British fund managers investing in Hong Kong have been keen to ride the wave of optimism that has buoyed red-chip stocks in recent months, but have found that stock selection can prove difficult.
Rupert Norman, a fund manager at Britain's biggest unit trust company M&G, said: 'Looking at red chips, a lot of guess work is involved . . . it is reasonably difficult for bottom-up-based investors to reconcile valuation with prospects.
'It is a balancing act between parentage, valuation, and the quality of existing assets . . . as well as the quality of potential assets.' Red-chip companies, which are Hong Kong-based but derive the majority of their earnings from the mainland, have become strong performers, and some, such as China Resources, have even been tipped as future Hang Seng Index constituents. Valuations in consequence can appear to be higher than the true worth of the company.
One recently floated company, Shanghai Industrial Holdings, is on a price-earnings (PE) multiple of 20, against an underlying PE of about 14 to 15 on the Hong Kong market.
Humphrey Carey, head of Far East Investments at Foreign and Colonial Emerging Markets, said assessing the quality of a company's management and a solid track record was the key to red-chip investment.
He said: 'One of the companies we like a lot is Guangdong Investments, which has also shown the ability to manage the business that it has acquired.