Red chips may present good buying opportunities in the second quarter, although their share price declines will continue amid the regional crisis, Schroder Investment Management (Hong Kong) says. China fund manager Tina So Shuk-man told a briefing yesterday that red chips would underperform in the Hong Kong market during the early part of the year as analysts revised their profit estimates downwards, and earnings and net asset values declined in the short term. Any rally in the Hong Kong market, which could be expected in the second half, would be led by blue chips, followed by red chips, she said. H shares and B shares would take a longer time to recuperate. H shares had less flexible management while the B-share sector suffered from a lack of liquidity. Ms So said she expected the premium of red chips relative to the Hang Seng Index - a figure which has dropped from more than 350 per cent to 100 per cent - to fall by a further 50 to 80 per cent. The premium was likely to stay, she added, because red chips were still viewed as the best vehicle to cash in on growth in the mainland. They are expected to register core earnings growth of about 28 per cent this year even without further asset injections while the slower economy in Hong Kong will depress the outlook for stocks that mainly derive their income from Hong Kong. 'Many of the [red chips] are not that exposed to property. Many of these earnings are more related to the higher growth industries and regions in China which I think still deliver very attractive long-term opportunities,' Ms So said. The sector would again become popular among investors as asset injections started to come through possibly towards June. The sector would trade at a price-earnings multiple of about 23 times, down from 27.4 times last year, she said. Ms So expects the rebound in H shares to come towards the end of this year. She said the mainland was likely to cut the one-year working capital lending rate by 1 per cent this year, reducing the interest burden on H-share and B-share companies and brightening their earnings growth prospects. Ms So said there would be strong incentives for Beijing to merge the A and B-share markets, possibly this year. B shares have been trading at a steep discount of more than 50 per cent to A shares. A merger of the two sectors would bring in fresh foreign capital, much needed to revamp flagging state-owned firms. The yuan would remain stable in the near term, she said. It is likely to fall to 8.7 yuan against one US dollar, or 5 per cent depreciation, by the year's end.
