China’s world-beating rally has alarm bells ringing as brokerages say to sell several hot stocks
- China stocks fall sharply after a breathtaking run
- Bearish calls come as more than 70 per cent of China stocks were technically above overbought levels this week
Alarms were sounded on the world’s best-performing equity market this year, as Chinese brokerages started to turn bearish on some of the hottest stocks by issuing rare sell ratings.
Huatai Securities cut to sell its recommendation on CSC Financial, the best performer on the CSI 300 Index this year with share prices more than tripling, in a report dated Friday, citing valuations that far outpace growth prospects and are much pricier than peers.
Just a day earlier, Citic Securities, the nation’s biggest listed brokerage, recommended selling shares of People’s Insurance Co Group of China, predicting the insurer will drop by as much 54 per cent in the following 12 months after more than doubling this year.
The bearish bets on the leading gainers on Chinese stocks sparked jitters among investors on whether this year’s rally has been too rushed. It took just 32 day for the benchmark Shanghai Composite Index to enter a bull market last month after a 20 per cent rise from a low. China has also been the world’s most overheated market in the world, with more than 70 per cent of the stocks technically above the overbought levels this week.
The latest calls contrast with a recent series of bullish ones, partly due to a rush of foreign money coming into China. Those boosters included Morgan Stanley and Goldman Sachs.
Financial stocks were among the most favoured sector on optimism about growth, as President Xi Jinping emphasised the importance of the industry in serving economic transformation. In addition, a separate board to host hi-tech companies is to be launched soon, sparking investor excitement.
The Shanghai Composite tumbled 4.4 per cent at the close on Friday, capping its biggest loss since October. Gauges tracking insurers and brokerages retreated at least 4.7 per cent. CSC Financial sank by the 10 per cent daily limit to 28.04 yuan in Shanghai and People’s Insurance Company (Group) of China also plunged by the same magnitude to 11.55 yuan.
“Reports from big brokerages such as Citic are simply like a bellwether,” said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai. “The market needed a push to realise some stocks are really overpriced and these sell reports are the last straw.”
Citic Securities initiated its coverage of People’s Insurance of China with a sell rating, saying the current share price was high above the reasonable level seen by the brokerage. The stock should trade at range between 1.25 times and 1.42 times its book value, compared with the current price-to-book ratio of 3.1 times, analysts led by Tong Chengdun at Citic wrote in a report dated Thursday. The shares may drop 53.9 per cent over the next 12 months, it said.
People’s Insurance Company (Group) of China, which gained a listing on the Shanghai exchange in November, had jumped 138 per cent through Thursday this year, making it the best performer among the nation’s five listed brokerages. The share-price jump far more exceeded the 49 per cent gain of China Life Insurance and the 25 per cent rise of Ping An Insurance Group of China in the span.
Huatai Securities said in the Friday’s report that CSC Financial was trading at a valuation not justified by its position in the brokerage industry. The multiple of 4.5 times its book values gave the company a market cap of around 200 billion yuan (US$29.8 billion), the second largest in the sector, while its revenues were only ranked seventh place, analyst led by Shen Juan wrote in the note. Huatai set a price target of between 13.86 yuan and 17.33 yuan for CSC Financial, implying a decline of as much as 51 per cent from its latest close. The stock had surged 258 per cent through Thursday in 2018.
