In this March 1, 2004 file photo, motorcyclists fill up their bikes with petrol at a futuristic PetroChina gas station in Wuhai, in China's Inner Mongolia region. The state-owned energy firm’s stock has been rising fast.Greg Baker/The Associated Press
Meet China's new tech stock: PetroChina Co. Ltd.
One effect of the sharp run-up in Shanghai's stock market this year is that some of the country's biggest state-owned enterprises are trading with valuations usually associated with high-growth sectors – a sign, for some, of how much Chinese shares have lost touch with reality.
PetroChina, with its 67-per-cent gain in the past year, has been the biggest contributor to a more than twofold increase in the Shanghai Composite Index in that time. It now trades at 34-times its forecast earnings over the next 12 months, after a 17-per-cent rise in its shares already in 2015. That's on par with or higher than the likes of Chinese tech giants like Tencent Holdings Ltd., trading at 36-times expected earnings or U.S.-listed Alibaba Group Holding Ltd. at 30-times, as well as U.S. names like Facebook Inc. at 35-times and Google Inc. at 18-times.
PetroChina's shares are also withstanding low oil prices better than those of its global peers. Worth $373-billion (U.S.), the company is already bigger than Exxon Mobil Corp., whose shares have dipped 6 per cent this year. Other major Chinese oil companies have performed strongly in Shanghai: refiner China Petroleum and Chemical Corp., known as Sinopec, is up 19 per cent this year in the Shanghai market. Cnooc Ltd. meanwhile has risen 23 per cent in the Hong Kong market.
The surge in Chinese oil stocks has much to do with the investment style of local investors: Chase names that are already rising.
But now there's a tricky dilemma: Should investors continue to ride the momentum upward or stick to investing based on a company's fundamental performance and business strength?
After all, Chinese oil companies aren't immune to falling oil prices: PetroChina's first-quarter net profit dived 82 per cent. Meanwhile, an anticorruption drive in Beijing has hit oil companies' top executives. Last month a PetroChina vice-chairman was placed under investigation, the latest in a series of top management at the company and its state-owned parent, China National Petroleum Corp., to be caught up.
One manager at a large foreign asset-management firm that has held on to its investment in PetroChina's mainland shares says its soaring share price is "bizarre by any finance textbook standards."
But, he says, "there's a very strong momentum in the market that is helping this disconnection" between the stock's price and its earnings.
Another rationale for investing in Chinese resource companies lies in the hopes that they are on a path of reform aimed at making them more efficient by, for example, spinning out underperforming or nonessential businesses. Sinopec is expected eventually to list its gas station business, though the initial public offering has been delayed until next year.
There's also been talk that Beijing may enforce consolidation of China's biggest state-owned companies, though such a move has faced resistance from industry executives who say change needs to come from market competition, not the government.
Investors are now weighing such positives against concern that Chinese stocks, which have risen most in the rally, will be first in line to suffer.
"There's still a reform angle but we got cautious about falling energy prices" rotated into stocks with reform opportunities elsewhere, said Stuart Rae, AllianceBernstein Holding's chief investment officer for Asia Pacific. The firm continues to bet on state-owned enterprises in the telecommunication, utilities and health-care sectors, expecting that Beijing will champion select big players in those sectors.
Other fund managers have stayed away from oil state-owned enterprises altogether.
"There's been no real announcement about the disposal of noncore assets, optimization of assets, promoting management in a way that would take more care of minority shareholders and unlock value and return more cash," says David Gaud, senior fund manager at Edmond de Rothschild Asset Management, which is sticking to mostly investing in what's considered "new economy" stocks in China, such as health care and technology.
"If you assume limited reform progress in the foreseeable future, you have to continue to value [oil companies] based on the cycle of the economy alone," Mr. Gaud said.
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