T H E R I S K A N D R E T U R N C H A R A C T E R I S T I C S O F

H O N G K O N G L I S T E D R E D - C f f l P S A N D H S H A R E S

by

S U N W A I - L E E

孫威利

M B A P R O J E C T R E P O R T

Presented to

The Graduate School

I nPa r t i a lFu l f i l lmen t

of the Requi rements for the Degree of

M A S T E R O F B U S E ^ S S A D M m T S T R A T I O N

T W O - Y E A R M B A P R O G R A M M E

T H E C f f l N E S E U N I V E R S I T Y OF H O N G K O N G

M A Y 1998

fi^^ p ； 1 1 HOV • j | |

^ ^ 4 i B ; Y ' S i v ^ y ^ " ^ ^ ^

The Chinese University ofHong Kong holds the copyright of this project submitted in partial fulfilment of requirements for the Degree of Master of Business Administration. Any person or persons intending to use a part or whole of the materials in this project in a proposed publication must seek copyright release from the Dean of the Graduate School.

ii

APPROVAL

Name: Sun Wai-Lee, Winnie

Degree: Master of Business Administration

Title ofProject: The Risk and Return Characteristics of Hong Kong Listed Red-Chips and H Shares

_ A ^ ^ Prof, Paul B. McGuinness

Date Approved: _ _ " j � - J ^

ii

iii

ACKNOWLEDGMENTS

T h e author wou ld like to thank Prof . Paul B. McGuinness， the supervisor of this study，for

h is gu idance th roughout the const i tut ion o f this pro jec t as well as his invaluable comment s .

Prof. M c G u i n n e s s ' s profess ional insights have also helped to inspire ideas contr ibut ing to

the achievement o f this study.

Special thanks also g o to Dr. T. Choi for his k ind suppor ts and encouragement in diff icult

t imes.

Finally, the author wishes t o send appreciat ions t o those w h o contr ibuted to this study.

These include Grant Chan and Kin Wong.

iv

ABSTRACT

This s tudy p roposes t o look at R e d Chips and H Shares and compared their r isk and

return characterist ic w i th that of the b roader marke t as measured by the All Ord inar ies

Index. Jn addition，the s tudy outl ined some o f t h e speci f ic and un ique fea tures inherent to

these t w o categories o f stocks.

These t w o types o f s t o c k s should be v iewed and analyzed different ly f r o m all o thers o n

the H o n g K o n g Stock exchange due to the impor tance o f Ch ina t o fu tu re earnings. Fo r

example，H shares der ive the major i ty o f earnings f r o m the main land whi le the m a n a g e m e n t

o f R e d Chips is pr imari ly connec ted to the P R C government , which paves the w a y for

bus iness expans ion via (cheap) asset injections.

The r isk-return prof i le o f t h e s e s tocks are different from that of o ther s tocks listed on

the Stock Exchange o f H o n g Kong. The analysis shows that R e d Chips had an average B e t a

value of 1.2 over the last f ive years. Whi le H shares are n e w to the market，their f ive years

be ta w a s not available. R e d Chips proved t h e m to b e "aggress ive" . A more detailed analysis

shows that Be ta values changed over t ime. A n interesting observat ion w a s that H Shares '

be ta va lue o f t h e b road market w a s low in Bull runs, but h igh w h e n the market w a s Bear

market，which can b e interpreted as the H Shares w e r e underper forming. Other stocks on

the Stock Exchange o f H o n g K o n g derive the major i ty of their earnings f r o m H o n g Kong ,

whereas H Shares der ive theirs from China and R e d Chips have strong relation wi th China

entities. Therefore the under ly ing fundamenta l economic fac tors affect ing earnings g rowth

are different and stock valuat ions should ref lect these inherent differences.

The pr imary measure of risk used in this study is Be ta values, wh ich w a s derived for

V

each s tock us ing s imple regress ion. M e a n w h i l e , r e tu rn w a s m e a s u r e d b y to ta l share p r ice

c h a n g e ( takes in to accoun t share spli ts and dividends) . Th i s s tudy s h o w s tha t t h e h igh r isk

o f R e d Ch ips w a s not c o m m e n s u r a t e wi th its return. F o r every uni t o f r isk，Red ch ips

prov ided 1.0356 re turn, wh i l e the average o f all s tocks o n the S tock E x c h a n g e o f H o n g

K o n g prov ided 2 .775 o f r e t u m . W e a lso c o m p a r e d t h e f ind ings w i t h tha t f r o m the m a r k e t

indexes，i.e.，AOI，HSCCI, H K C E I and similar f igures are resul ted.

H o w e v e r , past p e r f o r m a n c e m a y no t represent fiature earn ing potent ial , especia l ly

w h e n R e d Ch ips are g r o w i n g in impor t ance in local economy.

vi

TABLE OF CONTENT

APPROVAL “

ACKNOWLEDGMENTS Ui

ABSTRACT iv

TABLEOFCONTENT vi

LISTOFFIGURES ^

LISTOFTABLES x

CHAPTER 1 1

INTRODUCTION 1

Background 1

Organization of the paper 2

Relevance of the study to Hong Kong ^

Scope 4

5

RED CHIPS AND H SHARES 5

Section 2.1: The characteristics ofRed Chips andHShares 5

Background ^

Sector Distribution 9

Price Earning (P/E) Ratio 11

Different Aspects ofRed Chips and H Shares 13

Sectton 2.2: RedChips 15

Background 15

The Hang Seng China-Affiliated Corporations Mdex (HSCCI) 15

Market CapitaJization 17

vii

ListingMethods 19

Main Features of Red Chips 22

Section 2.3: HShares 乃

Background 25

The Hang Seng China Enterprises tidex (HSCEI) 25

Market Capitahzation 26

Listing Aspects 28

Main Features ofH Shares 30

CHAPTER 31

RlSK AND RETURN CHARACTERISTICS 31

Section 3.1: Literature Review 31

Measurement of Risk ^ 1

Section 3.2 Methodology ^

All Ordinaries 38

Data Collection and Empirical Work 40

Constraints 40

CHAPTER TV 对

41

Section 4.1 Index Performance 41

Section 4.2 Findings on systematic risks 43

Comparison between Red Chips and H Shares 43

MdividualRedChips 47

MividualHShares 48

Sectoral portfolios ofRed Chips 50

Sectoral portfolios ofH Shares 53

viii

Section 4,3 Risk andRetum Relationship 54

CHAPTERV 59

59 CONCLUSIONS

RECOMMENDATIONS FOR FURTHER RESEARCH 61

APPENDICES

BffiLIOGRAPHY

ix

LIST OF FIGURES

Figure 1 Index performance of Red Chips, H Shares and All Ordinary Stocks 4

Figure 2 Numbers of Listed Companies & Percentage of Total Market 8

Figure 3 Market Capitalization & Percentage of Total Market 8

Figure 4 Sector distribution of Red Chips (year ended 97) 10

Figure 5 Sector distribution of H Shares (year ended 97) 10

Figure 6 Price Eaming Radio of Listed Companies 12

Figure 7 HSCCI Weightings ODecember 31，1997) 18

Figure8 HSCEI Weightings pecember31, 1997) 27

Figure 9 The Change ofBeta Value ofRed Chips & H Shares Over 10 Subperiods (1993-1997).. 44

Figure 10 The Change of Sectoral Beta ofRed Chips Over 10 Subperiods(1993-1997) 51

Figure 11 The Change of Sectoral Beta ofH Shares Over 8 Subperiods (1994-1997) 52

Figure 12 Beta Value ofRed Chipsby Sector (Fvdi Period 1993-1997) 56

X

LIST OF TABLES

Table 1 Number of shares and Market Capitalization of Red Chips and H Shares 13

Table 2 Difference between Red Chips and H Shares 13

Table 3.1 Backdoor Listings of Red Chips 21

Table 3.2 Initial Public Offering (H>0) Listing ofRed Chips 21

Table 3.3 More than 35% shares holdbyMainland Authority 21

Table 4 H Shares Listings ^^

Table 5 Index Performance of Red Chips and H Shares 42

Table 6 Average Monthly Turnover 43

Table 7 Beta Values ofRed Chips (1993 - 1997) 46

Table 8 Beta Values ofH Shares (1993 - 1997) 49

Table 9 Vital Statistics ofBeta ofRed Chips (FvSi Period 1993 — 1997) 55

Table 10 Vital Statistics onRisk andRetire ofRed Chips (FviH Period 1993 - 1997) 57

Table 11 DaUy Return and Variance of different indexes 58

TheRiskandRetum Chtfracteri^ ofHong Kong liste4 Red-Chips an4 B Shares 1

CHAPTER I

INTRODUCTION

Background

The sovereignty t ransfer of H o n g K o n g from Britain to China in 1997 has

inevitably affected the stock market in H o n g Kong. H o n g K o n g n o w has a much closer

relationship wi th China and is increasingly an attractive marke t for China enterprises to

raise funds. Investors are also seeking investment opportunit ies since H o n g K o n g ' s

economy may benefi t as it becomes a part o f C h i n a .

There are two distinct groups of s tocks listed in H o n g K o n g that have strong ties

wi th the Mainland. These are labelled as Red Chips and H Shares.

Red Chips are companies listed in H o n g K o n g but principally controlled by

Mainland China entities. M o s t of them enjoy considerable government support from

China. In general, their management is quite westernized and is successful in

combining H o n g Kong advantages and China connections.

