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Published May 3, 2008
Brokers' Take
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S-chips
DMG & Partners Securities, May 2
THE Shanghai Composite Index has been on a downtrend over the past few months. Despite the Chinese government cutting the stamp duty on stockmarket transactions (effective April 24), which led to a positive market reaction, the index is still 33 per cent lower than at end-2007.
The FTSE ST China (FSTC) Index, which comprises Chinese companies listed in Singapore, has also weakened in tandem with the weakness for the Shanghai Composite Index. The FSTC Index value of 475 on April 29 is 38 per cent lower YTD, though there was some temporary firmness following the stamp duty cut by the Chinese government.
The temporary firmness in the FSTC Index has been accompanied by a corresponding surge in the volume of FSTC Index member stocks traded. The volume exceeded 400 million units per day for April 22-24 as market players traded on expectations of some measures by the Chinese government, and also post-announcement, sharply higher than the 248 million units daily average from Jan 10 to April 29.
 
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What is more interesting is the ratio of the trading volume of FSTC Index member stocks to the trading volume of Straits Times Index member stocks, which rose to a recent peak of more than two times compared with the average of one time over the past three-and-a-half months. However, over the past two to three days, the ratio has fallen back close to its 3.5-month average.
We note that the FSTC Index typically weakens after the ratio peaks. This occurred in late-February and early-April. It is likely that the ratio peak from April 22-24 could lead to some temporary weakness in the FSTC Index in future, barring any other measures by the Chinese government which could stimulate the stock market. If the FSTC Index does weaken, it will lower the PE of S-chips to below the current 9.5 times, which is already attractive. Notwithstanding this possible weakness, we recommend investors to buy into S-chips with strong fundamentals such as China XLX ('buy', TP: S$1.00) and Ferrochina ('buy', TP: S$2.14). In addition, JES International (unrated) and Li Heng Chemical Fibre (unrated) look interesting.