Bulletin
Investor Alert

New York Markets After Hours

Dec. 9, 2007, 8:54 p.m. EST

How to Market-Time China

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    China Mobile Ltd. ADR (CHL)
  • X
    Lenovo Group Ltd. ADR (LNVGY)
  • X
    CNOOC Ltd. ADR (CEO)

or Cancel Already have a watchlist? Log In

By Jonathan Cheng

HONG KONG -- From telecom providers to coal miners, some of the biggest companies operating in mainland China plan to offer shares on the Shanghai Stock Exchange next year.

That could present investors in the Hong Kong market with an indirect but compelling opportunity -- if they time it right.

Telecom China Mobile /zigman2/quotes/204514293/composite CHL -1.86% , computer maker Lenovo Group /zigman2/quotes/204000062/delayed LNVGY -4.80% and energy concern Cnooc /zigman2/quotes/204964401/composite CEO -3.00% -- three of the biggest and best-known "red chips," or nonmainland-registered companies -- are all gearing up for follow-on listings in Shanghai. Then there is a long line of mainland-incorporated companies eager to tap Chinese investors' thirst for share offerings, including Zijin Mining /zigman2/quotes/204517000/delayed HK:2899 +0.55% , China Coal /zigman2/quotes/201486584/delayed HK:1898 0.00% , Guangzhou R&F, Great Wall Motor /zigman2/quotes/207702000/delayed HK:2333 -1.34% , China Telecom /zigman2/quotes/200463528/composite CHA -2.38% , China Netcom and People's Insurance Company of China.

The opportunity? These mainland listings could boost the companies' Class-H shares, or shares of mainland-registered companies that trade in Hong Kong.

Typically, issuing yuan-denominated Class-A shares, available mostly to mainland investors, provides a sort of value target for the H-shares. A-shares fetch premiums of about 45% to their Hong Kong counterparts according to ABN Amro. The premiums stem from China's capital controls, which trap a lot of stock-investing liquidity within the Shanghai and Shenzhen markets. A follow-on mainland Chinese listing also can boost H-share performance simply by increasing the company's buzz in the run-up to the Shanghai or Shenzhen debut.

And the timing? As blockbuster companies prepare to make their A-share splashes, H-share investors shouldn't necessarily expect the party to continue well into next year.

Combo

"The Hong Kong-listed shares of companies that completed A-share listings typically outperform the market in the period prior to the IPO date, while post-IPO performance is less consistent," Jing Ulrich , J.P. Morgan's managing director for China equities, wrote in a year-end research note to investors.

Just look at the eye-popping gains that oil and gas company PetroChina /zigman2/quotes/205108732/composite PTR -1.54% netted on its first day of trading in Shanghai last month. Though PetroChina's A-shares shot up 163% that day, Nov. 5, to send the company's market capitalization above the US$1 trillion mark by one measure, its Hong Kong-listed H-shares fell 8.2% and were down 22% in a matter of weeks, before rebounding modestly. In Shanghai, the stock is faring worse, down 28% Friday to 31.31 yuan (US$4.23), from its opening day close of 43.96 yuan. Such stumbles out of the gate are teaching investors a lesson about companies' A-share listing plans: watch the Hong Kong stock price before the Shanghai debut.

"People have become smarter," says Lan Xue , at Citi Investment Research. "Listing in Shanghai is not going to automatically mean strong H-share performance."

The run-up to that Shanghai listing, though -- that's been no problem. Take PetroChina: Its H-shares rose 76% in the three months before the mainland debut, from 11.16 Hong Kong dollars (US$1.43) to HK$19.60 on the eve of the Shanghai listing. That far outstrips even the Hang Seng Index's growth spurt to a record level in that stretch.

The same overall arc can be seen in other companies, many of whose H-shares have shot up in anticipation of the domestic listing, only to have those gains evaporate. The H-shares of China Shenhua Energy were up 86% in the three-month lead to the company's Oct. 9 listing in Shanghai, peaking at HK$57.85 before plunging 30% in the next six weeks, bottoming out at HK$40.50. China Life Insurance /zigman2/quotes/206573290/composite LFC -0.85% , which saw its H-shares rise 73% in the three-month run-up to a Jan. 9 A-share listing, peaked at HK$26.85 before tailing off to settle around HK$22.80 three months later.