H Shares also enjoy principal control from Mainland parties wi th the additional

characteristic that they are also incorporated in the Mainland. Dr iven by the

modernizat ion o f t h e Chinese economy, an increasing number of China enterprises are

turning t o international capital markets to raise fiinds. One of the options is to publicly

I

TheRkkm4rnum Characteri^s ofHong Kong Listed RedChips and B Shares 1

list in H o n g Kong. H Shares have provided local investors with direct investment

opportunities in the thriving mainland economy. Moreover, H Shares have also

generated considerable interest in the global financial community.

Org^Tii7Mion o f t h e paper

This paper leads to discussion on the topic o f R i s k and Return Characteristics of

the above mentioned Hong Kong listed Red Chips and H Shares. The structure o f t h e

paper is as follows:

Chapter 1: Presents the background o f t h i s study and gives brief introduction o f t h e

two stock groups - Red Chips and H Shares. The origination and scope

o f t h i s study will be defined.

Chapter 2: Describes the main characteristics and listing features of Red Chips and

H Shares, and examines how these two groups of stocks entered into the

stock market o f H o n g Kong and in what ways they are different from

other common stocks in Hong Kong.

Chapter 3: Reviews the risk and return relationships of stock performance and

discuss on how market model can be applied in this study.

Chapter 4: A summary o f t h e results is undertaken here, which provides investors a

better understanding on how Red Chips and H Shares respond to market

moves.

Chapter 5: The conclusions o f t h e study is presented in this chapter

theRkkandUmrn CharacterisHcsofHongKmglistedRed-CkipsandBShares 3

Relevance o f the stiidv to Hong Kons

Although there are currently 36 Red Chips and 39 H Shares quoted on the Stock

Exchange o f H o n g Kong，little academic attention has been devoted to these two asset

classes. The Political Handover has magnif ied the prominence o f t h e s e t w o groups of

stocks. As Hong Kong and China are getting closer in terms o f b u s i n e s s and economic

relations，they rely much more on each other. There are still mountains of State owned

enterprises in China which need substantial capital to facilitate their business

development. Fund-raising in the domestic market is unlikely to meet their

requirement. The Stock Exchange of Hong Kong, being the seventh largest stock

market in the world and the second largest in Asia after J apan \ is well known for its

transparency and efficiency, and is therefore an attractive market to raise capital.

Figure 1 compare the performance o f R e d Chips, H Shares and all ordinary stocks

listed on the Stock Exchange in Hong Kong. The Red Chips appear very volatile with

the H Shares underperforming the market over the last few years. The ultimate question

remains: what factors affect the performance o f t h o s e China-related companies, is there

any differences between the Red Chips and H Shares? Would there be any relationship

between the returns ofChina-re la ted stocks and the market performance，and would the

re tum generated from investing in Red Chips or H Shares be sufficient to justify the

existing risk the potential investor bears，and how this risk compares with each other in

the two different groups? The findings of this study will certainly provide investors

with a better understanding of China related stocks in Hong Kong.

1 Hang Seng Bank's Press Releases 'New Index to Gauge Performance ofChina - Affiliated Companies on the Hong Kong Stock Market" 13

Jun 1997.

i

TheRiskm4murn Charactermcs ofHong Kong listedRedChips andHShares 4

Figure 1 hidex performance of Red Chips, H Shares and AU Ordinary Stocks

Index - Rebased (Base Date: 8/7/94 Base: 100)

500 f^as s seas f f lBSsaees s seasesp f i i i l i i i i i i i i i l i i i l l i f i i ^gp i i i i i i l i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i iH i I III "All Ordinary Shares _iliii;illii_______:i|_ii_iiii:;i_|i|_|_|;__iili_

450 Red Chips (HSCCI) “ 1 H Shares (HSCEI) |圓|丨|圓________1____1__|____圓|_|丨__ ^ ^

E ^ ^ ^ ^ ^ ^ ^ H i : ^ ^ ^ ^ ^ ^ ^ ^ 8 50 iiiii_;;i_i__i_i_;_ggii_i_^^

° s s s 实 落 落 落 s 冬 s s 爷 ^ 琴 ^ 考 孝 孝 寒 I 考 夸 夸 1 § I ?

^ 看 I I I f s 身 I I I i ^ t I ^ i i ^ I I ^ i I ^ t I

Source: Datastream

Scope

It is clear that the main focus o f t h i s s tudy is the H o n g K o n g listed R e d Chips and

H Shares. The study begins by looking at the general background and the main

characterist ics of the t w o groups of stocks. Relevant f igures and statistics will be

shown to demonst ra te their c o m m o n and dif ferent aspects. It then proceeds to analyze

their re turn relationship to the who le s tock market in H o n g Kong. Whi l e the te rms R e d

Chips and H Shares are convenient labels fo r China related enterprises, but these

classif ications sound t o o general. In fact , these companies vary vastly in size and

industry focus. Therefore , there would also b e sectoral analysis o f these t w o index

groups. However , as H Shares are too new to the market and most of t h e m w e r e listed

on the S E H K in the last t w o years, the analysis will thus focus on R e d Chips.

1

TheBiskmdRernrn Chura<terisHcs ofBong Kmg Listed Red^hips and H Shares 5

CHAPTER II

RED CHIPS AND H SHARES

This chapter is divided into three sections, with the first section outlining the

common characteristics and unique features that can be used to distinguish Red

Chips and H shares as well as the rise in market value. The following two sections

will go on to describe Red Chips and H Shares m further detail.

Section 2 1: The characteristics o fRed Chips and H Shares

In this section，we will look into the differences and similarities between Red

Chips and H Shares listed on the Stock Exchange of Hong Kong. The key areas

included market capitalization, business concentrations, and valuation.

Background

Owing to the special political position in Hong Kong，there has been growing

investor interest in China related companies listed on The Stock Exchange of Hong

Kong. This are reflected by the increasing number of listed companies and the market

capitalization o f R e d Chips and H Shares. Both groups ' weighting in the Hong Kong

market are almost double the size they were five years ago (see Figure 3).

Red Chips weighting has increased from 3% at the end of 1993 to 6% at the end

of 1997 whereas H Shares weighting has increased f rom 0.67% to 1.5% over the same

period. The total market capitalization of the sectors have risen to a large extent due to

neHiskan4Beturn CkaractermcsofHongKongMReMMp—tmares 6

the fol lowing reasons:

1. Share price increases. As shown in Figure 1, the Red Chips have substantially

outperformed the broader market over the past year. In spite of the currency crises.

Red Chips still recorded a 9 .8% increase during 1997.2

2. Raising of new capital Some existing Red Chips and H Shares have extended

their market capitalization and uplifted weightings through issuing new shares.

These fund-raising activities were well accepted by the market during the first

three quarters of 1997. Investors expected share price to benefit from these events.

In fact, the capital was to fmance asset injection or to acquire shares o f b l u e chip

companies in Hong Kong. One typical example is China Everbright Technology

Limi ted ' s acquisition o f s t o c k in Hongkong Telecom in 1997.

3, New entrants Favorable sentiment toward the sectors has facilitated new listings

of shares? As shown in Figure 2, sixteen H Shares were successfiilly listed in

1997 and most of them recorded huge over-subscription rates upon the Initial

Public Offering ( f f O ) . Thus contrasts with only six H Share listing in the market

in 1993.

The market mania with China-related shares could also be reviewed by the market

turnover coverage^. In December 1997，the monthly tumover was 20% and 5.7% o f t h e

market for Red Chips and H Shares respectively.^ Even the Hang Seng Index (HSI) lost

3 c S . ^ o h L o n . "Red-Chip Survey' Hong Kong Research, C^ldman Sachs 27 Jun 97. 4 Marketturnover coverage is the turnover as % of the total market (defined by HSI Service Limited) 5 Information is provided by HSI Services Limited

TheHiskm4n^rn Characteristics ofBong Kong listed Red-Chips and B Shares 7

its leading position. During August 1997, the H S F s share of market turnover coverage

dropped to a historic low o f j u s t 2 4 % compared with the usual 60%' O f t h e 20 most

actively traded stocks, only seven were fflS constituents. Almost all the remaining

were Red Chips or H Shares, which together made up 34.7% of the marke t ' s turnover."

In order to maintain the overall representativeness o f t h e HSI , the H S I Services Limited

revised one o f t h e selection criteria in which the H S I constituent stocks will no longer

be required to have a substantial business presence in H o n g Kong. Thus，China related

stocks could be added to the HSI. By the end of 1997，three of the most actively-traded

large market capitalization Red Chips are included in the HSI，namely China Resources

Enterprise Ltd.，Shanghai Industrial Holdings Ltd. and C O S C O Pacific Ltd. Meanwhile

several local listed companies such as Shun Tak Holdings Ltd. and South China

Morning Post (Holdings) Ltd. were deleted from the index."

As a result o f t h e "China Fever", the Hong Kong stock market was structurally

altered, giving greater weighting to china-related stocks. In addition, two other indexes

have been created specifically to monitor PRC company performance in Hong Kong ' ,

in which w e will discuss later. Looking ahead，this trend is expected to continue as

cash-starved China enterprises will continue to t u m to Hong Kong to raise funds.

e,7.48Hang Seng Bank's Press Releases 'HS1 Services Announces NoChange to the Number ofHang Seng Index Constituents and Launch of New Index-16 Dec 1997.

