Three merits of Chinese stocks that attract seasoned investors
By Chen Jiahe

Editor's note: Chen Jiahe is the chief investment officer at Novem Arcae Technologies. The article reflects the author's opinions and not necessarily the views of CGTN.

Many people ask whether Chinese equities are a good investment. My answer is yes. There are many valuable Chinese stocks whose value has been noticed by seasoned investors worldwide.

This positive answer is not only seen in my articles but also my investment portfolios. The growth rate of an investment portfolio's business fundamental in Chinese equities can achieve between 25 and 30 percent. Part of this tremendous growth rate, which is very rare in today's global equity market, comes from the rapid expansion of the Chinese economy, as well as the listed companies' financial statements.

For example, China's benchmark index, the Shanghai Composite Index, stood at around 3,000 points last Friday, 15 years after the first time it achieved this level in 2007. I believe the fundamental growth of the index is much quicker than the index points show. This index seems to be stagnating because its valuation has decreased.

Let us take a detailed look into this. On March 13, 2007, the Shanghai Composite Index was trading at roughly the same level as today. The index's price-to-earnings (PE) and price-to-book (PB) ratios were as high as 42.9 and 3.8 respectively, back then compared with 11.5 and 1.2 on April 28, 2022. This implies that with the same index level, the earning and book value of the Shanghai Composite Index has grown by 272.7 percent and 208.6 percent respectively, over the last 15 years, or 9.1 percent and 7.7 percent annually.

Furthermore, the Shanghai Composite Index does not include the dividend yield. Its index points are also negatively affected by the IPO calculation, where the latter was adjusted in 2020. This means that the real fundamental growth of the Shanghai Composite Index is even higher. Data from the annual statistics of the index shows that its real book value growth has been around 12.4 percent in the past 15 years.

Of course, long-term fundamental growth is only part of a successful investment. Another key point that leads to long-term investment success is the low valuation at the calling moment.

In China's stock market, there are around 5,000 companies traded in RMB, known as A-shares, and around 200 traded in U.S. dollars, known as B shares. Plus, there are around 2,000 companies listed in the Hong Kong stock market.  Experienced investors can easily find targets that have solid financial statements and low valuations within these companies.

For example, according to the Wind Financial Terminal, the Shanghai Stock Exchange Dividend Index trades at a 5.4 PE ratio, a 0.65 PB ratio and a 5.7 percent dividend yield. With this low valuation, the Shanghai Stock Exchange Dividend Index also offers a solid business fundamental. Dividing the PB ratio by the PE ratio, we find that its Return on Equity is 11.5 percent, a promising level for investment.

The financial companies in the A-share market also trade at low prices. According to the Wind Financial Terminal, the Shanghai Stock Exchange Financials Index, which is mainly composed of banks, insurance companies and securities firms, is now trading at a 6.0 PE ratio, a 0.7 PB ratio and a 4.4 percent dividend yield.

In the Hong Kong stock market, many companies also have low valuations. The same data source shows that the Hang Seng High Dividend Yield Index is now trading at 4.9 times PE ratio and 0.46 times PB ratio. That's even lower than the valuation in the A-share market.

Besides the good business fundamentals and low valuation, one final factor that can bring a large amount of investment value to seasoned investors is the value that can be generated by trading.

Roughly speaking, the Chinese financial market is a developing market. This means that stock price fluctuations are more severe and the pricing accuracy of the market is less accurate. It also means that investors can easily find opportunities to sell and buy different equities that can increase the quality and the quantity of their holdings for long-term fundamental value.

In my experience, a fair turnover ratio, which is the ratio between the trading value and the size of an investment portfolio, can be as much as 150 to 200 percent. That's much higher than the usual 30-50 percent turnover ratio that can be seen in most mature markets. Of course, as long as it has been carefully conducted, a higher turnover ratio can lead to a much higher long-term investment return.

With good business fundamentals, low valuations and a higher possibility for value-added trading, the investment value of valuable Chinese stocks will be noticed by seasoned investors around the world. This is a wonderful chance to profit from the world's second-largest economy.

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