Companies often seek follow-on listings during a high-growth phase, when they are hungry for more capital to expand operations, suggesting their good fortune, good buzz and share-price growth can continue. But some just can't sustain their H-share prices even after the fresh infusion of mainland Chinese cash.

Ms. Xue of Citi says companies going to the equity market with no obvious need for new funds enjoy "little support" for their H-share prices in the aftermath of the follow-on listing. "What we've found is that those companies who use the money productively see continued performance," Ms. Xue says. "Otherwise, what we see is that these companies underperform."

So, as more and more Hong Kong-listed Chinese companies line up to list up north -- and H-shares continue to stumble in the wake of the Shanghai listings -- investors need to ask: Why does this company want to list in Shanghai, and will the listing create more value?

Many companies seeking a Shanghai listing really do need fresh funds to fuel expansion. David Cui , head of China equity research and strategy with Merrill Lynch in Shanghai, highlights oil and gas players as well as property developers, who are under pressure to snap up increasingly scarce prime real estate. "Most companies need the financing, and you can't get equity any cheaper elsewhere," Mr. Cui says. Still, part of the reason for a mainland follow-on, especially for the big state-controlled companies, may be political, even though Chinese securities regulators say they don't actively encourage companies to list domestically.

"The Chinese government wants to build a strong market, and these companies are under pressure to return home," Mr. Cui says.

Write to Jonathan Cheng at jonathan.cheng@wsj.com

/zigman2/quotes/204514293/composite
US : U.S.: NYSE
$ 40.08
-0.76 -1.86%
Volume: 1.58M
Feb. 27, 2020 4:10p
P/E Ratio
10.35
Dividend Yield
4.19%
Market Cap
$167.24 billion
Rev. per Employee
$239,645
loading...
/zigman2/quotes/204000062/delayed
US : U.S.: OTC
$ 12.49
-0.63 -4.80%
Volume: 71,736
Feb. 27, 2020 3:58p
P/E Ratio
10.76
Dividend Yield
5.44%
Market Cap
$7.86 billion
Rev. per Employee
$924,869
loading...
/zigman2/quotes/204964401/composite
US : U.S.: NYSE
$ 139.52
-4.31 -3.00%
Volume: 147,544
Feb. 27, 2020 4:10p
P/E Ratio
7.40
Dividend Yield
5.98%
Market Cap
$64.22 billion
Rev. per Employee
$1.78M
loading...
/zigman2/quotes/204517000/delayed
HK : Hong Kong
HK$ 3.66
+0.02 +0.55%
Volume: 23.56M
Feb. 27, 2020 4:08p
P/E Ratio
19.75
Dividend Yield
3.11%
Market Cap
HK$92.37 billion
Rev. per Employee
HK$6.84M
loading...
/zigman2/quotes/201486584/delayed
HK : Hong Kong
HK$ 2.62
0.00 0.00%
Volume: 5.37M
Feb. 27, 2020 4:08p
P/E Ratio
6.00
Dividend Yield
3.39%
Market Cap
HK$34.74 billion
Rev. per Employee
HK$2.78M
loading...
/zigman2/quotes/207702000/delayed
HK : Hong Kong
HK$ 5.88
-0.08 -1.34%
Volume: 18.22M
Feb. 27, 2020 4:08p
P/E Ratio
11.26
Dividend Yield
5.64%
Market Cap
HK$54.40 billion
Rev. per Employee
HK$1.78M
loading...
/zigman2/quotes/200463528/composite
US : U.S.: NYSE
$ 37.70
-0.92 -2.38%
Volume: 116,967
Feb. 27, 2020 4:10p
P/E Ratio
9.65
Dividend Yield
3.82%
Market Cap
$5.36 billion
Rev. per Employee
$200,534
loading...
/zigman2/quotes/205108732/composite
US : U.S.: NYSE
$ 39.72
-0.62 -1.54%
Volume: 124,883
Feb. 27, 2020 4:10p
P/E Ratio
9.18
Dividend Yield
4.26%
Market Cap
$8.51 billion
Rev. per Employee
$678,384
loading...
/zigman2/quotes/206573290/composite
US : U.S.: NYSE
$ 11.68
-0.10 -0.85%
Volume: 996,068
Feb. 27, 2020 4:10p
P/E Ratio
9.18
Dividend Yield
0.72%
Market Cap
$17.53 billion
Rev. per Employee
$970,796
loading...

This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »
Link to MarketWatch's Slice.