Wall Street investment bank Goldman Sachs lifted its rating for the H-share market yesterday to "overweight" from "neutral", citing a big gap between the price-to-earnings ratios (PE) of H-shares and A-shares.

Some analysts said the improved rating is only a sentimental improvement and won't result in a fundamental change in the short term, given that there are still negative elements in the market.

H-shares, or Hong Kong-listed mainland companies, finished down 0.26 percent at 11,828.84 points yesterday, and the mainland's benchmark Shanghai Composite Index also tumbled.

The average PE for H-shares has dropped to 12 times their forecasted 2008 earnings, compared with an average PE of about 24 times for the mainland's A-shares, according to Thomas Deng, managing director of investment research for Goldman Sachs Asia Pacific.

Ronald Wan, head of investment banking at BOCOM International, said the value of some H-shares have been halved over the last few months, and they may need to be re-rated. He stressed approaching them cautiously.

"All the negative elements for the market haven't totally disappeared," Wan said. "The central government's tightening policy to curb the overheating economy will further affect the banking and natural-resource sectors."

However, he believes that infrastructures, for example, have been oversold by investors and deserve a more upbeat valuation.

Wan said mainland-based telecom operators will also benefit from the re-organization of the telecom sectors.

Linus Yip, a strategist with First Shanghai Securities, said he wasn't optimistic about the overall H-share market.

"I would not recommend H-share companies at the moment, but if I have to make a choice, I would vote 'buy' on the mainland's leading banks," he said.

Yip said he doesn't recommend mainland infrastructure companies, calling them overpriced.

Deng, from Goldman Sachs, expects the mainland's overall corporate-earnings growth in 2008 to be between 15 and 20 percent, instead of the 30 percent predicted previously.

He estimated that the listed A-shares of Chinese companies are roughly twice as expensive as their Hong Kong-listed H-shares, meaning that slower earnings growth could keep the A-shares under pressure.

"So this is why we upgraded the H-share market but remain cautious about the A-share market," he explained.

Deng said the A-share market also faces difficulties this year because of an expected slowdown in the mainland's economic growth, which could hurt the growth of corporate earnings.

(HK Edition 03/28/2008 page3)