9 Baldinger, Pamela. -Mainland Companies Settle Down in Hong Kong.' China Business Review, Vol 24’ Issue 6, Nov/Dec 1997’ pp. 4.

fke 細 m4 Urnm Ckm^d^k^ ^Hm0^mglMMe^Ck^ amdB Skare^ 8

wm^mm^s^s^^^^^^^^^^l^^ '^i^^ "‘ - • 广

^ ^ ^ ^ ^ ^ ^ ¾ ¾ 6 f h ^ O ^ p a n i e $ & Percentage ofTotal Market

^^^M ' H 0 M M k ^ ^ ^ ^ ¾

一 ^ ^^\ *^!^^^^^^f^^^^^^^^^^^&^0^^^^^^^^^^^^^^^*^^

^ ^ ^ ^ ^ ^ ^ ^ ^ f e t o ^ S a i t ^ i z M i < m & Percentage ofTotal MaAet

^ ^ S 1

^ — — U ‘ : ® ^ ^ ^ ^ ^ ^ M

'^'d^^^=E^ , ^ 89.00& - Z -^Kt 2 42% ~^^^^^^^^]]^^^^^^^^^^^^^^^ ；‘

_ r m 二 • m ^ , ; , r 9 ^ '^% 40,000 ~ y ^ m 0.67% ^ B _ ^ B j O ; ^ ^ ^ _ ^ i s g g | _ ^ P | ^ 愈 ’

- - < g J i J a 1 a 咖 “ ^ ^ ^ ^ " ^ ^ ^ ^ ？ “ ^ “ ^ ^ ^ ^ ？ “ “ ^ “ “ ^ ^ “ “ ： ^ ^ ^ ^ ^ ^ ^ ^ 遷

^ ^ ^ ^ ^ ^ ^ m

TheBiskandHetum CharacterM^ ofHong Kang liste4 Re4-Chip^ and H Shares 9

Sector Distribution

The const i tuents o f R e d Chips are d i f ferent in size and divers i f ied in bus iness

practices. They are classif ied into var ious sectors， including B a n k i n g and Finance，

Cong lomera t e Enterpr ises , Elec t ronic & Electric，Industrial, Oil & Min ing , Proper ty &

Construct ion, Trading，and Transpor ta t ion (See F igure 4).

T h e 36 R e d Chips can be divided into th ree large sector g roups _ Cong lomera te

enterprises . P roper ty & Construction，and Industrials. For each of these sector groups ,

there are seven part icipants , w h i c h sum u p to 5 8 % of total num be r of R e d Chips.

Never the less , the dominan t sectors w o u l d b e the Cong lomera t e enterprises and

Proper ty & Const ruct ion groups. Because of their heavy weight ings , the pr ice

m o v e m e n t s o f s h a r e s in these sectors strongly a f fec t s t he pe r fo rmance o f t h e R e d Chip

Index，which wil l b e discussed later. Industrial par t ic ipants are numerous but rather

ins ignif icant in marke t capitalization. Whi l e China Aerospace accounts for 1 .75% of

R e d Chip Index，the remain ing six compan ies are immater ia l t o the who le g roup as

contr ibut ing less than 1%.

The const i tuents o f H Shares appear rather different from R e d Chips. They are all

concentra ted in industrial sectors. Specifically, they are mainly Heavy Industr ials

engaged in Infras t ructure , Capital goods , Chemicals and Bui ld ing Mater ia l s (See

F igure 5). Consequently, their marke t pe r fo rmance is expected to b e closely related to

the industry circumstances. D e m a n d and supply o f indus t r i a l products , selling price and

cost o f p r o d u c t i o n , cost of capital and government policies are all de terminant fac tors

affect ing those H Shares. As H shares ' main entities are located in the Mainland, their

business focus，to a certain extent , ref lects the economic envi ronment of China, At

TkeRkkmd_rn ChrnMicsofmmgKmgLi^dR^d^^hip^^^^f^^fh^^^___^

present, China is devoted to large infrastructure projects and needs foreign capital t o

finance development. Therefore, flocks of China companies are approved to be listed

and raise capital abroad.

Figure 4: Sector distribution ofRed Chips O ear ended 97)

ttBankandFinance

6% 11% BConglomerateEnterprise • n ^ g f c i r n I 3 5 ¾ < ¾ ^ B:Electron.c&Elect:onics

v < < ^ ^ I B f c J U < i ^ ^ i S B l k k - • _ 19% ^ ^ ^ ^ ^ ^ ^ ^ S S j ^ M P j j ^ ^ B H P W P W | BOil&Mining

^^jj|^^^^^^^^|^^^^jHgj^^||^j!|!|||^^***^^^S^ BProperty & Qmstmction

i ^ ^ ^ l U I ^ ^ 1^；^^ 19%

Source : compUed with Wandley Cardex andthe guide to companies ofHong Kong

Figure 5: Sector distribution ofH shares O ear ended 97)

15%

: ^ i f f W ^ B B i i l H B B B i ^ ^ ^ a Building Materials & Basic Metals ^ ^ ^ ^ ^ ^ ^ ^ S ^ ^ H ^ ^ S S ^ ^ ^ | H ^ ^ | aCapitalGoods fPlllll_llllil'""l|j|;;|J!l!B!!jJJi " N^ j | p | p i i ^ p ^ m p ^ ^ QChemical l r""" '^ iZr '"^ ^ S I E ^ ^ S H I H °Consumption/Service

s k L ^ ^ ^ ^ ^ P F - � i ^

20%

Source : complied with Wardley Cardex and ABN AMRO China Research

TheRiskmdReturn CharacterisHcs ofHong Kmg listed Red^hips and H Shares 11

Price Earning (PyE) Ratio

Price earnings ratios should vary positively with differences in expected fu ture

growth in abnormal earnings，and negatively with risk. (The ratio varies according to

expected changes in abnormal earnings, not earnings per se.y®

During the period of 1993 - 1997，the broader market P /E ratio average ranged

between 15X to 2 5 X (see Figure 6). The average P /E ratio o f H Shares, though not

following in accord with the market pace, fell into the similar boundaries, (i.e. 13X to

25X. The implications are that the earning patterns and stock performance o f H shares

could be quite different from other Hong Kong listed companies. In fact, H shares

business operations are based on the Mainland China. Despite the China fever，

investors are still conservative and cautious in selecting H shares. They are possibly

dismayed by H shares ' past performance records and not confident in Chinese-style

management.

On the other hand. Red Chips ' average VfE ratio has steadily surpassing the

market range. The trend is especially apparent in the approach to 1997,s political

handover, reflecting an expectation of essentially significant growth in abnormal

earnings o f R e d Chips .

While some Red Chips still generate the majority of their earnings from Hong

Kong，they are trading at a higher P /E ratio，partly because of their abilities to exploit

China earnings. The average P ^ multiple for Red Chips reached 62X by the end of

10 Fairfield, P., 'P/E, P/B, and the Present Value of Future Dividends' Financial Analysts Journal, July/August 1994, pp. 23-31.

m ^ m k _ 4 ^ ^ ^ ^ ^ ^ h ^ ^ ^ ^ i ^ ^ ^ ^ ^ ^ ^ ^ ^ f ^ ^ ^ ^ ^ ^ f ^ ^ ^ ^ ^ ^ ^ f f ^ ! ^ Z ^ ^ _ _

1997 (see F igu re 6) , d o w n f r o m the mid-yea r h igh o f 126X. F o r s o m e p o w e r M

Ch ina -backed u p companies，such as Ch ina Eve rb r igh t Techno logy Ltd . and Ch ina

Eve rb r igh t In ternat ional Ltd.，their 视 ra t ios w e r e 8 7 5 X and 2 4 4 X respectively. T h e

marke t is pay ing a p r e m i u m fo r the va lue o f Gnarvci (關係 )” and the potent ia l asset

inject ions. Asse t in jec t ions t end t o lower t he V/E mul t ip le and jus t i fy toher pr ice

appreciat ion. Asse t in jec t ions m u s t b e d o n e wel l b e l o w marke t pr ices fo r rece iv ing

c o m p a n y t o benef i t . A f t e r this initial response， investors (especial ly t h o s e small retail

inves tors w h o are not qui te famil iar w i t h s tock va lua t ion) s imply chase t he R e d Ch ips

fo r t he potent ial asset in jec t ions , w h i c h has resul ted in t he crea t ion of t he Ch ina

Concep t mirac le - T h e P / E of R e d Chips w a s dr iven u p t o absurd level. M o s t R e d

Ch ips wil l f m d it increasingly di f f icul t t o source t he large-scale deals tha t jus t i fy their

p r e m i u m rating. H o w e v e r , focus ing o n 视 mul t ip les a lone is mis leading. Pas t

p e r f o r m a n c e d o e s not demons t ra te f u t u r e earning potentials .

^ ^ P 5 ) f , S : ¥ > i r i c e E a m i B g » — ^ f U s t e d Compawies

^ ^ ^ ^ ^ ^ E i m “ ~ ~ ™ “ ~ ^ M ^

_ ^ ^ ^ ^ M ” Means relationship

Different Aspects of Red Chips and H Shares

Even if Red Chips and H Shares are all China related companies listed on the

Stock Exchange of Hong Kong. They are different in many ways:

Table 1: Number of shares and Market Capitalization of Red Chips and H Shares

No. of Market Cap. Companies (HK$m)

Avg. Mkt. Cap. (llK$m)

%of H.K Market

Red Chips 36 H Shares 39

Source: Datastream Year ended 1997 figure (31 December 97)

191,600 48,013

5,322 1,231

6.00 1.50

The Red Chips outweigh H Shares in terms of importance. Furthermore, the

average size of Red Chips is 4X the size of the average ofH Shares (see Table 1). The

possible explanation is that investors have high expectations' for earnings prospects of

Red Chips and are willing to pay a premium.

