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Shanghai Composite

Show me the money: Chinese A share

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There are lots of talk about Chinese A shares market these days, both because of the big drop lately, and because of the in-action of the goverment. You can read the two Chinese articles (one supports inaction, another cries for goverment action), if you know Chinese. I don’t want to get into the debate of “moral hazard”, which is also a heated topic in the US right now. I am trying to explain why the Chinese A shares are still expensive, from value investing point of view.

Let me use two blue chip stocks as example, the 600030 (Citic Securities) and 600036 (China Merchants Bank). Both released 2007 results and declared the dividend. I rounded some of the numbers for simplicity (without distorting the results).

600030: dividend payout ratio (dividend/earning per share) 0.50/4.00 = 12.5%, the company pays 12.5% of the earnings to the shareholders, leave the rest for re-investing.

dividend policy pic
(source: www.iamgold.com)

Dividend yield (dividend/share price) 0.50/50.00 = 1%, assume the dividend stays the same, and ignore the inflation (and discount rate), it takes a hundred years for investors to get back the initial captial, if they buy the stock at 50.00 Yuan now. Note PetroChina A share (601857) has a similar payout ratio (read Chinese news).

600036: dividend payout ratio 0.28/1.00 = 28%, better than CS. Dividend yield 0.28/30.00 = 1%, similar to CS, 100 years to get your money back 🙂

Why dividend payout is especially important in China?

The earnings available to shareholders are shareholder’s money. Companies can use the money to re-invest in business, if they believe they can get a better return than investors’ expected return. But usually this is not the case, companies usually do things such as overpaying for acquisitions, or even more stupid things such as speculating in stock markets (which is the case for many public companies in China), or un-ethical things such as paying senior executives excessive package.

Also keep in mind, dividend is paid out by cash. A company can do all kinds of accounting tricks in China, but they can not print money to pay you the dividend.

Appendix: My take on Shui Pi s article
Don’t agree with the point 1 and 2. There is nothing wrong with:
原因之一是大盘蓝筹跌破发行价。中国太保、中煤能源和中海集运都是国有控股的大盘股,中石油虽然没有跌破发行价,但是跌到发行价造成的伤害对投资者更大。一方面对于中石油的投资者而言造成了70%的亏损,一方面持续的暴跌造成对指数形成巨大的压力,拖累所有的股票估值;

My comment: it’s normal in oversea market a stock fell below IPO price, sometimes on its first trading day. Why can not 中国太保、中煤能源和中海集运 fall below its IPO price? They fell because they were over-priced. Regarding to 中石油, Buffett said it’s worth 12 HKD. You can argue with him, but current A share price still is high.

原因之二是A股和H股倒挂,中国平安的股价在H股走强的同时顽强地跌破50元整数关,导致A股和H股倒挂,而中国人寿和工商银行A股和H股的溢价最低时只有50%左右。A股比H股价高是正常的,H股和A股大面积倒挂只有在998点时才发生,而且即使那样,金融股的A股比H股溢价其时也有20%-30%;

My comment: why A股比H股价高是正常的?

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