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CIMB: Why You Should Buy H-Shares Now
Aspire, Hot Picks | 15 April 2015
By: Vance Wong
Articles (74) Profile

H-Shares seems to have started a major rally since the middle of March. Speculation is rife that this rally is due to pent up demand from Chinese investors. CIMB believes that the southbound money from China will continue flowing into Hong Kong’s shares. This is essentially because of the current heavily discounted valuation of H-Shares against A-Shares.

Hang Seng Index vs Straits Times Index vs S&P500 Index

Nevertheless, CIMB maintains their positivity towards Chinese equities in view of “liquidity easing, household asset allocation, structural reforms and potential stabilisation of Gross Domestic Product (GDP) growth” later on this year.

A-Shares Currently 37% Premium Over H-Shares

The A-shares premium over H-shares rose to record highs in recent weeks

Although A-Shares and H-Shares stocks are basically the same companies, though listed at different locations (A-Shares in Shanghai, H-Shares in Hong Kong), it can be clearly seen from the graph above that the latter has been trailing behind for quite some time now.

A-Shares are currently trading at a 37 percent premium over H-Shares. As such, CIMB believes that investors are buying into H-Shares in view of the large discounted valuation.

CIMB points out that the reason for the huge premium is because of the current bull run in China “driven by the easing liquidity and household asset allocation.” The A-shares market benefited more out of this because of its nature of being a closed market. On the other hand, the H-shares market is subjected to global liquidity, thus not directly benefiting.

The Shenzhen-HK Connect

CIMB highlights the fact that the Shenzhen-Hong Kong Stock Connect will mainly focus on the small and mid-cap stocks, so investors who want maximum profits should get in for early exposure.

Furthermore, the China Securities Regulatory Commission (CSRC) recently loosened regulations to “allow mutual funds to invest in the offshore market without Qualified Domestic Institutional Investor (QDII) qualifications.” This will undoubtedly increase liquidity of shares being traded in both connect schemes.

IT Sector To Benefit Most

IT stocks enjoy the highest valuations on the A-share market

Looking at the graph above, the IT sector stocks are clearly sitting at the highest valuations on the A-share market. Therefore, CIMB feels that if the southbound money continues to flow, the IT sector would most likely benefit the most.

As such, CIMB upgrades the H-share IT sector to “Overweight” and believes that small/mid-cap IT stocks would be ideal picks. Their top picks for the H-shares are Fu Shou Yuan, Cosmo Lady, Xinyi Solar and Tongda.

Analyst chart of Cosmo Lady's share prices

Analyst chart of Fu Shou Yuan's share prices

Analyst chart of Tong Da's share prices

Analyst chart of Xinyi Solar's share prices

From the analyst charts above, CIMB’s reason of ranking these stocks as their top picks for the H-share market. Cosmo Lady is one exception where its actual price has surpassed its target price. Nevertheless, CIMB feels that all four stocks are great to buy in Hong Kong, highlighting the discount that H-shares are selling at right now.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

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