Dramatic surge in stocks

Up 80% this year, is the ChiNext share market a bubble waiting to burst?


13 Sep 2013
Week in China

When Vanke attempted its first public fundraising in December 1988, there wasn’t even a stock market in China. The real estate firm wanted to raise Rmb28 million ($4.6 million) so its chairman Wang Shi came up with a novel distribution technique. He loaded stacks of Vanke’s share certificates on his bicycle and sold them alongside rows of cabbage for Rmb1 each in Shenzhen’s wet markets.

Those who bought didn’t regret it. Vanke went public in January 1991 after the Shenzhen bourse finally opened. Vanke has since grown into China’s biggest real estate developer, with a market worth that exceeds Rmb100 billion.

Stories of instant riches in the stock market have long held a fascination for a Chinese public prone to speculation.

“The ChiNext is about new and emerging industries that the new government is keen to support,” the Securities Times adds

Perhaps the most famous example: what the New York Times termed a two-day long crush of more than a million retail investors camped outside banks in Shenzhen in August 1992. They were lining up for subscription forms giving them the right to buy IPO stock – which, at the time, was viewed as a one-way bet.

In recent years fervour for stocks has been more muted. Retail investors have become jaded by sagging share values and scandals.

But another dramatic swing in mood is underway in Shenzhen. Although both the main boards in Shanghai and Shenzhen are in the doldrums, the ChiNext – a market touted as China’s answer to Nasdaq – is buzzing. Investors have driven the ChiNext Price Index up 70% since the start of the year and it is now trading at record highs.

That marks something of a turnaround. WiC reported last November that there was precious little to celebrate as ChiNext turned three years old (see WiC171). Back then the ChiNext Price Index had dropped 44% from its peak in late 2010. Out of 355 companies listed on the board 221 were trading below their IPO prices, with their profits shrinking suspiciously since going public.

Thanks to the securities regulator’s year-long ban on IPOs, there are still 355 firms listed on ChiNext. So what has changed?

The reversal in sentiment, according to the Securities Times, is partly down to a policy shift in Beijing. This is tried-and-tested practice for Chinese investors, who often focus on the policy tailwinds, rather than the fundamentals of company valuation. Hence encouraging noises from Beijing about increasing the influence of the private sector in the economy has seen investors switch out of large-cap state-owned firms into smaller, more entrepreneurial plays in the hope that they will benefit personally.

“The ChiNext is about new and emerging industries that the new government is keen to support,” the newspaper adds.

The really stellar performers are media stocks. At least 14 shares linked to the ‘cultural sector’ have tripled their share prices this year, according to CBN. Huayi Brothers, for one, has just become the most valuable ChiNext company following a 300%-spike in 2013. It now has a market capitalisation of Rmb35 billion, a staggering 160 times the film studio’s 2012 profit. (Before Warner Brothers went into its fateful merger with AOL in early 2000, it was trading at roughly 50 times earnings.)

Investors have driven the ChiNext Price Index up 70% since the start of the year and it is now trading at record highs

Huayi has produced some of the biggest movie hits in recent years. But the China Securities Journal warns that the current valuation is pricing in near 100% market share for “Chinese movies as well as all TV soap operas”.

That sounds unrealistic. But the most telling evidence of a toppy valuation may come from Huayi’s founders themselves. One of the Wang brothers (read WiC34 for more on Huayi’s ambitions to rival Warner Brothers) sold a portion of his stock last month, pocketing Rmb430 million. But the explanation didn’t satisfy analysts, after Wang Zhongjun said he cashed out because he “needs money for his children’s study and work”.

This remark swiftly became one of the most forwarded comments online. “China’s stock market is indeed entertaining. Everything remotely related to entertainment has skyrocketed recently,” wrote Su Yu, a popular financial blogger at Hexun. “What are Wang’s children studying that would cost him Rmb430 million in tuition fees?”

After Wang’s selldown, other controlling shareholders at Huayi are now being watched carefully. The theory: if the ‘smart money’ is selling, something must be amiss with valuations. Certainly, prices are very high. Listed firms in the ChiNext are trading at an average price-to-earnings multiple of over 60 times, Sina Finance noted. The spike hasn’t been driven exclusively by retail money. Institutional investors have also bought into ChiNext for a record share of their portfolios: 8.25% as of June, comparing with 3.18% in late 2012.

“Many people reckon the ChiNext is now overvalued. But history tells us that an overvalued market remains overvalued until the bubble bursts,” the China Securities Journal opines. “When will this moment arrive?”

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