H-Shares Have Started Their Uptrend Trajectory

Both HK and China stocks should do well in first half of 2017 and HK stocks, especially H-shares, should perform better than stocks listed in Shanghai Stock Exchange. I can think of three reasons for my prediction.

1. Ants moving houses from Shanghai Stock Ex to HKEx

HK$ is pegged to US$ and it has strengthened rapidly alongside US$ in the past few months since the anticipation of Fed interest rates hike started. Conversely, Chinese yuan or RMB has weakened in the same period due to its massive outflow when China tycoons and businesses parked or invested their money in other countries, guessing that the China government would support the devaluation. However, the fact that the Chinese government has spent more than US$550 billion in 2016 to stave off attacks on RMB is showing its resolve not to let RMB depreciate too much or the confidence in the Chinese economy will be shattered.

As it is, RMB has depreciated against HK$ by 12 percent since July 2015. And all pundits are now predicting that RMB will keep weakening and the China government will have no choice but to try all means to stop the money from flowing out of the country as it is not helping their own economy now.

As it is, all China citizens are restricted by the existing rule to exchange a maximum of foreign currency equivalent to US$50k per year and this quota will be easily reached given that China is among the top few countries that have the highest savings. There have been rumours that China government will tighten the dollar-exchange limit. But with the new year just kicking in and China citizens being able to swop their RMB savings into US$50k again, you can expect China citizens will flock to their commercial banks to do this first thing in the morning. But what about the rest of the RMB cash hoard in excess of equivalent US$50k? What can the China speculators do to circumvent this?

One alternative is to buy H-shares through Shenzhen-HK Stock Connect or Shanghai-HK Stock Connect. When an investor does it this way, his action is not deemed as exchanging his RMB into US$. As H-shares are quoted in HK$ on HKEx, even if the share price of the stock he is buying does not rise subsequently, the investor may rest assured his money will not depreciate as HK$ is pegged to the strong US$.

On the last trading day of 2016, the money flowed from Shanghai Exchange to HKEx is a record RMB6.453 billion. You do not need a crystal ball to tell you that HK market will have a good start for 2017.

2. Smart Money will move to stock markets that have strengthening currencies  

In July 2014, I predicted that stocks listed on Shanghai Stock Exchange will start a bull run after the Shanghai Composite Index (SHCOMP) dropped from the peak of 6124 in October 2007 and hovered around 2000 in 2014 for a long time. 

At that time, only China citizens can invest in the cheaper A-shares and foreigners like me can try the equivalent H-shares listed on HKEx which is about 30+ percent more expensive. Then, in 2014, for the good dividend and very attractive p/e, I invested in China Construction Bank H-share (CCB, ticker: 939) , the second biggest China's bank in market cap, knowing very well that it is more expensive than its equivalent A-share listed on Shanghai Stock Exchange.

HK CCB H-share was more expensive than its A-share by 35% in 2014. And as the RMB was perceived as the strengthening currency and the China Chinese are more speculative after the launch of Shanghai-HK Stock Connect, CCB A-share became 14% more expensive than CCB H-share a year later in July 2015. That is, a 49% (35+14) gap in a year.

As the RMB has been perceived to be weakening since two months ago, the CCB H-share is only 2% cheaper now. Who knows CCB H-share will soon be, like the situation in July 2014, 35% more expensive than its A-share counterpart again?

As it is, A-shares generally still command a premium over their equivalent H-shares. The collective premium of A-shares over H-shares on the last trading day of 2016 is 22.35%.

My experience can tell you that currency risk assessment is important when you invest in any stock market. The time has come for us to wake up from our slumber to put money in H-shares if experience from history is anything to go by.

3. Fed will not raise interest rates in middle of March

In end of 2015 when Federal Reserve raised interest rates by 25 basic points for the first time after 7 years, Fed Chair Yellen informed that the interest rates would be raised four times in 2016. Lo and behold, it turned out that Fed only raised it once in 2016.

Given that the US$ has appreciated too fast and too furious against other major currencies within so short a time frame, it is in all probability that Fed will not raise rate more than twice in 2017 and the first one can only be in June, not March.  If that is so, the first quarter will be the best time for market players to invest in the HK bourse, especially in H-shares.

What stocks to invest?