Table 2: Difference between Red Chips and H Shares

Listing Quotation Supervision Liquidity Accounts Transparency Management flexibility

Red Chips

Hong Kong HK$ Hong Kong Stock Exchange High HKGAAP High, Low High

* CSRC - China Securities Regulatory Commission Source: Goldman Sachs.

12 Cheung, Johnson. 'Red-Chip SUNey" Hong Kong Research, Goldman Sachs, 27 Jun 97.

H Shares

Hong Kong HK$ China CSRC* High HKGAAP,PRC Medium Low

Furthermore, Red Chips are thought to be more transparent and accountable to

investors than H-shares. Managements of Red Chips have more flexibility and

considerable latitude in operating their businesses versus the state-owned H Shares.

Thus, Red Chips are believed to be better investment tools than H Shares. In fact, Red

Chips are far more effective in raising capital than H Shares. They are well supervised

by the Hong Kong regulatory bodies, with more reliable accounting systems and

stronger protection of minority shareholders' interest. 13

On the contrary, H Shares still have state-owned enterprise problems. They are

exposed to the inefficiency of a command economy which can be characterized by

bureaucracy, lack of operational freedom and well-defined lines of authority.

Accountancy standards can be ambiguous. In addition, H Shares' fortunes are still

dictated by Beijing's policies, business decisions may not based on economic

considerations, but to fulfill political targets. Those political targets may include the

remedy of the unemployment rate, the privatization or taking over poorly operated

State Owned Enterprises, etc. One example is that Tsingtao Brewery had to take over

several near- insolvent breweries and helped them reconstruct their businesses. No

matter how good or bad the result will be, the target companies are reluctant to decline

what is suggested by the Central Government. Clearly, H shares are more restricted in

decision making.

13 Cheung, Johnson. "Red-Chip Survey· Hong Kong Research, Goldman Sachs, 27 Jun 97.

Section 2.2: Red Chips

In this section, we will examine Red Chips, how they originated (whether via

public listing or backdoor listing), their spectacular rise in valuations and the

importance of Guanxi for acquiring cheap assets from parent companies (asset

injection).

Background

Red Chips are companies controlled by mainland Chinese entities, which infuse

their HK-Listed units with cheap assets. 14 Red Chips made their first entrance into the

Hong Kong Stock Exchange back in the early 1990s without much international

recognition. It has been only since mid-1996, following a number of asset injections,

that they have caught the attention of the international investors. Prior to this, Red

Chips were of interest only to dedicated China funds and other specific institutional

investors. 15

The Hang Seng China-Affiliated Corporations Index (HSCCI)16

The Hang Seng China-Affiliated Corporations Index (HSCCI) is a market

capitalization weighted index for Red Chips. It is comprised of 36 stocks (as at year

end 1997) . listed on the Hong Kong Stock Exchange which have at least 35% of their

shareholdings held directly or indirectly, by state-owned organizations or provincial

14 Du Bois, Peter C. ·Red-Chip Mania Sweeps Hong Kong, Wfth China Stoking the Flames.· Barron's Market Week, Vol. 77, Issue 21 , pp MW8.

15 Lo, Marvin & Chan, Edward. ·The Second Encounter of the Third Kind· China-Related Companies, Amsteel Research (HK) Ltd, 14 Qct 1997.

18 Information provided by HSI Services Limited

j^^^^^^^^^^^^^^^^^^^^^^^i^^^f^^^^^::^^^^!l^!^^^!!! : :15!"!:! ! - ^

and munic ipa l authori t ies in China .

r^]^^^l^t^nn F o r m u l a

Current Aggregate Market Current VahieofConstituentStock^ ^ Yesterday�Closing Index

Index ~ 7 Yesterday's Closing Aggregate

Market Value of Constituent Stoc^ ——__

T h e H S C C I w a s first l aunched on 16 June 1997 and w a s backda ted to 4 January

1993 wi th a base va lue of 1,000. It compr ises of n ine const i tuent s tocks o n the base

date.i7 These s tocks should have b e e n listed for at least 12 mon ths on T h e S tock

E x c h a n g e of H o n g K o n g and have a t rading record of at least 12 months under t he

control o f t h e Chinese entities. They can b e H o n g K o n g or overseas incorpora ted , bu t

mus t no t b e const i tuent s tock o f t h e H a n g Seng Ch ina Enterpr i ses Index ( H S h a r e s ) ^

AS ment ioned earlier, th ree R e d Chips are also included as the const i tuents o f H a n g

Seng i n d e x ¢181) due the growing impor tance o f R e d Chips on the H o n g K o n g s tock

market，combined wi th actively t rading and heavy capital ization.

In fact , t w o m o r e companies w i th s t rong China relat ionship, C I T I C Paci f ic and

China Telecom, are included in H a n g Seng Index Const i tuents . B u t since they are not

perfect ly me t wi th H S C C F s const i tuent requirement (i.e. C ITIC Paci f ic does not fulf i l l

the 3 5 % stake holding by China entity and China Telecom w a s listed on the Stock

Exchange o f H o n g K o n g less than one year) , will no t b e included in this study.

~ " ： ； ； " ^ ^

and Union Bank

18 Source: HSI Services Limited

mernkm4murn amr<uMcs#ngKongMRe4<Mp"ndHS1^^^^^^_^

Market Capitalization

E a c h o f t h e cons t i tuent s tocks o f t h e H S C C I is w e i g h t e d so tha t it wil l i n f l u e n c e

t h e index in p ropor t ion t o its respec t ive m a r k e t value. A t t h e year end 1997，the marke t

capi ta l izat ion o f t h e 36 R e d Ch ips r eached H K $ 1 9 1 . 6 bi l l ion. All R e d Ch ips toge the r

accoun ted fo r 6<>/o o f t h e total marke t capi ta l izat ion in H o n g Kong，up f o r m 2 . 8 2 % at

t h e year end 1993 ( refer t o Table 1). H S C C I is domina t ed b y a f e w C o n g l o m e r a t e

En te rp r i ses and P rope r ty & O>nst rue t ion companies . T h e largest six c o m p a n i e s had

al ready accoun t s m o r e than 5 0 % o f t h e marke t capi ta l izat ion o f H S C C I , namely: C h i n a

R e s o u r c e s Ente rpr i se L td . (13 .99%) , Shanghai Indust r ia l H o l d i n g s Ltd . (12.59<¼),

C P S C O Pac i f i c L td . (6.740/0), G u a n g d o n g Inves tmen t Ltd . (6 .41%)，China Over seas

L a n d & Inves tmen t Ltd . ( 6 .35%) and Ch ina M e r c h a n t s H o l d i n g s ( Internat ional) Co.

L td . (6 .21%). Indica t ing are tha t t he pr ice m o v e m e n t of these f e w s tocks wil l

s ignif icant ly a f fec t t he p e r f o r m a n c e o f H S C C I .

neEi^^^^^^^B^^^^^^^h^^^^^^^^^^[ti^^^^:^^!^^f^^"f""^l^^:^^"f^ - ~

HSCCI

Current Value (December 31, 1997) 1 J 4 5 . 6 2

B a s e V a l u e ( J a n u a r y 4 , 1993) 1000

N o . o f s t o c k s 36

F i g u r e 7: HSCCT W e i g h t i n 2 ^ Q e c e m b e r 31，1997)

SHOUGANG CCRD.CEN.HDG. | 必

ORffiNTALMETALSHDO. _奶

GZmCHUAUNGHDGS •顿

SHENYINWANGUO i O i ^

SHOUGANGCCRD.TECH.HDG. § 0 ^

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^ONE ELECTRONIC TECH. _ M 9

ONFEMHOLDINGS , < W 2

CHINA PHARMACEUTICAL B0.4J

POLYn^ESTMEKTHDG, _P-44

NnNXmHDG. H0^1 DENWAYm H | W ?

SHOUGANGCCRWNTLENTS. MMI^-^

LEGENDHOLDM5S | B ^

CmNAFOODS H M I ^

SHENZHENWTL.HDG. H i > ' ^

COKT.MARn^R •••支链

CHWAEVERBRTGHTTECH, p H i ^ - ^ ^

UNIONBANKOFHONGKONG ―至-形

roUNDERHONGKONG — ^ 舶

CHWAAEROSPACE ―】:?，

TOP GLORY INTERNATIONAL M M B H ^ ^

CHINAEVERBRTGHTTNTL. B J f B J J

GUANGNANHOLDWGS J j j M J j B l | ^

G U A N G Z H O U n v t V . — — 饥

CHU^AEVERBRIGHT J B B i B | B | i i | B M i i i l i | ^ ^ ^ ^

CHMATRAVELWrL. | — — 1 ^ ^ ^ ^ 棚

NGFUNGHONG 1 1 1 ¾ ¾ ¾ ^

CNPCHONGKONG | B | i l B [ l i l M

KAWAHBANK ii|||||||ili||||jiliiii|Jil^^M_||i_iiiiiiiii;;iiiiililiiiii;i:WWilMii�i;ii_liii CHWAMRCH.HCmNGS |1181111(11811^(1丨醒_画__謹匪_11丨1画_誦丨丨丨1|丨_画___謹_匪___麗謹___謹匪醒醒__111醒謹画_

yiigBajjj|jB CHE^AOS.LAND&TNV. i i i | i | i i i i | ^ B ^

GUANGDONGwv, B B i M W I B B B B B i B ^ ^ ^ ^ ^ ^ B ^ i i i _ _ l _ _ i _ _ i l l _ _ _ i i ! i i i i _ i l i i i _ _ _ _ _ _ _ i _ i l i ! _ _ i _ i _ i i i i i i i i i i i B i B i a B B ^

COSCOPAQHC — P — ^ _ ^ i ^ ^ ^ M ^ ^ M M ;Mg sHAi.nDusTRiAL | | | | | j j | j | j | i | | | | | j | | j j^^^^^^^^^Miiiiiiii i i i i i i i i i i i i i i i i i i i i i i i i i i i l i i i i i i i i l i i iM__^iiiillii i l

CHmRES.ENTREP. | ( | | | ^ 8 | ^ ,4m ie.OO

000 2.00 4.00 6.00 8.00 _ ( % )

Source: Datastream

TheBkkmdRetum Churacteri^ ofHong Kang listed Red-Chips and H Shares 19

Listing Methods

Red-chips come into the Stock Exchange of Hong Kong generally through two

ways - Initial Publ ic Offer ings (n>Os) or backdoor listings

Tnitial Public Offer ings O P O S �

Initial Public Offering (H>0) is the traditional way of a company to sell common

stock to the public for the first time^' and grant the listing position on the stock market.

