China Money: Offbeat stocks in spotlight as liquidity tightens

By Lu Jianxin and Edmund Klamann

SHANGHAI (BestGrowthStock) – Non-mainstream companies such as solar cell makers will be the stars of China’s stock market in the next several months as the government’s credit tightening drains market liquidity, hobbling trade in index heavyweights.

Investment opportunities abound for small-cap shares in budding sectors such as clean energy, new materials, biotechnology and high-tech manufacturing, although the benchmark Shanghai Composite Index (.SSEC: ) is expected to stick to a relatively narrow range well into the second quarter.

Selected shares in mainstream sectors, such as autos and insurance, may also outperform the market on expectations of strong fourth-quarter earnings during the peak of the results reporting season in March and April.

But the bulk of index heavyweights, dominated by banks, are set to underperform as the money supply tightens and authorities push more new shares onto the market, under an official campaign to cool asset prices and a widely expected gradual exit from economic stimulus in place since late 2008.

“With less liquidity flowing into the market amid an official clampdown, you can’t expect a bull run for the market or a strong rally in index heavyweights,” said Zheng Weigang, head of investment at Shanghai Securities.

“But we still see potential in environment-friendly sectors, consumption-related stocks and counters from regions which are expected to receive special support from the central government.”

Eight mainland China analysts and fund managers canvassed by Reuters this week expected the benchmark index to move between 2,800 and 3,200 points over the next two months.

The index traded around 3,050 points on Thursday, down nearly 7 percent this year, pressured by official credit tightening and regulatory approval of more share supplies to the market.

CHINEXT

China’s principal sites for trading clean industry stocks are ChiNext, a Nasdaq-style market launched last October, and the Small and Medium Enterprise Board, both on the Shenzhen Stock Exchange in the boomtown of Shenzhen near Hong Kong.

Analysts’ recommended shares on those markets include Shenzhen Topraysolar (002218.SZ: ), a maker of solar power cells, and Suzhou Hailu Heavy Industry Co (002255.SZ: ), a maker of nuclear power generating equipment.

Others include Beijing Water Business Doctor Co (300055.SZ: ), which develops waste water recycling technology, and Xiamen Savings Environment Co (300056.SZ: ), an air filter producer.

While these companies have average price earnings ratios of about 50 times forecast 2010 earnings, double the average for mainland-listed stocks overall, analysts said their growth potential justified the high valuations.

Opportunities are also emerging among companies based in areas designated as national-level economic development zones, marked for government support under Beijing’s drive to build up less-developed areas and bolster domestic demand.

China’s cabinet this year has approved nine cities along the Yangtze River in eastern China’s Anhui province for such zones, while the island province of Hainan in the south has been designated for development into a global tourism center.

Similar plans are expected to be approved for Sichuan province and Chongqing municipality in southwest China, as well as the city of Tianjin near Beijing, state media have reported.

REGIONAL DEVELOPMENT

“We are quite confident that for coming months, ChiNext and the small-cap board will be investors’ focus as supervision of bank lending has been enhanced, effectively cutting off funds that flowed improperly into stocks via grey-area channels,” said Cao Xuefeng, senior analyst at Western Securities in Chengdu.

“Structural adjustments in China’s economy (Read more about the fastest growing economy.) to boost regional development will also create opportunities among related stocks.”

Only a few index heavyweights are expect to outperform.

“During the peak of earnings reporting, investors typically trade heavily in stocks of companies that post strong results, even if some are just confirming what they have forecast,” said a Chinese fund manager, who could not be quoted by name as he was not authorized to discuss the market with the media.

Top Chinese auto maker SAIC Motor Corp (600104.SS: ) forecast in January that its 2009 net profit would jump more than 900 percent from 2008, buoyed by a surge in vehicle sales as government incentives boost domestic consumption.

And China Life (2628.HK: ) (601628.SS: ), the world’s biggest life insurer by market value, said this week its 2009 net profit may have more than tripled from a year ago, helped by a stock market surge and new accounting rules.

In coming months, investors should avoid banks, which account for about one-quarter of the combined market capitalization of the Shanghai and Shenzhen stock exchanges, traders said.

Several Chinese lenders, including China Merchants Bank (3968.HK: ) (600036.SS: ), Bank of Communications (3328.HK: ) (601328.SS: ) and Bank of China (3988.HK: ) (601988.SS: ), are rushing to raise funds after record lending of nearly 10 trillion yuan in 2009 to support the government’s economic stimulus.

Regulators fear a rise in bad loans and are pressuring lenders to raise capital to shore up their finances.

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($1=6.83 Yuan)

(Editing by Tomasz Janowski)

China Money: Offbeat stocks in spotlight as liquidity tightens