Warren Buffett Comments on China

Recently, Warren Buffett mentioned in an interview on CNBC that he has tried to bid on one Chinese stock but was not accepted. This has become a very hot topic in Hong Kong media and everyone is interested in finding which stock it is. But very few people are interested in what Warren Buffett has told CNBC in the interview. Actually Mr Buffett also talked about his view on China economy and its future which is very meaningful for us. The name of the program is :

"THREE HOURS WITH WARREN BUFFETT - LIVE FROM OMAHA" ON CNBC'S SQUAWK BOX WITH BECKY QUICK, FRIDAY, AUGUST 22, 2008.

You may find the full part of his interview on CNBC.com (http://www.cnbc.com/id/19206666/). For those who are interested in his view on China, you should pay attention to TRANSCRIPT/VIDEO PART ONE and TRANSCRIPT/VIDEO PART SIX. Mr Buffet has told Becky about China that "But it's a terrific--it's going to be a terrific area for business. So, under the right circumstances, you could see us with a lot of money there."

It seems that Mr Buffett is very optimistic about China's Economy and its future!

Hong Kong Stock Market - From A PE Perspective

Traditionally, PE ratio is a useful measure of the valuation of a company. Recently investors have been diverted to other means of measures such as PEG, PB ratio and ROA etc such that the high valuation of stocks in the past few years can be explained in a more reasonable manner. However, the importance of PE in evaluating the stock market should not be ignored. PE ratio gives the meaning of the number of years you can earn back your investment (the price you paid) given that the earning does not change for the given years. In reverse, the PE gives the earning yield such that investors can compare the yield with other type of investments to see if such investment is worth.

How is the application of PE in evaluating Hong Kong stock market? I have plotted a graph of monthly PE of Hang Seng Index (a widely adopted indicative index for Hong Kong stock market) for the period of Jun 1974 ~ Jun 2008 which is shown at the top of this blog. From the above graph and data, I have the following findings which may be useful in formulating investment strategy for Hong Kong stock market :

a. The average PE over the period is 14.58 with a Standard Deviation of 3.6. This means 68.27% of the data points lies within PE ratio from 10.98 to 18.18 (1 SD). 90% of data points lie within PE ratio from 8.68 to 20.48 (1.645 SD). This gives us a hint that whenever the monthly PE of HSI goes beyond 20.48, it is more likely that the market is overvalued and there is 90% chance the market will turn downwards. This is the moment of last tango. For those monthly PE of HSI goes below 8.68, it will be a real bargain to buy.

b. The lowest of point of PE for each high-low cycle is becoming higher and higher which means the market is willing to accept a higher PE for HSI in the recent years which may be explained as more and more Chinese enterprises were selected as components of HSI which are mainly growth stocks and investors may be more willing to buy at a higher PE.

c. From a simple glance of the graph, I would rather start buying at around PE ratio of 10 for which the risk has been significantly reduced.

In conclusion, I will suggest investors to buy when HSI dips below PE ratio of 10 and avoid stocks when HSI goes up above PE ratio of 20.5.

As a reference for today (17th July 2008), HSI close at 21735 with a PE ratio of 13.19 which is below the mean by 1.39.

Finding Prospectuses for Hong Kong Stocks

One of our blog reader asks about where to find the prospectus of Hong Kong stocks. Here is the way. Normally the prospectus is available online through the websites of stock exchange. For Hong Kong stocks, you may go to the website of Hong Kong Stock Exchange ie http://www.hkex.com.hk/ and follow the following instructions :

For Already Listed Stocks :

Click on the "Investor" section at the left and then click on the link "Current Securities" under Listed Company Information Search. Type the stock code (eg ND Paper is 2689), select a time period that covers its ipo and also select "Prospectuses" at the pull down menu of "Document Type". Finally click the "Search" button. You will find your needed prospectus.

For IPO Stocks :

Click on the "Listing Matters and Listed Companies" section at the left and then click on the link "Main Board - Prospectus" for the latest ipo prospectuses.

A Discussion on Strategic Investors of Hong Kong

One of the blog readers has posted the following comment which is quite interesting to discuss :

"Regarding stategic Investors. Both Cheng Yu Tung (New World) and Thomas Lau have "Interesting" histories and not always friendly to minority shareholders. Care to comment?"

My response is as follows :

Many people may have bad experiences in investing in the companies owned by these two people. The major problem is that many major shareholders of listed companies in Hong Kong have treated these companies as a way to gain money from but not sharing the profits with majority shareholders. The most profitable part is still hold in their own hands. For example, Chai Tai Fook is the most profitable company of Mr Cheng which is privately owned and New World Development (0017) is a listed company but with high level of debts. For profitable projects or investments, Mr Cheng will invest with Chai Tai Fook instead of New World. This is a typical example of common thoughts of Hong Kong rich people not just Mr Cheng. Even Mr Lee Shau Kee who is recently treated as Warren Buffet of Hong Kong is investing with his own investment flagship but not his listed company Henderson Land (0012) . Therefore, when considering the roles of strategic investors, we need to identity by what means these people are investing in the new companies. If they are not the major shareholders but simply strategic investors, it should be a good news to minority shareholders like us as we do not have to worry about any "capital tricks" and instead they can act in a positive way for us to push a good performance from the new company just like TCI 's role in the Link Reits (0823). However, in the case of Kingboard Laminates (1888), there is no confirmed information up to now that they actually have invested in this company.

In some forums, I have read that some people invested in Kingboad Laminates simply because they think that Mr Lau will drive the share price up. These thoughts are very dangerous. We have to remember profit is the final driving force of share price not strategic investors!