N e w EPOs o f R e d Chips are considered to be higher-quality companies since they

have been investigated by Hong K o n g ' s Listing Commit tee and may also be endorsed

by the China Securities Regulatory Commission (CSRC). But they cannot diverge

from their fundamental business or raise new capital within six months of listing^^

Table 3.2 shows the Red Chips listed on The Stock Exchange o f H o n g Kong through

n>os.

Rackdoor listings

Backdoor listing means that the mainland shareholder acquires majority shares of

a listed shell company (relatively small and poorly performing company) and then

gradually replaces the original assets and activities with its own.

Backdoor listings are generally more convenient, allowing the acquirer to skip the

stringent and t ime-consuming JPO process. N o wonder half of the Red Chips

companies went public on Hong Kong stock market through backdoor listing.

Encouraged by the successful experimental listing of Guangdong Investment Ltd.,

« Reilly, Frank K. Investment Analysis and Portfolio Manaoement. The Dryden Press, 4th Edition. 1994, p.86 20 Cheung, Johnson. 'Red-Chip Survey. HongKongResgarch, Goldman Sachs, 27 Jun 97.

ThernkandRmrn Characten^o/HongKmglistedRed^hipsandHShares 20

backdoor listing activities burst during 1993 and 1994 (see Table 3.1). Furthermore，

share prices of ten soared as retail investors rushed in to chase the stocks. Even though

the real earning growth or management reconstruction was not demonstrated right after

taken over，investors were speculating on the China "concept" and the potential asset

injection. However , on 20 June l997 , the State Council announced new guidelines on

China owned companies in which back door listing on the H o n g Kong stock market

through acquiring shell companies is prohibited. Existing back door listed Red Chips

are thus better off.

The Risk md Hmrn CharactemHcs ofHong Kong histed RedChips and H Shares 21

Tah1p .1 Rackdoor Listings of Red ChiPS

Company Name Date Sector Shell Company SHENYIN W A N G U O Nov-96 Bank andFinace Shanghai Int'l (HK) Ltd SHOUGANG CCRD.CEN.HDG, Jan-95 Industrial Easterb Century Holdings Ltd. CHINA EVERBRIGHT Nov-94 ConglomerateEnterprise IHD Holdings CNPC HONG KONG Oct-94 Oil & Mining Paragon Holdings Ltd. SHOUGANG CCRD.TECH,HDG. Oct-94 Electric & Electronics Santai Manufacturing Ltd CHINA EVERBRIGHT TECH. May-94 Electric & Electronics Han Wah Holdings Ltd.

SHENZHEN INTL.HDG. Apr-94 Property & Construction Innovisions Ltd, TOP GLORY INTERNATIONAL Feb-94 ConglomerateEnterprise Word Trade Centre Group Ltd. CHINAFOODS Jan-94 Industrial Seabase Int'l Ltd • CHINA EVERBRIGHT INTL. Oct-93 ConglomerateEnterprise Newfound Land M'\ Co. Ltd. ONFEM HOLDINGS Oct-93 Oil & Mining Law's Property Holdings Ltd POLYINVESTMENTHDG. Oct-93 ConglomerateEnterprise LdlimanHoldingsLtd SHOUGANG CCRD.GRD.GP. Sep-93 Property & Construction Kader Inv. Co, CHINA AEROSPACE Jul-93 Industrial ConicInvestmentCo.Ltd, SHOUGANG CCRDJNTL.ENTS. Jul-93 Property & Construction Tung Wing Steel Holdings Ltd. CHINA RES.ENTREP, Sep-92 Property&Constmction Strong Foundation Dev. Ltd GUANGDONG INY. Jul-88 Property&Construction Union Globe Dev, Ltd MINXIN HDG. ‘ Jul-88 iBai^andFinace |PaninHoldingsLtd.

T^^e. ^ 7 Tnitia1 Publir Offering OPO) T ^ tinp of Red ChiPS

Company Name ListingDate Sector SHAI.INDUSTRIAL May-96 Conglomerate Enterprise FOUNDER HONG KONG Dec-95 Electric & Kectronics

NG FUNG HONG Oct-95 Trading COSCO P A C M C Dec-94 Transportation ORIENTALMETALSHDG. Dec-94 Trading GUANGNAN HOLDINGS Dec-94 Trading CHINA PHARMACEUTICAL Jun-94 Industnal LEGEND HOLDINGS Feb-94 Industrial G Z m C HUALING HDGS Dec-93 Industrial STONE ELECTRONIC TECH. Aug-93 Electric & Elec_ics DENWAY INV, Feb-93 Industrial GUANGZHOU INV. Dec-92 Property & Construction CHINA TRAVEL INTL, Nov-92 Conglomerate Enterprise CHINA OS.LAND & INV- Aug-92 Property & Construction CHINAMRCH.HOLDINGS Jul-92 |ConglomerateEnterprise

T^^e. 13 More tban ^5% shares hn1d bv Mi\m] r\d Authoritv

Compnay Name Date Sector CONT.MARE^R 93, Transportation UNION BANK OF HONG KONG 92' Bank and Finance K A W A H B A N K 86' |BankandFinance

Source: Wardley Cardex

theRkkandROum CfmracteristksofHongKonglistedHed-Chlpsan4BShares 22

Main Features ofRed Chips

Both red-chip companies and their controlling shareholders hold considerable

business interests in China. These enterprises may own substantial assets in China and

Hong Kong. To understand the background of their major shareholders could be as

equal important as their fundamental analysis.^^

Qiianxi Tssues

Influence and Guami are critical for doing business in China - especially true

since China still operates a centralized economic system. Mos t Red Chips ' parents

have strong backgrounds including state-owned enterprises, central government

ministries，provincial or municipal authorities. They are so powerful and report directly

to the State Counci l . ' ' Some Red Chips are even the window companies o f t h e Chinese

Government, such as Shanghai Industrial Ltd., and the potential Red Chip, Beij ing

Enterprise Ltd. (At present，the company does not meet the requirement of one year

listing). These companies tend to count more on their political connections to attract

investors, rather than through any solid asset restructuring. In fact, the H>0 o f B e i j i n g

Enterprise raised a record of 1,276X^^ oversubscription, reflecting investors ' fanaticism

over the "China Concept".

Guanxi grants Red Chips advantages in doing business, either through acquiring

assets and resources cheaper and faster or confer the companies with special franchises.

The China Travel International Investment H K Ltd. is well known for its leading

21 «22 Cheung, Johnson. "Red-Chip Survey' Hong Kong Research, Goldman Sachs. 27 Jun 97.

23 'China: Growing pains', ABN AMRO China Research. Feb 1998, p.15.

fhem^rndReturn Chmacteri^ ofHong Kong listedRed^hips andH Skares 23

position in developing the tourism and transport business in China because of its

special Guanxi^ In addition, the concurrent take-over activities of the China

Everbright group to acquire stake in local blue chips companies, such as Hongkong

Telecom，are supported by China ' s Government .

The China Guami obviously becomes an intangible asset to Red Chips. What

investors pay for Red Chips are not only the assets o f t h a t companies, but also this

Guarm privilege yet to be realized in earning growth in the future.

However , in the longer term, companies cannot survive solely depends on Guami.

Strong Gnanxi does help business operations in certain ways, but as the market is

increasingly transparent and globalized, inefficient organizations would no longer exist.

Guami adds value to a company，but will never be the core factor ofsuccess .

Asset Tnjection

The magic o f a s s e t injection has ever been the major motive to "Red Chip fever".

Prior to the June 30 handover o f H o n g Kong to Beijing, owning shares in a Red Chip

seemed a license to print money. After setting up shop in Hong Kong, a Red Chip

would typically snap up state-owned assets on the cheap hoping to tun big profits once

they were restructured. The promise of such asset injections drove Red Chip ' s

valuations to 'ridiculous levels.^^

狄 Cheung, Johnson. 'Red-Chip Survey" Hong Kong Research, Goldman Sachs, 27 Jun 97.

25 Einhom, Bruce & Capell，Kerry. 'A Red Flag for Red-Chip Stocks' Business Week. Issue 3551.3 Nov 1997. pp. 49.

TheBskandBetHrn CharactemHcs ofHong Kang listedRedChips an4BShares 24

Experiencing various miraculous rises in share prices, investors were ecstatic over

any potential asset injection of Red Chips. Even a rumour was sufficient enough to

drive up the share price. It was not a surprise that share prices doubled or tripled in a

short period. Sometimes, prices moved over 50% up / down within one day. The

typical cases could be the China Everbright Group.

