Subprime Danger Limited - But What About Chinese Stock Market Exposure? / China

It´s yet time for another update on China. The FT is reporting some very interesting details on the earnings quality of Chinese companies. If you take this into account the PE that is calculated on the operating level would be far higher than the already sky high ratio. To my knowledge only Slovenia rivals China with an even higher PE. But as we all know it´s all about liquidity and most shares are probably still a better buy than Washington Mutual & Co .......

Es ist mal wieder Zeit für ein Update aus China. Die FT hat ein paar extrem interessante Details zur Gewinnqualität der chinesischen Firmen ausgegraben. Wenn man lediglich die operativen Gewinne zur Berechnungsgrundlage des KGV´s heranziehen würde kommt man zu einem noch deutlich höheren KGV als dies jetzt ohnehin schon der Fall ist. Nach meinem Kenntnisstand kann es z.Zt. lediglich Slovenien in Sachen astronomisches KGV mit China aufnehmen. Aber bei der Liquidität spielen Bewertungen momentan halt keine Rolle und ich würde immer noch fast jede chinesische Aktie lieber kaufen als zum Beispiel Washington Mutual & Co ....... But it could be that in China investors should be looking closer to home for worrying exposure inside the nation’s lenders and other companies.

Strong earnings growth in China has been used by some to justify the higher valuations there than elsewhere in Asia.
But, reports Jamil Anderlini in Tuesday’s FT, what if it turns out that growth is underpinned by the country’s soaring stock markets, rather than core profits?

Profits rose on average by 71 per cent in the first six months of the year for the more than two-thirds of listed Chinese companies that have already published results. But operational profit growth was only about 35 per cent, according to Jerry Lou, equity strategist at Morgan Stanley.

So up to half of the heralded earnings growth of companies listed in Shanghai and Shenzhen may have originated from piling into the country’s red hot stock market. Almost a third of those companies’ income in the first half was non-operational, up from 13 per cent in 2006, and much higher than most developed markets where non-core income usually accounts for less than 10 per cent of total profits.

And this is the market that sent Bank of China A-shares up 1.3 per cent at the end of last week on the back of news that it had $10bn of subprime exposure. BoC’s Hong Kong-listed H-shares fell about 6 per cent on the same announcement.

Financial companies derived 26 per cent of first-half profits from non-operational income in the first six months of the year, Anderlini adds, up from 8 per cent in 2006.

Subprime be damned - stock market exposure could spell quite some profits slowdown when the easy earnings evaporate.

Thanks to Bespoke

> Somehow this reminds me of the Nasdaq bubble when companies like Intel were reporting billions of profits from unloading some of their ( 12 month later worthless) venture capital investments via IPO. ....

> Irgendwie kommen bei mir da Erinnerungen an die wilden Nasdagzeiten hoch. Ich kann mich noch gut daran erinnern wie Firmen wie Intel Quartalsgewinne in Mrdhöhe dadurch erzielt haben das sie ihre ( im nachhinein wertlosen) Venture Capital Beteiligungen mittels eines IPO an den Markt gebracht haben ......