China So Cheap Chalco's Twice Profit Growth Discounted to Alcoa

June 2 (Bloomberg) -- Chinese stocks have fallen so much this year that Aluminum Corp. of China Ltd. is offering investors twice the profit growth of Alcoa Inc. at a lower price.

The 32 percent slump in China's CSI 300 Index, the steepest decline among the world's 20 biggest equity markets, narrowed the price-earnings gap with the Standard & Poor's 500 Index to 13 percent from 139 percent. Mainland stocks traded in Hong Kong, where no foreign investment limits exist, are 23 percent cheaper than U.S. shares, data compiled by Bloomberg show.

The CSI 300 fell after a fivefold gain sparked concern that prices are outstripping earnings prospects as the fastest-growing major economy slows, inflation accelerates and a stronger yuan makes exports less competitive.

``The correction in China provides a good opportunity to get in,'' said Mark Mobius, 71, who oversees about $42 billion of emerging-market equities as executive chairman of Templeton Asset Management Ltd. in Singapore. ``Valuations of these companies are very attractive. There's no question that even if you downgrade China growth by a few points, it's still going to be greater than in the U.S.''

The CSI 300 Index surged 478 percent in the past two years as China's government adopted measures to make state-owned shares tradable and the economy grew more than 10 percent every quarter. Chinese gross domestic product, which expanded 11.9 percent last year, may rise 10 percent in 2008 compared with 1.3 percent in the U.S., economists' forecasts compiled by Bloomberg show.

Rally Fizzles

The rally pushed valuations on Chinese shares to the most expensive among the largest equity markets. It fizzled this year amid concern new stock sales will overwhelm demand and the highest interest rates in nine years will slow profit growth.

Companies in the CSI 300 trade at an average price-earnings ratio of 26.4, down from a record 52.8 in October, weekly data compiled by Bloomberg show. That compares with a ratio of 23.4 for the S&P 500. The benchmark index for American equities last traded at a premium to the CSI 300 in March 2006.

The Hang Seng China Enterprises Index, a gauge of 42 Chinese companies that trade in Hong Kong, became cheaper than the S&P 500 in March and is now valued at 18.1 times profit, Bloomberg weekly data show. Chinese companies list in Hong Kong to lure international investors who face restrictions on mainland shares.

`Irrational'

``Selling has been irrational,'' said Chen Shide, who manages the equivalent of $2.3 billion at GF Fund Management Co. in Guangzhou, China. ``The current level already holds great investment opportunities in the medium and long term.''

Chinese measures to combat the fastest inflation among the world's 10 biggest economies may dent earnings, some investors say. The People's Bank of China raised its benchmark one-year lending rate six times last year to 7.47 percent, helping slow economic growth to 10.6 percent in the first quarter.

Inflation rose to 8.5 percent in April, close to the highest since 1996. The yuan has gained about 5 percent this year against the dollar, making exports more expensive. Overseas sales grew 22 percent in April from a year earlier, down from 31 percent growth in March.

Valuations have ``gone from very high to still high, that's why we're cautious,'' said David Darst, who helps oversee more than $700 billion as chief investment strategist at Morgan Stanley Global Wealth Management in New York. ``We don't think it's time yet to go trying to do too much bottom-fishing.''

Earnings in China

Chinese companies' first-quarter profits grew 5.5 percent. Earnings exceeded forecasts by 4.3 percent for the 203 with estimates tracked by Bloomberg. By comparison, profits at U.S. companies dropped 16 percent in the first quarter and trailed analysts' forecasts by 4.4 percent, according to Bloomberg data.

Net profit at Beijing-based Aluminum Corp. of China will rise 20 percent in the next two years, outpacing the 8.7 percent growth for New York-based Alcoa, analyst estimates compiled by Bloomberg show. Chalco, as the company is known, is valued in Hong Kong at 14.5 times profit, down from 25.1 seven months ago. Chalco trades at an 11 percent discount to Alcoa, the world's third-largest aluminum producer.

Alcoa bought Chalco shares in its initial public offering in 2001 and sold a 7 percent stake last September.

Analysts expect net income at Guangshen Railway Co., which operates trains in China's richest province, to increase 41 percent over the next two years. That compares with 31 percent for Burlington Northern Santa Fe Corp., estimates compiled by Bloomberg show.

Heaviest Snowstorms

Guangshen, which was hurt in the first quarter by the heaviest snowstorms in five decades, may see its profits boosted by government plans to spend 300 billion yuan ($43 billion) upgrading China's rail network this year.

The Shenzhen-based rail operator's Hong Kong-listed shares are valued at 17.3 times profit, a 17 percent discount to Fort Worth, Texas-based Burlington, the second-largest U.S. railroad. That's the biggest gap since 2003.

``It's probably time for investors who have not been involved in this area to start nibbling,'' said Alan Gayle, a Richmond, Virginia-based senior investment strategist at RidgeWorth Capital Management, which oversees about $74 billion. ``The long-term story is still intact.''

To contact the reporter on this story: Darren Boey in Hong Kong at dboey@bloomberg.net; Chua Kong Ho in Shanghai at Kchua6@bloomberg.net.

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