It was reasonable to believe that the Red Chip companies would acquire quality

assets from their parent companies at a substantially discounted price. The reason could

be the majority shareholders personal stake. They were possible to benefit from

acquiring assets cheap and had their holding shares increase in price. Moreover，

Chinese government wanted to maintain good reputation in exploring the new capital

market.

Investors usually evaluate the size of the asset injection，and the size of the Red

Chips as well; the smaller the company the larger the impact, and hence the higher the

increases in share prices.

However，the asset injection game cannot go on forever. The parent companies

will run out of attractive assets to inject. The quality of assets will deteriorate, and the

Chinese government will not always provide a free lunch. The State Council had

announced guidelines on Red Chips asset injections in which those companies cannot

inject their mainland assets until three years after the investment are made. A derating

of some Red Chips would probably fol low and it did, compounded by the recent

currency crisis.

The Hisk md Return O m r a c t e r i s t i c s ofHong Kong listed Red-Chips and H Shares 25

S^pt^nrf 7 1- H Shares

This section overviews H Shares in terms of valuation and origination

Background

H Shares are incorporated in China with their asset and businesses mostly located

in China. Even though they have obtained listing position on the Stock Exchange of

Hong Kong, the stock performance depends intensively on the political and economic

situations，and interest rates in China. As a result, their stock movement could be quite

different from the broad market o f H o n g Kong.

The Hang Seng China Enterprises Index (HSCEI) ^

The Hang Seng China Enterprises Index ^ i S C E I ) is a market capitalization

weighted index comprised of 39 stocks (as at year ended 1997) listed on the Hong

Kong Stock Exchange. It serves as an indicator of the stock price performance o f t h o s e

Hong Kong-listed PRC companies — H shares. Through it, investors and analysts can

trace the overall market performance o f t h e s e companies while being provided with a

common point of reference.

28 Information provided by HSI Services Limited.

TheRiskandRmrn Characteri^ ofHong Kong Listed Red^hips and H Shares 26

r^1r.ii1ation Formula

Current Aggregate Market Current Value of Constituent Stocks

Index = X Yesterday's Closing Index Yesterday's Closing Aggregate

Market Value ofConstituent Stocks

The H S C E I was first published on 8 August 1994 with a base value of 1,000 set

on 8 July 1994; it comprises o f t e n constituent stocks on the base date. The Index senes

is backdated to 15^ July 1993 when the first China enterprise, Tsintao Brewery Co.

Ltd., was primary listed on the SEHK.

Market Capitalization

At year ended 1997, market capitalization o f t h e 39 H Shares surged to HK$48

billion. All H Shares together accounted for 1.5% o f t h e total market capitalization in

Hong Kong, up form 0.67% at the year ended 1993. The constituents for the H S C E I

have increased over the past few years, f rom one on 15 July 1993 to 39 by the end of

1997. Recent data shows that the increasing number o f H Shares results in dropping

weight and reducing sensitivity of individual H Shares on the HSCEI. While Beij ing

Datang Power accounted for 10.58% o f t h e weight in the index, all other individual H

share companies constitute less than 10%.

The Hisk md Return Omracteristics ofHong Kong listed Red-Chips and H Shares 27

Current Value (December 31, 1997) 722.99

Base Value (July 8，1994) 1000

No. o f s t o c k s 39

Figa^& E f f l m t o a ^ o e n b e r 3 1 , W J )

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CHN\sifflK}c&/. H I I M I M H M H H M M 4 6 ZtHIEKESSSmYOO j |[ j | [ j j j ippi | j | j i j j j | j j i j j | j j j j j j | j j j | jpj | |___|___|___^_|_______|__^^

ZffiWRSN&OM | | | J | j | | i [ | | | J | | j | | | J | | | J | | | | [ | | ^ J J _ _ | | j _ | _ | | | | | | | | | | j | ^ | _ | _ | | j _ | | | _ _ cHmsm RL ||||^^

swQMtEnm^ | | | B amHfi »«mY 11|||1||!|||1||||||11|0|||||||||||||{|{||||||| |||0_|_謹謹_|_11___丨_圓11_111_ ^

ommcKacN — — l ^ — 1 — — — — 6 3 4 ~ QNaK3tvoos i l l l l l l l l l l l l l l l i l l l W 1 W I W W l 7 J 5

ffijn^MJtcpo®? iiiiiiiiiiiiiiiiiiiiiiiBiiBiiiiiiiiiiiBiiiiiiiPiiliiiiWi^iiWBiWiMWMiMiMiWiBB"liilii;;;"ii_"i"j 伪

0.00 zoo 4.00 600 8.00 細 •

Source: Datastream

TheRiskmdBetum CharadeHsHcsofHongKongLMRed-ChipsandHShares 28

Listing Aspects

China ' s Open Door policy began in 1978. The country is running towards its

modernization targets. Yet o f t h e total number of340，000 state owned enterprises，45%

o f t h e m are still operating at a loss. The reform of state owned enterprises has long

become the Chinese government ' s major economic concern. The country cannot

always subsidize the poor performing state owned enterprises. Three basic principles

are being adopted to remedy the situation.

1. M e r g i n g , s e c u r i t i e s , o r p a r t l y s o l d o u t . This policy is applied to those large to

medium enterprises which engaged in key industries such as national defense,

banking and finance and advanced technologies.

2. Sales to employees. For that small size firm，the equity will be sold to its

employees or foreign investors.

3 Bankruptcies. Unmanageable organizations cannot survive.

Reform takes t ime and leads to massive layoffs. Better ways would be to induce

foreign investments which would also stimulate economic growth. Followed by Deng

Xiaoping,s trip to the South the Summer of 1982, the reformation and modernization

gained new momentum. Overseas listing, such as the launching o f H Shares, was thus

initiated.

As look into Table 4, the first H share began trading on the Stock Exchange of

Hong Kong in July 93. Followed by f lood of other China enterprises. The overseas

listing o f H shares was most active during the first three quarters 1997，whereas the

market was extremely bullish.

ThemkandUeturn CharacterisHcs ofBong Kang listed RedCkips and H Shures 29

y^h]e 4: H Share Listings

StockName ListingDate [Sector • GUANGZHOU PHARM. 'H SHARES' 30-Oct-97 Chemical

ANHUI CONCH 'H' 21-Oct-97 Building Materials & Basic Metals

CHONG QING IRON & STEEL "H' 17-Oct-97 Building Materials & Basic Metals

SICHUAN EXPRESSWAY 丑 SHARES' 7-Oct-97 Infrastructure

CATIC SHENZHEN 'H' 29-Sep-97 CapitalGoods

ANGANG N E W STEEL 'H' SHARES 24-Jul-97 Building Materials & Basic Metals

CHINASTHN.AIRL. 'H' 3-Jul-97 Infrastructure

JIANGSU EXPRESSWAY 'H SHARES' 27-Jun-97 Infrastructure

BEIJING YANHUA 'H SHARES' 25-Jun-97 Chemical

FIRST TRACTOR 'H SHARES' 23-Jun-97 Capital Goods JIANGXI COPPER 'H SHARES' 12-Jun-97 Building Materials k Basic Metals

ZHEJIANG EXPRESSWAY CO ’H SHARES' 15-May-97 Infrastructure BEIJING NORTH STAR CO. 'H SHARES' 14-May-97 Consumption / Service BEIJING DATANG POWER 'H SHARES' 21-Mar-97 Infrastructure SHENZHEN EXPRESSWAY 'H SHARES' 12-Mar-97 Infrastructure CfflNA EASTERN AIRLINES 'H SHARES' 5-Feb-97 Infrastructure SHANDONG XINHUA PHARM. 'H SHARES' 31-Dec-96 Chemical ANHUI EXPRESSWAY CO. 'H SHARES' 13-Nov-96 Infrastructure GUANGDONG KELON 'H-SHARES' 23-Jul-96 Capital Goods GUANGSHEN RAILWAY ’H SHARES' 14-May-96 Infrastructure NANJING PANDA 'H SHARES' 2-May-% Capital Goods JINGWEI TEXTILE MACHINE 'H SHARES' 2-Feb-96 Capital Goods NORTH EAST ELEC. 'H SHARES' 6-Jul-95 Capital Goods JILIN CHEMICAL IND. 'H SHARES' 23-May-95 Chemical HARBIN POWER EQUIPMENT 'H SHARES' 16-Dec-94 Capital Goods CHENGDU TELECOM.CABLE 'H SHARES' 13-Dec-94 Capital Goods ZHENHAI REFN. & CHM, 'H SHARES' 2-Dec-94 Chemical CHINA SHIPPING DEV. 'H SHARES' 1 l-Nov-94 Infrastructure QINGLING MOTORS 'H SHARES' 17-Aug-94 Capital Goods LUOYANG GLASS 'H SHARES' 8-Jul-94 Building Materials & Basic Metals DONG FANG ELECT.MCH. 'H SHARES' 6-Jun-94 Capital Goods TIANJIN BOHAI CHM. 'H SHARES' 17-May-94 Chemical YIZHENG CHM.HBRE 'H SHARES' 29-Mar-94 Chemical

MAANSHAN IRON & STL. 'H SHARES' 3-Nov-93 Building Matenals & Basic Metals

BEIREN PRINTING 'H SHARES' 6-Aug-93 Consumption / Service

GUANGZHOU SfflP. 'H SHARES' 6-Aug-93 Capital Goods

SHANGHAI PETROCHEM. 'H SHARES' 26-Jul-93 Chemical TSINGTAO BREWERY 'H SHARES' 14>Jul-93 Consumption / Service KUNMING MACHINE SHARES' 12-Jul-93 ICapital Goods

Source: Wardley Cardex

TheRiskmdRetHrn CfmracterisHcs ofBong Kong liste4 Red-Ckips andHShares 30

Main Features ofH Shares

Management Tssues

As discussed earlier, the driven element for launching H shares being the

incapable management of state owned enterprises. Yet H shares provide direct access

to China investment opportunities, the management problem still exits. Inter

company debt piled up and went unsett led，while accounting and disclosure

requirement are not abided by. Investors may even be shocked by the misapplication of

raised funds. The mainland companies claiming to raise funds overseas often don ' t

realize the rules of shareholder capitalism. Even Tsingtao Brewery Co, one of the

eminent H Shares，had been suspended trading for one day because it lent much o f i t s

proceeds to other mainland companies instead of expanding existing plants.

