Traders have been returning to the ChiNext gauge of smaller Chinese companies almost five years after it crashed, sparking a marketwide meltdown that wiped out US$5 trillion in capitalisation.
The prospect of a rebound in earnings growth, the easing of restrictions on refinancing and loosening liquidity have got investors piling into the board that hosts 803 technology start-ups on the Shenzhen Stock Exchange.
The ChiNext index has risen 26 per cent so far this year, making it the best performer among all the gauges of Chinese onshore and offshore stocks.
Even the scourge of the Covid-19 epidemic has not derailed the momentum. The gauge took only two days to recover from panic selling sparked by the virus, and is now trading at a three-year high.
The ChiNext index climbed 1.7 per cent to 2,263.97 on Monday, still 43 per cent shy of the record high set before the 2015 crash.
The partial comeback has been a long and turbulent one for the ChiNext board. It was the flashpoint of the rout on Chinese stocks in 2015, losing about 70 per cent of its value in the aftermath of a boom-to-bust cycle that had led its price-to-earnings ratio to exceed 100 times. The board again bore the brunt of selling in 2018, when a deluge of companies posted profits that were way off analysts' estimates after acquired units failed to deliver on earnings promises.
The bearish sentiment did not end until late last year, when the earnings woes faded. Brokerages including Haitong Securities and Kaiyuan Securities say profits for ChiNext companies may have increased at least 60 per cent in 2019 based on their official earnings guidance, because of a lower base for the previous reporting period amid massive impairments of goodwill values linked to acquisitions.
"It's just the start of the run-up as the peak of the technology industry typically lasts for two or three years," said Zeng Wanping, a strategist at China Galaxy Securities. "The concern is overdone that the run will end in spring sometime this year."
Instead, Zeng was cautious about the performance of the benchmark Shanghai Composite Index this year, saying a buying opportunity would only emerge after an excessive decline. The gauge of bigger companies has slipped 0.6 per cent in 2020.
Policy support has added further impetus to the ChiNext small caps that are sensitive to the stance of regulators and liquidity flow.
The China Securities Regulatory Commission has introduced revised rules on refinancing this month, making it easier for smaller companies to fund mergers and acquisitions through stock sales. Meanwhile, the People's Bank of China has pumped hundreds of billions of yuan into the financial system and pledged access to funding for smaller companies to counter a slowdown in growth since the outbreak of the coronavirus epidemic.
Still, elevated valuations after the spectacular run may cause some investors to worry that it is more of a liquidity-driven rally. The companies trading on the ChiNext are now valued at 57.3 times earnings, compared with a multiple of 18.1 times for the bigger companies on the main board, according to data provided by the bourse.
Companies with heavy weightings on the gauge have led the bull run. Contemporary Amperex Technology is one of them, jumping 45 per cent this year, after the maker of lithium batteries for electrical vehicles said it was picked by Tesla as a supplier.
"Corporate earnings for ChiNext companies are expected to improve in 2020, with industry leaders likely to be the biggest beneficiaries," said Li Hao, an analyst at Sealand Securities. "The coronavirus epidemic will have a significant impact (on earnings) in the short term, but the long-term outlook remains intact."
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