Still the same stocks that I have recommended before in my blog. Good stocks will withstand the test of times. Prices quoted here are the closing prices on the last trading day in 2016:

1.     Emperor Capital (英皇證券, 717) – A brokerage with insider purchases, p=0.7, p/e=7.778x, yield=3.571%, p/b=1.11x

2.     Get Nice Hldg (结好控股, 0064) – A brokerage with insider purchases, p=0.265, p/e=3.786x, yield=7.547%, p/b=0.46x

3.     HS H ETF (恒生H股, 2828) - H-shares ETF, p=94.4, yield=3.284%, A/H=1.22x. Advantage of diversification and you may save some money on clearing fees too when you invest in ETFs in HKEx.

4.     HuanDian Power (华电国际电力, 1071) – Utility, p=3.51, p/e=3.722x, yield=10.057%, p/b=0.69x, A/H=1.5732x.

5.     HuanNeng Power (华能国际电力, 902) – Utility, p=5.14, p/e=4.647x, yield=10.759%, p/b=0.81x, A/H=1.5301x.

6.     Datang Power (大唐发电, 991) –Utility, p=2.03, p/e=8.219x, yield=9.852%, p/b=0.59x, A/H=2.0993x.

Two potential growth stocks with low p/e:

7.     Donfeng Motor (东风集团, 489) - Car manufacturer, p=7.57, p/e=4.8x, yield=3.104%, p/b=0.6x.

8.     China Saite (中国赛特, 153) - Steel Structure Constructor with a theme of One-Road-One-Belt. p=0.53, p/e=2.573x, yield=3.585%, p/b=0.49x.

英皇领头先开张
结好加油也跟上
囊中好股天天涨
喜笑颜开精神爽

I have parked my money in HK bourse, what about you?

Superphang

superphang@blogspot.sg

Little Changes Added Up to Imminent Bull Markets

The Singapore second- and third-liners all moved up strongly this week mainly due to rebound in crude oil prices. However, the STI still largely remains in the doldrums. This begs the million-dollar question: Will the STI move up soon?

The HK market has moved up quite a fair bit in the past 3 months or so. My strong sense, based on both my fundamental and technical analyses, is that the uptrend of HK market is still intact and the China market and Singapore market will start to move from here onwards. The following reasons will lend support to my prognostication.

1.      Inclusion of RMB in SDR

As of 1^st October 2016, the Chinese renminbi (RMB) has been included by IMF in the Special Drawing Rights (SDR) together with four other major currencies -- the U.S. dollar, euro, the Japanese yen, and pound sterling. The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. This will help RMB to be more internationalised and increase the foreign funds’ interest in trading stocks in Shanghai and Shenzhen stock exchanges, partially through HK stock exchange.

2.      The countdown to Shenzhen –HK Stock Connect

The Shenzhen-Hong Kong Stock Connect will be rolled out by end of 2016 and so far most pundits believe it will take place in November. This is a strong booster to stocks listed in HK Exchange, especially H-shares.

3.      China expansionary PMI

The China Caixin Manufacturing PMI announced on 30 Sep is 50.1, and the official government Manufacturing PMI is 50.4. It has been a few months for this economy leading indicator to hover above the expansionary level of 50. This should give impetus to smart monies to enter the China and Hong Kong markets.

The China August railway freight volume increased by 1% compared to the same period last year. This number may seem insignificant but it is the first growth registered in a single-month freight volume in the past 32 months. The electricity power consumption in August grew 7.8% compared to the same period last year. The RMB loans were up 11.6% in August as compared to August 2015. These three important figures that economists monitored closely for the health of China ‘s economy have all shown obvious improvement and this should translate into an imminent strong rebound in China’s economy and thus the stock market performance. 　

4.      Entry of A-shares into Morgan Stanley Composite Index (MSCI)

On 29^th September, MSCI Inc. noted that Shenzhen-HK Stock Connect will allow foreign investors to put their money in the US$6 trillion China stock market, and this should help international investors solve their problems of bringing their investment money out of China.

It is expected that MSCI will announce the assessment of all its indexes in June 2017 and there is a likelihood that China’s domestic equities (A-shares) can be included into MSCI emerging-market  index, which is tracked by investors with US$1.5 trillion in assets, even before June 2017’s announcement and if this happens, it will prop up A-shares prices more. The entry into MSCI Inc.’s benchmark indexes will turn renminbi into a truly international currency.

