Undervalued small-cap mainland shares will be bargain hunters' target

Undervalued small-cap stocks of mainland enterprises listed in Hong Kong are expected to reap the most from the upcoming launch of the Shenzhen-Hong Kong Stock Connect later this year.

Local stockbrokers are convinced that a flurry of buying by bargain-hunting Hong Kong investors is in the cards, further raising volatility in the market.

Tan Yueheng, chief executive officer of BOCOM International Holding Ltd, said he believed that local investors will be out in droves seeking small-cap stocks with growth potential.

Such buying activities would propel market volatility. "An increase in the price volatility of penny shares is unavoidable," said Yim Fung, chairman of Guotai Junan International Holdings Ltd.

He predicted that a higher turnover in small-cap stocks would entice more small- to medium-sized enterprises to raise capital through IPOs in Hong Kong.

Tan said, as such, there could be a need to introduce a 'cooling-off' mechanism in the local stock market, such as price swing limits.

Charles Li Xiaojia, chief executive officer of Hong Kong Exchanges and Clearing Ltd, said, however, that even if the mechanism is successfully brought to Hong Kong, it would only apply to big-cap stocks that could move the market indicators.

Li said the Tuesday the financial system will be place in July for the start of the Shenzhen-Hong Kong scheme, which will be the second stocks cross-trading link between the mainland and Hong Kong following the launch of the Shanghai-Hong Kong Stock Connect in November last year.

However, Li said the final decision for the exact launch date of the Shenzhen-Hong Kong "through train" rests with the central government.

Stock analysts said the additional liquidity that's widely expected to pour into the market after the start of the Shenzhen-Hong Kong program could push the benchmark Hang Seng Index to 32,000 points.

Yim said he believed the Hang Seng Index's (HSI) current price-to-earnings ratio, at 12 times, is too low. "It can easily go up to 15 times with a little push," he said.

The HSI slumped 1.12 percent on Tuesday to 27,407.18 on turnover of HK$136.42 billion.

"Hong Kong stocks have been undervalued for a long time," said Tan. "For that reason, I believe the Hong Kong stock market's risk factor is far lower than that of Shanghai," he said.

With more stocks programs between the two stock markets, the bull run of mainland stocks will brighten sentiment among Hong Kong investors, he said.

Hong Kong stocks currently are more closely related to the Shanghai and Shenzhen markets, he said, but he disagreed that the local stock market is in "A-sharization".

"A-sharization" refers to an emerging trend of Shanghai A shares surging quickly before dropping equally fast and furious.

celia@chinadailyhk.com

Hong Kong stocks currently are more closely related to mainland stock markets, but some experts disagreed that the local stock market is in "A-sharization", which refers to an emerging trend of Shanghai A shares surging quickly before dropping equally fast and furious. Edmond Tang / China Daily

(HK Edition 05/13/2015 page1)