NB's Yao: why China is now a compelling value play

By on

China's recent market weakness has created an attractive entry point for investors willing to overlook further short term volatility, according to Neuberger Berman's Frank Yao.

China's equity valuations are now at their weakest point since 2006 with the Shanghai Composite index down 57% between January 2008 and March 2013.

Over the same time frame China’s real GDP growth has increased more than 66% and earnings growth of China A-share companies has risen by 92%.

Yao admits China is facing liquidity problems brought on by a mix of capital outflows, seasonal liquidity tightness, and the Central Bank of China (CBoC) 's failure to act to alleviate liquidity issues.

However, the Euro Stars A-rated manager said, with valuations at such a low point and the government determined to reform the economy over the long term, he expects the market to start catching up with GDP growth.

Yao, who is a senior portfolio manager on the Neuberger Berman China Equity fund, said: 'Valuations for the domestic and overseas-listed Chinese equities are at their lowest point in recent years [and] the new political leadership has made a concerted effort to move toward long term market reform.'

'As confidence builds, we expect the asymmetry between equity market performance and GDP and earnings growth to correct.'

Although Yao believes talk of an end to US QE has had a negative impact on Chinese equities, it is liquidity fears that have had the biggest impact.

But he says: 'We think the current liquidity situation is extreme, technical and short term, and that it will be resolved soon with a liquidity injection from the central bank. With this in mind, we believe that current Chinese equity markets provide what we consider a compelling opportunity for value-oriented investors.

'Valuations for the domestic- and overseas-listed Chinese equities are at their lowest point in recent years (as of June 21, 2013) - lower than late 2008 levels and roughly half the historical averages.'

He pointed out that the MSCI China Index is trading at 7.9 times forward earnings, compared to an average of 16, and at a cheap looking 1.2 times book value.

'The CSI 300 Index, representing domestically listed China equities, is trading at 9.1 times earnings, versus the historical average of 19. Coupled with double-digit 12-month EPS growth expectations for the MSCI China and CSI 300, we believe valuations are currently very attractive.'

'The new political leadership has made a concerted effort to move toward long-term market reform rather than rely on stimulus packages to foster growth. We favour what we consider to be quality individual names that demonstrate strong visibility of top and bottom line growth and recurring cash flows from core businesses.'