ChiNext rally in Shenzhen keeps stock traders on guard for fallout as valuation approaches 2015 peak
- The ChiNext board of start-ups trades at 77 times earnings, more than four times the multiple for the benchmark Shanghai Composite Index
- The ChiNext index gained 4.8 per cent last week for the best five-day performance in a month after trading rules were eased
The rally in ChiNext, the 11-year-old board that hosts 868 companies, has pushed its average price-to-earnings multiple to 77 times, according to data compiled by Bloomberg. That is four times more pricey than the average of 1,496 stocks represented in the Shanghai Composite Index.
“I am not too upbeat on the broader ChiNext board,” said Wang Zheng, chief investment officer at Jingxi Investment Management in Shanghai. “When the central bank begins to tighten liquidity after the epidemic is over, ChiNext will suffer.”
The index of start-ups advanced 4.8 per cent last week, its best run in a month after the China Securities Regulatory Commission doubled the daily permissible trading band for companies to 20 per cent from August 24.
The easing of the trading barriers has so far boosted market liquidity rather than heightened volatility. Average daily trading volumes over the past week has surpassed their levels a year ago by more than 20 per cent, according to exchange data.
So far, both measures have captivated investors, who interpreted the policy as a greenlight for further stock gains. After all, Chinese authorities in July championed local bourses amid US-China tensions in tacit approval of the market rally.
The easing “is conducive to bolstering trading activities,” said Wan Kelin, an analyst at Huaxi Securities in Chengdu. “It gives the market greater room for full trading and makes new shares converge to their true market values more quickly.”
Wan expects a significantly higher supply of IPOs – such as the impending offerings by Dongfeng Motor, Henlius Biotech and Pinlive Foods – in the second half of the year, as the registration-based system leads to a shorter vetting period.
The impact on the market may be muted, as the increased capital coming in from individual and institutional investors is mitigated by a greater stock supply, the analyst said.
The spectacular run of ChiNext stocks may lose momentum because of a lack of new catalysts, according to Shen Yandong, an analyst at Vanho Securities. The sustainability of abundant liquidity, China’s economic recovery prospects, and the simmering US-China tensions are among key concerns.
While there are still good companies on ChiNext to invest in, “buying needs to be very selective now based on the quality of earnings”, said Wang at Jingxi Investment.