Valuations for the yuan-traded stocks, also known as A shares, may expand by as much as 40 per cent if China’s market manages to close gaps with global leaders in terms of factors including dividend payouts, buy-backs, corporate governance and institutional ownership after the sweeping reforms, Goldman analysts led by Kinger Lau wrote in a note on Tuesday.
Meanwhile, UBS raised its rating on the MSCI China Index and Hong Kong stocks to overweight, citing earnings resilience and policy support.
China’s State Council, or cabinet, issued a nine-point guideline earlier this month to prop up the US$9 trillion stock market, which has been reeling from a faltering growth outlook and an exodus of foreign investors over the past year. The new guidelines stress the quality of listed companies, regulatory supervision and investor protection, marking a shift from a focus on development in previous policy frameworks.
It was the third time the cabinet has issued such a document directly targeting the stock market, with the previous two being in 2004 and 2014.
“The untapped reform/policy upside seems significant for Chinese stocks even in a difficult growth environment if the necessary reform actions materialise,” Goldman said in the report. “These changes point to a potentially stronger risk appetite and a more conducive trading environment for A shares in the near term.”
In a base-case scenario, Chinese stocks’ valuations will expand by about 20 per cent if the reform measures can prompt China to catch up with the global or regional average levels, the US investment bank said.
China’s listed companies lag their global peers in corporate governance and returns to small investors. Mainland-listed companies currently set aside an average of 33 per cent of their profits as dividends, while European companies have paid 60 per cent over the past decade and Japan 50 per cent, according to Goldman.
Stock buy-backs were only equivalent to 0.3 per cent of total market capitalisation in China last year, while repurchases by US-listed companies on the S&P 500 Index equalled 2.7 per cent of market value over the past decade on average, it said.
Beijing issues unprecedented guidelines mapping out future of stock market
China’s CSI 300 Index has risen 2.2 per cent this year, reversing losses after a slew of market rescue measures from Beijing, including state buying and curbs on short selling. Still, it trails other key markets in Asia, where Japan’s Nikkei and Taiwan’s Taiex have gained at least 9 per cent in 2024.
The gauge has lost 1.6 per cent this year. Its biggest constituents are Tencent Holdings, Alibaba Group Holding and PDD Holdings.
Earnings per share for the MSCI China Index companies are down by only 2 per cent over the past 18 month on UBS’s index-weighted methodology. The consensus earnings per share is distorted by free-float summations, in which some companies have small representation in the index, but have a big sway in earnings, according to UBS.
“The largest stocks in the China index have been generally fine on earnings/fundamentals,” said Sunil Tirumalai, a strategist at UBS. “What makes us more positive now on earnings are the early signs of a pickup in consumption, as seen through robust festive holiday spending numbers year-to-date [and] listed consumer stocks performing better than general consumption in the economy.”
The Swiss bank also raised its rating on Hong Kong stocks, citing rising dividend support for stocks and a potential benefit from a pickup in tourism.
It downgraded the rating on Chinese stocks to neutral in August last year.
