Hong Kong is the largest capital market
by Sikonathi Mantshantsha, Financial Mail
March 8th 2013
The fast-growing Chinese economy has attracted billions of dollars in foreign investment, but SA retail investors have been slow on the uptake. And even for keen investors, China rigorously controls capital flow in and out of the market, which has limited the exposure to its several stock exchanges.
"There are massive capital controls, so it's not a case of hot money in and hot money out," says Martyn Davies, CE of Johannesburg-based Frontier Advisory.
Investors had a good run if they were invested in Chinese stocks over the past 10 years, with the Hang Seng index returning on average about 23% annually.
Hong Kong is the largest capital market, with a market capitalisation of US$2,6trillion. The benchmark Hang Seng index was valued at $917bn on Tuesday.
Even as the Chinese economy slowed down from its 10%-plus average growth rate to the 7,6% recorded last year, the Hang Seng rose 22,7% last year.
The largest 300 companies that are listed on the Shanghai and Shenzhen stock exchanges are grouped in the Shanghai Shenzhen 300 composite index, valued at $865bn. The index rose only 8,7% in 2012.
Chinese retail investors make up about 85% of the markets, according to financial services advisory firm Forbes. That compares to 25% retail participants in the US, says Forbes. On the JSE that number is lower than 5%.
Davies attributes the high retail investor participation to cheap and accessible broadband to access the stock market. "Everyone has Internet in China. You can walk into the most rural of villages and find reasonable Internet services with good speeds," he says .
SA retail investors unsure how to navigate China's exchange controls and unwilling to use their offshore allowance (limited by SA's own exchange controls) can access the Chinese economy by investing in SA companies that operate there.
Naspers, which made its move into China about 10 years ago, continues to reap the rewards of its 34% holding in Tencent Holdings. Tencent's share price rose 75,7% on the Hong Kong stock exchange last year.
Led by Koos Bekker, Naspers derived R8,9bn of its R22,5bn revenue from Tencent in the interim period to September. Tencent contributed R3,6bn to a total of R4,2bn trading profit. The company had risen on the JSE to a record high of R617/share on Monday, from a year low of R396,55 last year.
SABMiller is another SA company that has made a success of its Chinese investment. SABMiller has been a shareholder in the China Resources Snow Breweries joint venture since 1994. The company is now China's largest beer brewer by volume, with the Snow brand taking a lion's share of the 487m hectolitre market early last year.
Bidvest Group, which derived about R2,5bn of revenue from China in the six months to December, will add between six and eight fruit import and distribution branches in smaller Chinese cities this year, says finance director David Cleasby. These will be growth nodes, though currently contributing only a small portion to the group's R75bn revenue.
These companies' shares may seem expensive at current levels, but many analysts have called the top of the market for the past five years, only to be proven wrong.
That's certainly been the case for Naspers. At a p:e of 44 it is the most expensive of the lot, but it has consistently outperformed its peers, thanks to its deal-making abilities. SABMiller follows with a p:e of 30 and Bidvest is at a moderately affordable 16.
Another avenue investors can pursue is the alliance between Brics stock exchanges which allows investors to access the benchmark indices by investing in futures on their local bourse.
But Davies says volumes through this alliance have been low so far.
The Hang Seng futures index has been the most popular; in January, JSE issuer services director John Burke said the futures contract had attracted R32m since March 2012.