, halting four days of losses, as Chinese developers gained after reporting higher sales, and after Central Huijin Investment Ltd agreed to take up a Bank of China Ltd rights offer. The Hang Seng Index climbed 1.2 percent to close at 20084.12, rebounding from its longest losing streak in two months. The gauge, which swung between gains and losses at least 11 times, declined as much as 0.3 percent on Tuesday.

"For the longer term, valuations are cheaper with the index down so much all this while," said Khiem Do, Hong Kong-based head of multi-asset strategy at Baring Asset Management (Asia) Ltd, which oversees $10 billion. "China is a growing region, and its companies have balance sheets strong enough to support stock prices eventually." Shares on the benchmark measure are priced at an average 13.3 times estimated earnings, down from 18 times on Nov 16, when the index hit its high for 2009, data compiled by Bloomberg show.The Hang Seng China Enterprises Index increased 2.4 percent to 11456.42, halting a nine-day, 7.8 percent drop.

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