Chjna Factors

Investors must be aware that H Shares are greatly influenced by the Mainland

policies. While Chinese government intends to adopt a more open and transparent

economic policy, the mechanism is not mature at present. China, to a great extent, is

still a planned economy. Input costs and selling prices may be fixed at uneconomic

rates. There is also exchange control, and unexpected policy promulgation may hamper

the business operation. For example, the introduction of austerity measures in later half

of 1993 ruined the economic development and hence led to depressed share prices.

The Hisk md Return Omracteristics ofHong Kong listed Red-Chips and H Shares 31

CHAPTER III

RlSK AND RETURN CHARACTERISTICS

The previous chapter gives a general impression of the characteristics of the

Hong Kong Red Chips and H Shares. This chapter will be divided into two

sections，with the first section defining risk and return as well as how investors

typically prefer to increase return while minimizing risk. The following section

describes the use ofbeta and simple regression to measure risk and return in this

study. We also outlining the minimization of risk by diversifying away

unsystematic risk.

Section 3.1 • T .iterature Review

A rational investor normally prefers high re tum for less risk. W h e n choosing

between the investments with the same level of risk, investor would prefer high retum;

and i f t h e investments generate the same return, investor would prefer the one with less

risk. When investigating the performance of an investment，the two dimensional

aspects o f r e t u r n and its associated risk must be taken into account.

Measurement ofRisk

Risk could be defined as the probability of an adverse outcome. There was no

specific measure for risk until the 1950s. The basic portfolio model was developed by

Markowitz (1952), who derived the expected rate of return for a portfolio o f a s s e t s and

an expected risk measure. It was proved that the variance of the rate of return was a

The Risk md Befum Characteristics 0fHmg Kang listed ReMMps andBShares 32

meaningful measure o f p o r t f o l i o risk. Thereafter, the variance, or standard deviation of

expected re tums becomes the common way to measure risk.

Investors generally regard a stock with larger price fluctuations within a short

period o f t i m e as risky and a stock with smaller price fluctuations as stable or less risky.

Price fluctuation is a measurement of risk (variance / standard deviation). Greater

price changes tend to increase the chance for the return to deviate from the expected

return. The future price o f a h i g h l y fluctuating stock tends to be less predictable, and as

a result，investors in this stock are taking greater chances, hence greater potential

returns..

Systematic anH Non-svstematic Risks

Stock investors are actually facing two types of risk - the systematic risk (market

portion) and the non-systematic risk (individual portion). The non-systematic risk

arises from the company specific or industry specific factors such as changes in

management and the financial policies of the company. With a fully diversified

portfolio, however, the non-systematic risks for stocks in the portfolio tend to cancel

each other out. Systematic risk arises from the market-wide factors which affect most

stocks in the market and cannot be eliminated through diversification^^.

Risk-Return Relationship

Markowitz (1952) laid down the foundation of modem portfolio management in

which Sharpe, Lintner and Mossin developed the Capital Asset Pricing Model (CAPM)

independently. CAPM, known as the Sharpe-Lintner model, is a theory about the way

泣 Mok, Henry, M. K. & Lam, Kin. & Cheung, Iris, Y.K. "An Exploration on Risk and Return of Hong Kong Stocks' The Securities Journal. Feb 1990.pp. 17.

ThernskandUetHm Charaaeris^ofHongKanglMRed^hipsandHShares 33

Stocks are priced in relat ion to their risk. It is employed in a lmost all empir ical studies

investigating issues such as the relat ionship be tween risk and return, the existence o f

abnormal returns (event studies)，and in determining “fair，，returns for regulated

industries. In most studies a posi t ive and signif icant relationship be tween the ex-post

mean re turn and the corresponding risk index (beta) is found?"

Through making a number o f a s s u m p t i o n s , a posit ive linear relat ionship be tween

a s tock ' s expected returns and is be ta values is derived. In other words，when plot ted in

the beta-return space, a straight line wi th upward slope would emerge.

^^ta as a m^^^ure nf Svstematic Risk

The posit ive and significant f inding enhances the role of C A P M ^nd presumable

has convinced professional investors to employ beta as the appropriate risk index. Be ta

is reported by numerous institutional investors, such as Value Line，Standard and Poors ,

and Merri l l Lynch>^ El ton and Gruber shared the similar point of v iew (1987). F r o m

casual observat ion of s tock prices, they found that when the market goes u p (as

measured by any of the widely available s tock market indexes)，most stocks tend to

increase in price, and w h e n the market goes down, most stocks tend to decrease in

price. This suggests that one reason security returns might be correlated is because of a

c o m m o n response t o market changes, and a useful measure of this correlation is

suggested by relating the return on a stock to the return on a stock market index.

Sharpe ' s Marke t Mode l (Sharpe, 1963) is commonly used to capture a s tock 's

price movement and risk. This market model takes a single market index as a proxy for

28 Levy, H. 'Risk and Return: An Experimental Analysis' International Economic Review, Vol 38, No.1 ’ Feb 1997’ pp. 119-145.

29 prakash, A. J., Parhizgari. A. M., and Perritt, G. W., "The Effect of Listing on the Parameters of Characteristic Lines Models". Journal of

TkeRiskan4Return Characteris^ ofHmg Kmg Listed Red^hips and H Shares 34

the market influence. It decomposes the 产 s tock 's return (Rit) into two components:

Rit= ai+yS,RMt + ett……(1)

Stock's Return = Performance related to broad market + Individual portion

The first is a systematic component which measures the performance o f t h e stock

in responds to the broad market, which is equal to /5 i t imes the return on the market

portfolio (RMt). The second component is the individual portion of the s tock 's return

that is independent o f t h e market ' s performance. This component can then be divided

into an expected portion ( a d and a random portion ( e ^) in Equation (1). In fact, this

non-systematic risk can be eliminated through diversification.

Beta measures the expected change in the s tock 's return per one per cent change

in the re tum on the market portfolio. The market beta equals one and stocks with betas

larger (smaller) than one are regarded as more (less) risky than the overall market.

Stocks with beta values greater than one are termed aggressive. They tend to rise (fall)

at a faster rate than the average stock during up (down) market. Stocks with beta values

less than one are termed defensive. Their prices tend to rise (fall) at a slower rate than

the average stock in up (down) markets. However, this relation does not always held as

the underlying company may have structural or other changes which may affect the

earning potential，in which the stock is possible move in a completely opposite

direction from its past relation with the market.

Business Finance&Accounting, 16(3) Summer 1989.

TheRiskm4Remm CkaracterisHcs ofHong Kmg listedRed-Chips andH Shares 35

The total risk of a stock can be broken down into two components:

V a r ( R , t ) = 3 i ' V a r ( R M t ) + V a r ( e « ) … … ( 2 )

Total Risk = Systematic risk + Unsystematic risk

The first component is the systematic risk and the second component，the non-

systematic risk. The beta coefficient links the risk of a stock with that of the whole

broad market. The larger the s tock 's beta, the larger its systematic risk. Beta is a direct

measure o f t h e systematic risk of a stock.

Siy^tematic Risk Relative to Overall Risk

Equation (1) postulates a linear relation between Ri,andRMt. By applying least

squares method to estimate the parameters in Equation (1), the slope of the regression

line as an estimate for the beta coefficient o f t h e stock is formed. From this regression

analysis, the total variation represents the overall risk, i.e.Var(RJ in Equation (2), the

explained variation corresponds to the systematic risk (undiversifiable market risk) and

the unexplained variation, the non-systematic risk (diversifiable individual risk).

Consequently, the coefficient ofdeterminat ion, R ' o f t h e least squares procedure can be

interpreted as the proportion o f t o t a l risk that is systematic, or the percentage of risk

that cannot be eliminated by diversification. To put it in another way, l - R ' is the

proportion of total risk that is non-systematic which can be eliminated through

diversification.

fheRiskm4Retum CharacterisHcs ofHong Kong Listed RedChips and H Shares 36

Since non-systematic risk can be eliminated through diversification, investors

would not be rewarded for bearing this part of risk but be rewarded for bearing

systematic risk. Hence, higher systematic risk is expected to generate a higher return.

Since systematic risk is now measured by the betas, a linear positive risk-return

relationship is translated into a positive beta-return relationship.

Criticisms on Beta Estimations

Such a beta-return relationship of the C A P M has been subjected to numerous

empirical studies since the general equilibrium C A P M was developed in the 1960's.

