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Chinese Stock Market Valuation Is at the Lowest Level Since 2000

GuruFocus

GuruFocus

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While the U.S. stock market has enjoyed a smooth ride since the summer and attempted to make new highs, the stock market of China has been in constant decline. Chinese SSE Composite Index is now traded at about one-third of what it was five years ago. Although it is about 20% higher than its bottom in October 2008, the valuation of the Chinese stock market is at the lowest level since 2000, the earliest time that data is available for GuruFocus.

You can view the daily updated Chinese stock market valuation here.

Historical Low Valuation

Just like we evaluated the U.S. market, we measure the Chinese stock market with the ratio of its total market cap over GDP. While the growth of Chinese economy may have slowed down, it has enjoyed double-digits growths for decades. Compared with five years ago, when the Chinese market was at its peak, the Chinese GDP has roughly doubled. With the SSE Composite Index at one-third of its peak five years ago, the Chinese market is at the valuation of one-sixth of what it was five years ago. At the peak of 2007, the ratio of total market cap over its GDP was about 322%. Today it is 52%. As a comparison, this ratio is close to 100% for the U.S. market.

This is the historical valuation of the Chinese market as measured by the ratio of total market cap over GDP:



With its historical low valuation, the Chinese market valuation is among the lowest as measured by the ratio of total market cap over GDP:



Among the markets we track, only Italy, Mexico and Germany have lower valuations. Even the Spanish market has a higher valuation than the Chinese market, although both of them are at their own historical lows.

With the Chinese market at its historical low valuation, it is worthwhile to look into high-quality Chinese companies that are traded at low valuations. One way to play it is to invest in Chinese ETFs iShares FTSE China 25 Index Fund (FXI) and iShares MSCI China Index (MCHI). Both of them have China Mobile (CHL) as the largest component. China Mobile is traded at a P/E of 10.8 and yields 3.5% in dividends. It is in the portfolio of John Hussman and David Dreman.

A number of Chinese companies that are traded in the U.S. in ADRs that have at least $1 billion in market cap and dividend yield of more than 4% can be found with the All-in-One Screener:

Symbol Company Price Market Cap($Mil) Yield
SNP China Petroleum & Chemical Corp. (ADR) $94.64 $88,459 4.5%
YZC Yanzhou Coal Mining Co. (ADR) $14.28 $7,258 5.5%
ZNH China Southern Airlines Limited (ADR) $21.34 $4,512 6.2%
SFUN SouFun Holdings Limited (ADR) $13.96 $1,083 7.1%
GA Giant Interactive Group Inc (ADR) $4.76 $1,167 5.9%
CYOU Changyou.com Limited(ADR) $22.49 $1,213 32.6%


Try the All-in-One Screener to find the companies that may meet your criteria. Define your customized screen and bring it up with just one click next time. This is the link.


Rating: 3.7/5 (16 votes)

Comments

superguru
Superguru - 1 year ago
Any of the companies you mentioned - are they reverse mergers?

I am worried about fraud when investing in China.
gurufocus
Gurufocus premium member - 1 year ago
These are all ADRs. That means they are also traded in the Chinese markets.

Reverse mergers are not ADRs.
Cornelius Chan
Cornelius Chan - 1 year ago
Thanks for posting these informative bulletins. I have heard over and over of China's 10%+ growth rate (now slowed to 7% approx.) and then to hear of this current undervaluation? Amazing.

It would be cool if some guru or knowledgeable investor on this site would elaborate an article about which types of Chinese stocks are good to invest and which types to avoid. I hear so many investors freaking out about Chinese fraud companies or they got burned by xyz company out of China. The knee-jerk response is to tar all with the same brush, however I am thinking this type of behavior is limiting of one's vision and potentially detrimental to one's long term returns.

Cheers!

paulwitt
Paulwitt - 1 year ago
The following excerpt is copied from reversemergerblog.com

Berkshire Hathaway, Turner Broadcasting System, Texas Instruments, Tandy Corporation, Occidental Petroleum, Muriel Siebert & Co., Blockbuster Entertainment, and the New York Stock Exchange all went public without doing initial public offerings. They did so by means of the reverse merger—a method by which a private company buys a majority stake in a public one and thereby becomes public itself

superguru
Superguru - 1 year ago
Also with Chinese economy slowing down may lead to more fraud due to desperation and more fraud being exposed. Bad times. Value investing in China does not seem like a good idea.
paulwitt
Paulwitt - 1 year ago
I have a basket (44 stocks) of chinese smallcap/microcap stocks

If I'm wrong I'll lose 30% of my portfolio. If I'm right I'll make money.

*disclaimer: I haven't been right yet

YONG seems to be doing ok. last 3 months up 33%

paulwitt
Paulwitt - 1 year ago
LLEN is another stock to keep an eye on. China has a policy of consolidating small coal mines and this is what this company is doing. LLEN is based in Seattle and they have a few American executives, 70 million marketcap

Disclosure: Iong LLEN

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