5.      Market Reforms taken seriously in China

China stock market has been a closed market that used mechanisms like freezing the market and making it illegal to short, using government funds to buy shares -- interventions that are not welcome among global investors.

However, there have been a number of market reforms in progress. In February, China regulators allowed qualified traders to shift money in and out of the country on a daily basis, a key change for open-ended mutual funds and ETFs. In May, domestic stock exchanges published rules restricting trading halts. In June, China gave a 250 billion renminbi (US$38 billion) investment quota to the US, allowing American institutions to invest overseas renminbi in mainland markets. The progress made has shown China’s determination to make itself link to the world and this should augur well for the China stock market as well as for the world economy.

6.      Equity Risk Premium are telling us the markets are undervalued

The historical average p/e for matured stock markets are generally around 15x. But when the interest rates are low, the more practical way is to use equity risk premium to determine if the markets are undervalued or overvalued.

Equity risk premium is the excess return that investing in the stock market provides over a risk-free rate. A survey of academic economists gives an average range of equity risk premium of 3 to 3.5% for a 1-year horizon.

From the Business Times Weekend Oct 8-9, 2016, we can obtain latest p/e of various markets. The estimated p/e of HSI is 13.1x, STI is 13.8x and SHCOMP is at 14.1x. The p/e of US S&P 500 is currently 18.3x. If we benchmark against fixed deposit rates, with about 1.5 % per annum, as the risk-free investment, the equity risk premiums are 6.13%, 5.75% and 5.59% for HSI, STI and SHCOMP respectively, which are all better than the range of 3 to 3.5% as recommended by economists.

From mathematical calculation, p/e needs to be around 20x for equity risk premium to be at 3.5% with respect to a one-year-risk-free rate of 1.5%.

This shows that the stocks in Singapore, HK and China are all very cheap compared to putting money in the banks or with government bonds.

The current US two-year treasury bond yield is only at 0.838% partly because all investors are treating US dollars as the safe haven. So, even the USA market which is perceived to be lofty, with p/e of S&P at 18.3x, is still considered as undervalued.

7.      The charts are telling us an uptrend has started

The charts of STI and SHCOMP have shown that both markets are starting to move up and the momentum should be increasing soon. Hang Seng Index (HSI) for HK market has already experienced a bull run and the uptrend is intact.

I hope I have given all a clear picture of why the Singapore and China markets will start its bull run soon. Singapore market will not be lacklustre anymore. I have moved some of my money back to Singapore market after about 20% gains made from investing in HK market for the past 6 months or so.

Download the mobile free apps: InvestingNote and you can find remarks of my recommendations like Rowsley and Ezion W200424. For the latter, I got in at an average price of 5.088 cts on 8 Sep 16, and now it is 8 cts --- a whopping surge of 57.23% in exactly a month. Luck? Not really. It is still about old-fashioned hard work, research, research and research.

For my estimation done in InvestingNote, I will set a target price for a stock I recommended to buy or sell. Once the target price is reached, I will likely post another estimation to ride the trend. But in actual investment, once I get hold of a growth stock and when its price keeps ascending, I will not sell it until Mr Market signals to me that the reversal is imminent. You could see that I have kept raising my target prices for Ezion W200424 in InvestingNote as I am still holding on to this rare and beaten-down gem.

The shrewd investors and smart money have to move their funds to a more lucrative asset class. Period.

Superphang

http://superphang.blogspot.sg

Is investing in Singapore market better than in HK market now?

Over the last six months, Hang Seng Index edged up 12.5 percent more than Straits Times Index and the analysis in my blog that H-shares were the best bet has been vindicated.

From The Business Times Weekend, the p/e of STI at 2857.65 now is 12.24x and the p/e of HSI at 22909.54 is 12.17x. They are almost equal now.  Still, H-shares are the better bet. Why?

I can think of the following reasons:

1. GDP of China at more than 6.5% is still much higher than that of Singapore which is of anything lower than 2%.

2. the average p/e of H-shares is lower than that of HSI.

3. The Shenzhen and HK Stock Connect will propel H-shares to close up the current A- and H-shares gap of 24.96%.

4. The anticipation of Fed Chair Yellen to jack up the US interest rates alone will strengthen the US and HK currencies and thus the influx of foreign funds to HK. Singapore currency, on the contrary, should be weakening due to poor NODX figures.

