SHCOMP overvalued?

 

In terms of price earnings ratio (“P/E”), the SHCOMP is trading at a differential premium of 144.2% against HSCEI. Is SHCOMP overvalued?

In terms of P/E, Hang Seng China Enterprise Index (“HSCEI”) usually trades at at a discount to the Shanghai Composite Index (“SHCOMP”), possibly due to “closed system” of SHCOMP as well as different constituents for both indices.

Currently, HSCEI is trading at trailing P/E of 5.97x against SHCOMP that is trading at relatively higher PER of 14.58x. The following 10-year historical P/E graph shows that HSCEI is already trading closer to its all time low P/E of 5.81x. As for SHCOMP, it is trading at relatively higher than its all time low P/E of 9.61x.

HSCEI vs SHCOMP PER.png

The following graph will show the premium / discount of SHCOMP against HSCEI:

HSCEI vs SHCOMP PER Differential.png

SHCOMP may be potentially overvalued as the premium of SHCOMP (against HSCEI) has shot way above the mean premium differential of 56.4% in year 2015 (with a current differential premium of 144.2% against HSCEI).

Assuming a mean differential premium of 56.4%, it is envisaged that the SHCOMP may trade at a P/E of between 9.09x and 12.51x, translating into implied SHCOMP index range of between 1,722.8 and 2,372.2

HSCEI PER (x) 5.81 5.97 6.50 7.00 7.50 8.00
Mean Premium 56.4% 56.4% 56.4% 56.4% 56.4% 56.4%
SHCOMP PER (x) 9.09 9.34 10.17 10.95 11.73 12.51
Implied SHCOMP Index      1,722.8 1,770.2 1,927.4 2,075.6 2,223.9      2,372.2
Note – SHCOMP currently trades at 2,736 (as of 5 Feb 2016)
Key implications: Dissecting the various components of the indices will yield clearer underlying reasons for the valuation differences between SHCOMP and HSCEI.

 

DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION.  SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.

 

Author: Ken Utau

Markets Observer + Food Lover

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