China’s still headed South – Baoshan Iron a good buy?

31 Aug

Shanghai continued moving South this week as I’d expected for the following primary reasons:

1) Less credit – Caijing magazine expects CNY200bn of lending this August, compared with CNY355.9bn in July, and a staggering CNY1.53tr in June.

2) Reduced company earnings – for example Baoshan Iron 1H09 profit decreased 93% to (CNY669m) as shipbuilding and car manufacturer continued to be hit globally.  The company said that “foundations for a domestic recovery are not solid.”  China Southern Airlines (China’s largest carrier) 1H09 profit decreased 97% to CNY25m.

Good news is that the index is now trading at a 29.2x p/e compared with a high of 38.75x on 4 August.  This compares with 19x for the MSCI EM index.  Nonetheless with potentially higher growth prospects in 2010+ than other countries Shanghai certainly deserves to trade at a higher thatn MSCI EM overall.

Goldman Sachs consider China a ‘bright spot’ in equities, and focus on that growth potential in 2010 and beyond.  GS sees the Government remaining pro-growth.  In addition, Baoshan remains one of GS top ten picks for China.  In fact of 35 analysts polled, 30 recommend a buy/add/overweight for the stock, with an average Target price of CNY9.33 (a third above today’s close).

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