Bottom fishing time?

Yesterday was another brutal day in the Wall Street, or the Bay Street (Toronto), or SSE (Shanghai Securities Exchange). According to the number, the Dow is now officially in bear territory. General Motor (NYSE:GM), a Dow component and an American icon, hit 53 years low. It closed at $11.43. So, should we go bottom fishing?

I am not a market timer, nor do I like to predict the market trend. But I noticed another interesting article from my friend Wang Jianshuo’s blog: Stock Market Big Drop. Note Jianshuo is not into stock market, a rare type in Shanghai. In other words, when people like Jianshuo started to pay attention to the market, things are either really good or bad (noteworthy). So, the 1 million dollar question: should we go bottom fishing? My answer is be careful, because if we don’t we will catch some falling knives instead 😦

Some ideas for bottom fishing

A-share and H-share

I wrote about the bubble of PetroChina during its Shanghai IPO last Nov. I understand lots of people in China (San Hu 散户) are under water on this one. Obviously they bought into this “the most profitable company in Asia” slogan touted by some institutions that wanted to dump their shares during IPO.

Here I list some of the A share and H share price, and their bubble factor.

PetroChina: 601857.SS: CNY 26.39; 0857.HK HKD 12.27 (still lot of bubble !)

On other hand, insurance companies and banks are more rationally valued.

Three ways to buy H shares

With the Chinese goverment recent policy of “opening H shares to domestic investors”, there are three ways to buy H shares for China domestic investors, and people with different investment objectives and pockets can pick and choose.

1) QDII: there are many bank issued QDII products. Those products mostly invest in H shares, and it’s very likely the fund managers will buy something they are familar, the Chinese companies listed in Hongkong. This is indirect way of buying H shares; it carries modest risk and the return will also be moderate.

2) Open an account in Hongkong Stock Exchange directly: this is not officially endorsed by the Chinese regulators. But many people have done that, and I think those people at least enjoyed the recent “bump” after the “China life gate to H shares” news. In reality, I think those are “forward thinking” investors, and they usually have deep pockets. The down side of this approach is: it’s difficult to get the money in and out of China, because that’s not blessed by the goverment.

Q and A on China A shares

1. Chinese stock market has started in early 1990s and it has not done well until 2005. Why the China A shares market suddenly became so hot since then?
When the Chinese stock market started in the early 1990s, it’s a way for the state owned companies to raise the capital, and market speculators to make money. It’s not friendly to small shareholders because there are two types of shares in additional to floating shares: the state shares and Fa Ren Gu (legal entity shares); those shares can not be floated. Normally the majority shareholder is the goverment (or some Fa Ren) and they have no incentive to help the stock (floating shares) price go up because their shares can not float.

This all changed in 2005 in the Gu Gai (stock reform): during which the floating shareholder are compensated, and the state owned shares and Fa Ren Shares can be floated within a pre-arranged time frame, just like the share plan of big shareholders in the US stock market (unlock period). Now all the shareholders have aligned their interest. The big shareholder and management have incentive to deliver.

Of course another reason is people got lots of money: Chinese has a more than 40% saving rate; the emerging middle class; people made money in business and investing (housing etc.)

2. How can I buy the China A shares?
At this time the A shares are open to Chinese residents. For foreign investors, they can buy through the QFII (source: ChinaDaily), stands for qualified foreign institutional investors, e.g., Morgan Stanley etc.

3. Why some companies like to buy “shell”?
In China there is this listing requirement that a company needs to be profitable before it can list. Some companies that did not meet this req. but want to list, have decided to buy the shell of already listed companies. That will drive up the stock price of the “shell” company. It often triggered lots of insider trading. Buying “shell” is generally not as good as IPO. Lately the Chinese securities regulatory commission (CSRC, equivalent of SEC in the US) has tightened this “shell buying” activities. This makes economic sense to me.