However, what with the interest rates moving in the opposite direction of the performance of stock markets, and with HSI moving higher, we have to reduce our investment in the stock market unless you can find another phenomenal growth stock like Tencent 腾讯 (Ticker: 700) about 10 years ago.

Superphang

http://superphang.blogspot.sg

The Impacts of Legal Insider Trading & Its Correlation with Stock Performance

Are insider sales and purchases effective in predicting the future price movements of a stock?

Peter Lynch, arguably the best fund manager ever, managed the Fidelity Magellan Fund from 1977 to 1990, during which time the fund's assets grew from $20 million to $14 billion, achieving a CAGR of 29.2% and beating the S & P 500 index benchmark in 11 of those 13 years. In his books, he shared that he made use of insider trading as one of his strategies to buy stocks. I read his books and have adopted this tenet with alacrity in some of the stocks that I purchased, e.g. 800 Super (my blog posted on May 29, 2016), Singapore Land (before its privatisation), Innovalues, Ellipsiz, Best World (my blog on April 23, 2016 ) and all have produced wonderful profits for me.

Peter Lynch made his point straight: If the boss buys his own company stock, the only reason is he sees potential in his company and he thinks the stock price will go up. But if he sells the stock, it is not necessary that the company is not doing well.

Insider trading happens in different kinds of companies, big or small, and can be at any time.  The information is, through my trading experience, more crucial in smaller companies than large companies. All stock exchanges will impose strict regulations, restrictions and penalties if the substantial shareholders do not disclose their trades within a certain timeframe after the transactions have been concluded. The information will be disclosed quite timely for all market players and we have to make use of it to our advantage.

We need to classify the insiders into different levels. The top insiders -- people like CEOs, CFOs, Directors, Chairmen of the board – are generally able to trade more profitably than other insiders. It is quite easy to come to that conclusion as they are privy to the company’s developments. The investment funds, even though they are substantial shareholders, either will not have the big picture or they will receive the information at a later stage.

The market timers and asset allocators will be encouraged by evidence that insider trading data can predict future stock returns. But my years of experience and knowledge told me that not all insider trading information is equally predictive. I would like to share with you the nuances between the various insider trades to increase your odds of picking the right stocks at the right time:

1.    Insiders typically have undiversified portfolios as their holdings are huge. They also generally get stock as compensation. Being rich and risk-averse, they will want to diversify their portfolios. So, to buy more shares in the same company runs counter to the principle of diversification and the only reason that insiders would buy more has to be the positive development of the company they are privy to. They can sell to diversify, for liquidity reasons, or for other reasons. Sales are still informative but less informative than purchases.

2.    Insider trading in small companies is more predictive. It is generally easier for top executives of smaller companies to understand everything about the company.

3.    When insiders trade frequently and have large trades, those transactions are more predictive.

4.    Try to wait for some time, say 3 months or so, to see if you can get the stock at a price cheaper than the insider’s. This is not to suggest that the insider is wrong in his prediction of the company’s future growth. Most of the time, the technical analysis do not support the price moving upward when the insider bought the stock. If the price has gone higher before you get in, so be it. There is always another opportunity.

5.    If the price of the stock moves up and an insider is buying it, it is very predictive.

6.    If the price of the stock moves up and an insider is selling it, it does not imply that the company is in trouble. The scenario can be: The insider knows the company is doing well and there will be a good earnings announcement, but he needs to sell some shares to raise money. There will usually be a restrictive period for insiders to buy or sell within a month before the quarterly result announcement. So the insider postpones the sale until after the stock has priced in the good news. The insider has no intention to exploit future stock-price declines. It is timed to take advantage of the good news and in that sense the insider’s sale is not that informative.

7.    Even with insider trading, buying into strength and selling into weakness tends to be more informative. We have to worry if the insider sale takes place when prices are falling.

8.    You still need good diversification even when you buy stocks after insider purchases.

In a nutshell, investors willing to 'mimic' large trades by top executives of smaller companies will make money and the effectiveness of the purchases is nuanced by the above summary that I have made.

