Optimism on future of stock market

Shanghai Daily, February 21, 2011

Secondly, I see opportunities in the seven new emerging strategic industries listed in China's Five-Year Plan for 2011-2015. Specifically, among the seven industries, I prefer high-end manufacturing companies, information technology and clean-energy vehicles. These are the stocks that could be profitable in the long term.

But investors should be wary of shares on the ChiNext board and the SME board because most stocks there are overvalued and could be quite risky.

Q: Listed firms are expected to release their 2010 earning reports by the end of April. So what should an investor look for in those reports?

A: First of all, whether the company has made profits. That's an obvious and key question.

After that, we usually divide all the firms into three categories to determine what we should buy. The most favorable candidates are usually in industries that have high potential profit growth in the future. In most cases, it would be sensible to buy leading companies if the reports indicate they can maintain large market share for a long time.

In the second category are firms with stable growth, which usually are in traditional industries. But investors should keep an eye on whether these companies have the potential to increase their market shares and cut back on production costs to boost their profits.

And thirdly, companies in industries that are considered outdated or on a declining track. For those, investors should look for opportunities in companies that have good restructuring plans or will fundamentally change their businesses to go into another industry.

Q: Real estate companies and banks are always the most discussed sectors. How do you rate them?

A: For the real estate industry, I think it's quite likely that the newly introduced property tax will bring down housing transaction volumes a bit.

But valuations of developers are now at record lows. I don't think they can drop much more even in the worst-case scenario of a 20 percent plunge in housing prices, which I think is definitely unlikely for now. So basically, I don't think there is much room for developers to lose more ground now.

The situation is much the same for lenders, whose shares are also now quite undervalued even given the banks' encouraging earnings reports.

Many investors worry that China's monetary tightening could erode banking profits. However, when China raised the one-year deposit rate to 3 percent, it also raised the one-year lending rate to 6.06 percent, which means banks still benefit a lot from the large margin gaps.