By Chao Deng
HONG KONG--Meet China's new tech stock: PetroChina Co.
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% 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% 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 names in the U.S. like Facebook Inc. at 35
times and Google Inc. at only 18 times.
PetroChina's shares are also withstanding low oil prices better
than those of its global peers. Worth $373 billion, the company is
already bigger than Exxon Mobil Corp., whose shares have dipped 6%
this year. Other major Chinese oil companies have performed
strongly in Shanghai: refiner China Petroleum and Chemical Corp.,
known as Sinopec, is up 19% this year in the Shanghai market. Cnooc
Ltd. meanwhile has risen 23% 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%. 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 hopes they are on a path of reform aimed at making them
more efficient by, for example, spinning out underperforming or
nonessential businesses. Sinopec, for one, 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" so decided to rotate 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 SOEs
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 so-called new economy stocks in China like health care
and technology.
"If you assume limited [reform] progress in the foreseeable
future, you have to continue to value them [oil companies] based on
the cycle of the economy alone," Mr. Gaud said.
Write to Chao Deng at Chao.Deng@wsj.com
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