A research report of CITIC Ka Wah Bank said mainland A-shares have been priced below fair values due to sell-offs of mainland equities in recent months, while analysts expect H-shares to grow in the next six months.

Liao Qun, senior vice president and chief economist and strategist of China banking, said the continued strong medium- and long-term growth prospects of the mainland economy can support the A-share companies' earnings at around 25 percent in the next 10 years. Thus, the price-to-earnings (PE) ratio for the A-share market, at present, could be 25 times or moderately higher.

"However, the current PE ratio level is around 14 times, which suggests that A-shares are undervalued," Liao told reporters yesterday.

A research report of CITIC Ka Wah Bank said the A-share market is currently undervalued due to the slowdown in economy, the worsening external environment amid the financial crisis, the undermined confidence of the A-shares investors and lacking of basic knowledge in the economy and investments among investors, who have been taking a short-team view on the market development.

The sustained sell-off of the stock market has taken a PE ratio of A-shares from 71 times, during which the Shanghai Stock Exchange Composite Index reached its peak of 6,124, to just 14 times, when the index was around 1,700, within a year.

Associate Director of CASH Asset Management Patrick Yiu said it is acceptable for the A-share's PE ratio to maintain at 20 times, as the earnings growth of the A-share companies remains quite good.

"As the market sentiment is quite distressed, the A-shares are undervalued," Yiu said.

When asked if the H-share market is also priced below its actual value, Yiu said it was difficult to say, as H-shares and A-shares are two different markets.

However, he pointed out that H-shares may reach their bottom level if the Hang Seng China Enterprise Index drops to around 5,000.

"The H-shares can show a rebound in the following half year, the China Enterprises Index may amount to the level of 7,500 to 8,000," Yiu said.

The CITIC Ka Wah Bank's research also expects the earnings growth of A-share companies to range between just 10 and 20 percent this year.

"The profit falls in the energy sector and the utilities sector significantly drag down the overall earnings of A-share companies. If these two sectors are excluded, their earnings growth would be 43 percent," Liao said, noting that the first-half earnings of A-share companies was just 19 percent.

(HK Edition 10/30/2008 page3)