Brilliance's attraction may be about to fade

WHILE China B share issuers celebrate the news that US funds have been allowed to buy their stock, the one mainland company listed in New York may find the development less heartening.

Brilliance China Automotive Holdings, noted for its pioneering flotation on Wall Street last October, has become the favourite stock for US investors keen to have a stake in the booming Chinese economy.

Its share price had surged beyond US$33 by late November, compared with the offer price of $16. It has been trading at a premium because of its status as the first mainland enterprise to gain a direct listing abroad.

Although Brilliance China remains the only mainland issue on the New York exchange, its initial appeal among US investors is likely to fade as more consideration is given to the stock's fundamentals.

On Monday, the US Securities and Exchange Commission issued the long-awaited no-action letter, indicating that the regulator would not take action against registered investment companies investing in China B shares.

While the move will bolster the mainland B share markets, local fund managers noted that it would also dampen interest in Brilliance China.

It is natural that institutional investors will take a more realistic look at the stock when alternatives are no longer lacking, and they can plunge straight into the Chinese B share markets.

''Why should the investors buy China Brilliance shares at a price-earnings multiple of 30 times when its counterparts in Shanghai are trading at a much lower premium?'' a stock analyst asked.

Brilliance China faces the same problems as other mainland stocks - inflation and an overheated economy. That should mean the stock is given a similar rating to China-listed shares.

In recent weeks, Brilliance China's shares have tumbled and are currently trading at a low of $16.

Brokers believe that the shares will continue to become less attractive as the merits of B shares became more apparent and US investors take advantage of the no-action letter from the SEC.

Last month the company announced a net profit of 37.4 million yuan (about HK$50.71 million at official rates) for the second half of last year, in line with the prospectus forecast. At $16 a share, Brilliance is on a price-earnings multiple of about 17.

While this can be considered a fair valuation, there could be considerable downside if the stock's liquidity does not improve in the near future.

The flotation of Brilliance China was originally intended as a way to test the water for mainland enterprises wanting to list overseas, but China's new securities authorities have made it clear that their priority is the nine enterprises planning Hongkong listings, not a rush to other exchanges.

The no-action letter has helped justify this approach: it shows that mainland companies do not have to list far from home to attract overseas investors' attention.

It is also an indication that the US authorities recognise that the regulation of China stocks has greatly improved.