Stocks that have outperformed
Chinese equities have gained momentum after a lackluster performance in 2016. Investors expect the technology sector to gain as smartphone demand is rising in the country.
Stocks like Momo Inc. (MOMO), BYD Electronics (0285.HK), Sunny Optical (2382.HK), and Bitauto Holdings (BITA) have generated 104%, 99%, 86%, and 66% respectively in the year so far. In contrast, stocks like National Agricultural Holdings (1236.HK) , Landing International Development (0582.HK), and Rentian Technology Holdings (0885.HK) have plunged 34.3%, 26.5% and 25% during the year so far.
Valuations
Growth in all of the above-listed companies is a direct function of an increase in consumer spending. When demographics favor growth in consumption expenditure, revenues for these companies will grow, thereby leading to higher returns on the stock. However, market valuations for these successful companies are at levels, which may not seem very attractive to new investors.
Generally, stocks trade at an average price to earnings ratio of 20-25x. Stocks trading lower than their average price to earning multiples or lower than the sector average price to earnings multiples attract investors’ attention because they’re considered cheap. The price to earnings multiple compares a stock’s price to its forward earnings per share. If a company trades at a high PE, it means investors are anticipating higher growth in the future.
Stocks in the technology sector (CQQQ) trade at an average price to earnings ratio of 29.4x. Jinkosolar Holdings (JKS), China Aerospace (0031.HK), and JA Solar (JASO) are currently trading at inexpensive valuations compared to their peers. They have one-year forward price to earnings multiples of 3.7x, 4.2 x and 4.6x respectively.
Meanwhile, Cheetah Mobile (CMCM), HNA Holding (0521.HK), Weibo Corp (WB) and Baozun Inc. (BZUN) are currently expensive. They have PE multiples of 407x, 101.3x,95.1x and 65.2x respectively.
