China Strategy

Red chips which are constituents of Hang Seng Index and with net
income larger than Rmb1b or HK$1.02m

Ticker Short Name Net Income (HK$m) Market Cap (HK$m)
941 CHINA MOBILE 64,343 1,482,635
883 CNOOC LTD 30,139 326,264
762 CHINA UNICOM 3,637 145,652
906 CHINA NETCOM 12,630 138,010
144 CHINA MERCHANT 2,540 83,231
291 CHINA RES ENT 2,776 66,344
1199 COSCO PAC LTD 2,261 45,902


Look out for A-share targets among H shares

The HK Economic Times quoted China media reports saying that China
Securities Regulatory Commission (CSRC) is urging 6 major state enterprises listed in HK to go home to sell A shares. In fact, the reports, without naming sources, say CSRC will submit a proposal to the State Council next month to help speed up the return of these giant state enterprises to the domestic stock markets.

The six companies being targeted by the CSRC are PetroChina (857.HK),CNOOC (883.HK), China Shenhua Energy (1088.HK), China Mobile (941.HK),China Construction Bank (939.HK), and China Telecom
(728.HK). All of these companies are relatively cash-rich and are not necessarily in a hurry to do A-share sales. But some - such as PetroChina,CNOOC, China Shenhua, China Mobile and China Telecom - may still be keen to raise funds back home because of rising capex and acquisition funding needs.

With the bubble in the A-share market ballooning by the day despite several rounds of reserve ratio and interest rate hikes, CSRC would like to bring back more big and better-run state companies to increase the supply of A-shares and, hopefully, prick the bubble gradually and thus forestalling a massive share price collapse.

Beijing has repeatedly warned retail investors about the rising risks of investing - but the warnings have fallen on deaf ears.

We do note that the share price of companies planning A-share sales tend to go up quite sharply in the months leading to the A-share sales, as the table below shows. Except for BoCom (3328.HK) whose share price was flat, the share price of recent returnees to China has tended to rise from 15% for Ping An to 65% for China Life. We are talking about the H-share prices three months before A-share IPO. The H-share price is one key factor the returnees take into account when they set the A-share IPO price. However, their share prices are often flat on the day of the A-share IPOs, no matter how well the A-share does on its debut In the table below, we tabulate a list of companies likely to sell A shares within 12 months. It will probably be longer for red chips, as the rules and regulations governing their return to China have not yet been released.

Chinese state companies qualified to sell A shares

Code H-share Code Red chip
857 PetroChina 883 CNOOC
1898 China Coal Energy 941 China Mobile
1088 China Shenhua Energy 906 China Netcom
2883 China Oilfield Services 966 China Insurance Intl
1919 Cosco Hldgs 144 China Merchants Hldgs
2328 PICC 2380 China Power Intl
728 China Telecom 688 China Overseas Land
598 Sinotrans 203 Denway Motors
2899 Zijin Mining 297 Sinofert
939 China Construction Bank