Superphang

http://superphang.blogspot.sg

800 Super: The Uptrend Trajectory Is Intact

800 Super Holdings, another defensive stock listed in the Catalist of the Singapore Stock Exchange, is worth a closer look even when its price has surged substantially of late.

800 Super has grown steadily since its inception as a waste management solutions provider to a one-stop provider of waste and environmental solutions by expanding into the cleaning, recycling and horticulture industries. It is one of the four licensed public waste collectors in Singapore appointed by the National Environment Agency (NEA). Its industrial and commercial waste collection services span across various industries including shopping complexes, hotels, factories, shipyards, etc.

In Singapore, 800 Super was awarded by the NEA for the cleansing of public areas including public roads and pavements in the North West and South West district which almost covers half of Singapore. Its horticultural services include grass-cutting, planning and maintenance of landscape and aboricultural services that include the planting and pruning of trees and plants.

800 Super’s business  is considered non-cyclical and defensive  as the waste still needs to be collected and the roads still needs to be swept during both good and bad times.

Between FY2011 to FY2015, its profit has a compound annual growth rate of 39.86%. The company has been giving out dividends in the past years and FY2015 being the highest at S$0.02. This translates to a dividend yield of 3.03 percent based on the closing price of $0.66 on 27 May 2016.

The trailing price-earnings ratio is at 6.73x.

800 Super largest shareholder Yong Seong Invesment increased its holdings in the group in February at a price of 43 to 44 cts, which has increased its stake in 800 Super from 66 to 66.8 percent.  

Being defensive and in an industry that has relatively high entry barriers, the worst case scenario will be that the company has stopped growing and will maintain its p/e at 6.73x, this should give its investors a return of 14.86 percent per year, some of which will come from the dividend declared by the management board, and some in the retained earnings which should be reflected in the surge in share price.

The transaction volume of the share is usually very low but both the prices and its volume have gone up substantially lately as market players started to have interest in it. Due to the illiquidity of the transactions, chart reading is not useful. This is a stock more for investors with a long-term horizon.  

Going forward, there are three highly possible scenarios that I think of:

1.       Privatisation of the company: the share price will surge.

       2.       Bonus issue: the share price will surge.
       3.       Giving better dividend: the share price will surge.

Superphang

http://superphang.blogspot.sg

The Power That You Want In Times of Uncertainty

Today I will recommend you three electricity power houses: HuaDian Power 華電國際 (1071), HuaNeng Power 華能國際 (902) and DaTang Power 大唐發電（991）. All have been giving solid and consistent dividends for the past four years, with an average yield of 10% today. All have very low forward p/e, at 4.8x, 5.3x and 6.6x respectively. All have very low forward p/b, at 0.66x, 0.74x and 0.48x respectively. They are H-shares and all are substantially cheaper than their A-shares counterparts listed in Shanghai Stock Exchange. Their A/H premiums are at 60%, 68% and 130% respectively.

The prices closed at the end of 25 May 2016 at HK$3.83, HK$5.03 and HK$2.00 respectively. All have been hovering at their respective nadirs and waiting for the ever-mysterious time for a breakout. And I think now is about the time for the exacting breakouts to take place due to the following reasons:

(1) They are defensive stocks whereby all people have to use electricity be it good times or bad times.

(2) The prices have dropped by 25%, 25% and 15% respectively from the beginning of 2016 and value investors would want to get the solid dividends as the ex-dividend date are drawing near.

(3) During times of uncertainty, these stocks with steady and high dividends are the best bet. Their dividends are payable only once a year, so you stand to get on average 10% returns within a short time.

(4) The charts have all shown that the turning points are around the corner.

(5) These three companies operate in an oligopoly environment, where barriers of entry are relatively high.

Superphang

http://superphang.blogspot.sg

Get Nice Holdings (HK:0064) Issued Positive Profit Alert

Based on the preliminary review of the unaudited consolidated management accounts of the Company for the year ended 31 March 2016, it is expected that the profit attributable to owners of the Company for the year ended 31 March 2016 will substantially increase as compared to the same period of 2015 (profit attributable to owners of the Company for the year ended 31 March 2015 was approximately HK$260.6 million). The increase is primarily due to the increase in revenue from margin financing interest income, the increase in income generated through our brokerage services, and the increase in income generated from investment, for the year ended 31 March 2016, when compared to the same period in 2015.

Click here for link to the official announcement.