Not much of a month for surprises, really. Yes, the Shanghai market is down and, yes, this does make us slightly concerned about our mid-term prospects – but it’s nothing we weren’t expecting to happen.
Similarly, the shockwaves created by the first day performance of PetroChina 601857 were not as powerful as they might have been. Having it set the price of its initial public offering at RMB16.7 (US$2.20) per share, the stock began trading nearly three times higher at RMB48.6 (US$6.50).
This was undoubtedly a big jump but it came after prospective investors had laid down a record US$44.7 billion in subscriptions. Given that the IPO was “only” worth US$8.92 billion, many of those who missed out were waiting to pounce in the secondary market.
The company issued a total of 4 billion A-shares or just 2.18% of its enlarged share capital. With about a quarter of these shares going to cornerstone investors willing to commit to a three-month lockup period, there was never going to be enough supply to satisfy demand. Such is the nature of mainland China IPOs.
PetroChina sucked up so much money in subscriptions that a tightening in liquidity around the time of the IPO was understandable. But the company – and, in particular, the high valuation of its stock – is going to have a much greater impact on the market than that.
PetroChina joined the Shanghai Composite Index (SCI) on November 19 and, such is its weighting, when the company suffers, so will the SCI.
For every 1% shift in PetroChina’s share price, the market will move about 11 points. Taking into account its high price-to-earnings ratio the prevailing market conditions, few analysts expect the stock to gain much in the short term.
This will only add to the nervousness among investors who in the last few weeks have witnessed the SCI slip from around 6,000 points to as low as 5,000 at one point. Much of the unease is derived from China’s macroeconomic numbers, which continue to fly in the face of government cooling measures. Further interest rate hikes appear likely.
The SCI’s underperformance has seen the “20-80” phenomenon we discussed last time – whereby the 20% index-weighted stocks rally while most of the others drop – turned on its head.
This may mean a few more days in the sun for lower-tier companies but for everyone else it means havoc. Including the Red Dragon Fund.
We added China Enterprise 600675 when it stood at about RMB25 (US$3.40) per share but our timing was poor. The real estate sector underperformed in October and we were left waiting for a rebound that never came. There’s no choice but to wait and see if this is resolved in the next technical rebound.
As for Jiangxi Ganyue Expressway 600269, we moved to bolster our position by picking up another 500 shares following a dip in the price at the end of October. Then, in the recovery that followed, it seemed an opportune time to offload lots at a profit.
Overall, though, we still see Ganyue as a keeper. Its price-to-earnings ratio is only 18, yet profit growth remains at 50% year-on-year. Are we worried that Ganyue might suffer in a mid-term market correction? No. Our sights are set on what the price might be this time next year.