China plays offer fresh hopes amid gloomy global landscape

The mainland share sector offers a landscape pitted with almost as many mines as Wall Street, where a series of corporate-governance and accounting scandals have shaken investors. Alleged asset stripping by Brilliance China Automotive Holdings, undeclared loans to parent firms by Guangdong Kelon Electrical Holdings and Northeast Electrical Transmission & Transformation Machinery Manufacturing and revenue scares at Greencool Technology Holdings are among the problems that have hit the sector this year. With world markets in the shape they are now, the spotlight could return to China. Mainland shares generally outperform in times of global market strife because of China's closed capital account, which keeps it relatively sheltered from financial contagion. Credit Suisse First Boston upgraded its weighting on the market recently, even before the general malaise in shares hit a near-crisis last week with Wall Street touching lows not seen since September last year. CSFB expects the H-share index to rise to 2,500 points, an upside of 17.37 per cent, and the MSCI China Index to rise about 12 per cent. While the small mainland players have outperformed the premier stocks, CSFB expects that situation to reverse. 'Sentiment and stories of the large-caps are improving,' CSFB said. Kenneth Luh, head of China research, said the key sectors of telecommunications, oil and gas, power and airlines all had strong stories. Recent subscriber data from China Mobile has been better than expected and the operating environment is showing signs of stabilising. China Unicom, with its separate code division multiple access network problems, is not part of CSFB's portfolio. Restructuring stories are behind CSFB's calls of Beijing Datang Power Generation and Shandong International Power Development. CNOOC is its top pick in the oil sector, which is due to benefit from rising crude prices. 'The oil and gas sector offers the most meaningful second-half upsides based on market and price performances,' Mr Luh said. HSBC is another fan of CNOOC, which is analyst Gordon Kwan's favourite oil pick. He said three new projects by CNOOC could lead to production surprises. CNOOC is trading at about 12 times this year's earnings and its yield is less than 2 per cent. That makes it more expensive than PetroChina and Sinopec Corp - both on eight times earnings with yields above 5 per cent - but the oil explorer may see new joint ventures and other earnings-enhancing events this year. While red chips are down 11.43 per cent this year, investors seeking safety in H shares face an outperformance problem. The H shares have outperformed the Hang Seng Index by 28 percentage points this year. With few other choices in the world market, some are convinced China offers a last refuge. Core Pacific-Yamaichi head of research Alex Tang Yee-yuk is hearing that attitude from Japanese fund managers. Last week, for instance, two leading Japanese houses said they were reallocating funds to China from other overseas markets. 'They believe in the China boom story. They think funds will continue to move away from the US,' Mr Tang said. He said H shares were trading at 11 times current year earnings. He recommended the 'restructuring' stories, including power and oil stocks, airlines and toll-road operators. ABN Amro made one of the more intrepid calls last week by steering investors towards Brilliance China, whose shares have plunged 17.4 per cent since the middle of last month. Analyst Dennis Chung said the departure of Yang Rong should remove an overhang. He said the firm recently finalised a joint venture with BMW to make and sell BMW cars in the mainland. The management expects the venture to begin in the fourth quarter of next year and to produce 16,000 units in 2004. Mr Chung said there was an argument for increasing the target price to HK$1.41 based on the venture. For now, he is keeping it at $1.20. That is because transparency problems remain. Even as shares plunged amid rumours about Mr Yang, the firm said it was unaware of any reasons for the unusual share-price movement. The management denied knowledge of any investigations of any senior executives including the chairman, only saying that the major shareholder, the Education Fund, had asked Mr Yang to step down. The shares were suspended on Friday. Graphic: hsi24gbz