ShowHand in HONGKONG!

Steady flow of retail money from China. Starting from tomorrow (29 Aug
07), mainland retail investors can start to buy Hong Kong-listed stocks. With
personal savings of US$2.2t in China, the size of retail money that may flow
into the Hong Kong is huge. Assuming 2-5% of the money can be channelled
into Hong Kong over the next 12 to 24 months, we are talking about an
amount of as high as US$100b. The impact on the Hong Kong stock market
will be profound and can be summarised as follows:
• Turnover of the market will rise significantly since mainland retail
investors are well-known for their trading-oriented strategy. This is
positive to Hong Kong Exchanges (388; BUY) and brokers that can deal
with those investors.
• Three groups of stocks (which are the likely targets of retail investors)
should perform well over the next 12 months.
o The first group is the China H shares that trade at a significant
discount to their China A-share counterparts. Our recommendations
include Datang Int’l (991), Chalco (260), Jiangxi Copper (358),
Chongqing Iron (1053), Sinopec (386), Jiada Kunji (300), ZTE (763)
and China Life (2628).
o The second group is those companies that will soon issue A shares.
Our recommendations include China Mobile (941), Zijin Mining
(2899), PetroChina (857), China Shenhua (1088), CNOOC (883),
Lenovo (992) and PICC (2328).
o The third group, which is probably less well-known than the first two
groups, is the penny stocks that have low share prices (such as
below HK$3). Chinese investors commonly believe that penny
stocks have high potential for backdoor listing, M&As, asset injections,
earnings surprises and spectacular returns given the high volatility.
Spectacular performance of A-share penny stocks. As the following
tables depict, penny stocks have delivered spectacular returns in the last 12
months even after the severe correction starting from June. In particular, in
the nine months from 22 Aug 06, stocks with share price below Rmb3
delivered a return of 309.7% compared with a return of 170.9% for stocks
with share price above Rmb5. Needless to say, a high return also means high
risk. In the recent correction starting Jun 07, penny stocks dropped
significantly from their recent highs, though they still posted better returns
than the stocks with high prices on a 12-month basis.