However, many estimations o f b e t a were ‘rolled over，by Roll (1977) who argued that

only i f t h e beta is computed by using an efficient market portfolio is the return on an

asset of portfolio an exact linear relation of beta. Otherwise, beta is not an

unambiguous measure of risks. It fol lows that beta values are very sensitive to the

choice market p roxy?�

Recent studies have also cast doubt on the stationarity of individual security betas

as it was found that betas in one period different substantially from their values in a

previous period (e.g. Bey 1983; Chen and Lee 1982). Previous research done on the

betas of Hong Kong securities also questioned their stationarity and applications in

general，see for example Wan (1980) and Ip (1982). The non-stationarity o f b e t a values

is possible threat to the beta-return relation. Stationarity and predictability of beta are

beyond the scope o f t h i s article，but interested readers are referred to the paper by Lam，

M o k and Cheng(1982)^^ . Although the prediction of security beta is associated with

^ Mok, Henry, M. K. & Lam, Kin. & Cheung, Iris, Y.K, 'An Exploration on Risk and Return of Hong Kong Stocks" The Securities Journal, Feb 1990, pp. 17.

31 Lam, Kin Henry M.K. Mok, iris Cheng 'Predictability and the Stationarity ofBeta. Coefficients ofHong Kong Securities" Proceedings : International Symposium on Pacific Asian Business, Honolulu, Hawaii, USA Vol 3 (Jan) 1990, pp.115-117

fheRi^an4Metum CharoaerhHcs 0fHong Kong listed Red-Chips andHShares 37

large variability, the prediction of portfolio beta is more accurate. That is why in

investigating the beta-return relationship, portfolios should be considered.

Portfolio Beta

Despite criticism on the securities' estimated betas and the models used to

estimate them，past research conceded that quite an accurate and stationary beta

estimate could be obtained from a diversified portfolio. Errors in estimating individual

betas will cancel each other out when they are combined to from a portfolio.

Section 3.2 Methodology

To capture a stock's price movements and risk, Sharpe 's Market Model (Sharpe,

1963) is commonly used (as in M o k 1992, for example). This study attempts to

determine the return correlation of investment in the Red Chips and H Shares risk with

the broader market performance o f H o n g Kong..

This market model takes a single market index as a proxy for the market

influence.32 Thus, All Ordinary Index (AOI) would be used as a proxy for the market

influence. Applying AOI as the market proxy has the advantage over the Hang Seng

Index since AOI counts all stocks listed in Hong Kong, including the Red Chips and H

Shares, thus eliminating the relevancy problem. Therefore AOI is representative by the

overall market.

32 Mok, Henry M. K., Kin Lam, Y. K., Kin Lam, Y. K. Cheung. 'An Exploration on Risk and Return ofHong Kong Stocks； The Securities Journal, Feb. 1990, pp. 1-16.

ThemskrndReturn Chara<ieri^ o/Hong Kong listedRed^hips andHShares 38

AllOrdinaries Mdex^

The All Ordinaries Index (AOI) is market value-weighted index which includes

all the ordinary shares listed on the Exchange since 1 February 1989. The base index of

AOI is 1000 as a t t h e close o f 2 April 1986.

Calculation Formula

Current Aggregate Market Current Value of Constituent Stocks

Index = X Yesterday's Closing Index Yesterday's Closing Aggregate

Market Value ofConstituent Stocks

The basic methodology of this study involves the use of the Sharpe 's Market

M o d e l Where:

Ri t = a i + i8 iRMt + e t t

Rrt = the daily return of stock i at t ime t,

RMt = the daily returns o f t h e All Ordinary Index (AOI)

a, = E ( % ) - ^ i E ( R M t )

where: E is the expected portion

^ 1 = beta

£ ^ - stochastic error term (random portion)

33 Information provide by the HSI Services Ltd.

TheRiskmdReturn Characteri^ ofHong Kong listedRed-Chips and H Shares 39

T h e daily re turns o f s tocks are used in the analysis. M o r e specifically, the da ta

type col lected for the t^ daily c losing pr ice o f t h e 产 s tock P , is the defaul t pr ice that

have ad jus ted fo r subsequent capital act ion such as cash dividends，capital changes，

bonus issues，rights issues, splitting, etc. The s tock ' s daily re turn Ri = In (P^ 丨 Pit-i)- The

re turn on the marke t p roxy，R_ at day t，then，is measured by R g t = In ( A O ; / A O I ( . )

B e t a coeff ic ient fo r the 产 s tock is compu ted by regress ing R ^ u p o n Ryt

All the const i tuent s tocks o f t h e H S C C I and H S C E I w e r e included in th is study.，

as o f 3 1 D e c e m b e r 1997. There are total ly 36 H S C C I const i tuents (Red Chips) and

39 H S C E I ( H Shares). The s tudy per iod w a s from 1 January 1993 to 31 D e c e m b e r

1997. To see h o w the risk and r e t u m of s tocks changed over t ime, the who le s tudy

per iod w a s fur ther b roken d o w n into t en bi-yearly subperiods.

In order to reduce the bias or meaningless result genera ted from the infrequent ly

t raded stocks, be ta of some inact ive s tocks will be del iberately deleted for certain

subperiods and / or the full period. 93 - 97，i.e. individual s tock ' s bi-yearly turnover

date less than 110 will b e deleted f r o m that period, or the turnover date less than 1100

in the full period 93 — 97 will a lso be deleted f r o m the full per iod study.

Stocks will then be classif ied into different sectors according to their special

marke t feature. There w e r e eight sectors for R e d Chips: Bank ing and Finance,

Conglomera te Enterprise，Electronic & Electric，Industrial，Oil and Mining，Property

and Construct ion, Trading，and Transportation. A s for H Shares, there are only five

sectors : Bui lding Mater ia ls and Bas ic Metals，Capital Goods , Chemical , Consumpt ion

/ Service and. Infrastructure.

TheRiskm4Retum Churacteris^ ofHong Kong listed RedChips andHShares 40

There will be comparison o f b e t a value among the two groups o f s t o c k . After all,

the total risk o f R e d Chips over the f ive years will be decomposed into systematic and

non-systematic risk. Whi le this study does not intend to look deep into the matter of

portfolio selection or diversification，the information of risk component would provide

investors with a better understanding of Red Chips. H shares will not be included in

this part of the analysis since they are too new to the market and many of them are

listed on the Stock Exchange o f H o n g Kong for not more than a few months.

Data Collection and Empirical Work

This study is to examine all Red Chips and H Shares quoted on the Stock

Exchange o f H o n g Kong, covering for the period between January 1993 and December

1997. Daily stock price and All Ordinary Index (AOI) f igure were collected and then

processed for the performance analysis. Electronic data is collected f rom Datastream,

while companies ' background information was referred to Wardley Cardex.

Constraints

Data covered in this study is up to the year ended 1997 (31 December 1997).

However, the stock market suffered severely due to the regional currency crisis during

the 4也 quarter 1997. The beta value shown for this latest period may not represent an

objective estimation of risk of each stock in related to the market.

Moreover, most H Shares were listed and started trading in the Hong Kong Stock

Exchange in 1997. The initial period of listing and short term performance, may not

reflect the true performance of those companies in the longterm.

TheHiskm4murn Characteristics ofHong Kmg listed RedChips and H Shares 41

CHAPTER IV

THE RESULTS

This section summarizes the results of the study. We will look at the results from

difference aspects. Beginning with a broader overview of the index performance,

we will then focus down to narrower perspectives such as beta value ofRed Chips

and H Shares related to the broader market. In addition, we will examine the

sectoral betas as well as how they changed over the study period. Finally, we will

decompose the total risk of Red Chips into systematic and non-systematic risk,

and see to what extend Red Chips could be diversified to reduce risk.

Section 4 1 Tndex Performance

Jn this section, there would be a brief discussion on Index performance of

Red Chips (HSCCI) and H Shares (HKCEI) in the latest years.

Red chips attracted enormous trading interest back in early 1993.'^ But during

mid-1993, the development o f C h i n a shares suffered a serious setback as China entered

into its credit tightening period, following the exorbitant growth experienced over the

previous two years. The infamous triangular debt issues and credit crunch nakedly

exposed the environmental weakness of most H Shares. Even today the lingering

effects have meant that most H Shares have yet to recover basis. Red Chips did not

34 Lau, K. Y. 'Red Chip Fever' The Securities Journal, June 1997, pp. 42-46.

nernskm4Return Characteristics ofHong Kang LMRed^hips andBShares 42

share the same painful experience as their H counterparts.'^

The H S C C I outperformed the AOI for the first t ime in late 1996 (as shown in

F ig . l ) and the premium has continued to widen thereafter despite the recent correction.

In the first half of 1997, the shoot up o f t h e H S C C I was mainly driven by the asset

injection activities of the heavy weight Red Chips, such as Shanghai Industrial

Holdings Limited and China Resources Enterprise Limited.

In addition, there are many derivatives products on the Red Chips. Despite the

numerous H o n g Kong Listed warrants, the Red Chips fotures and options began

trading on 12 September 1997, making the share prices even more volatile and

sentiment driven. Despite the great drop in return (i.e. 57.5% down from 1997 high, see

Table 5) aroused by currency crisis. Red Chips, as a whole, still recorded 9.8% return

in 1997. However, H Shares，as a whole suffered 30 .4% loss in value.

Tiihlft ^! Tnde^ Pprformanri> nfUed Chips and H Shares Fn^-1QQ7 o/n nhar>ge from

2/1/97 1997 High 31/12/97 2/1/97 1997 High

HSCCI 1,589.5 4,110.6 1,745.6 9.8 (57.5) HSCEI 1,038.6 1,727.0 723.0 (30.4) (58.1)

Source: ABN A M B O CfflNA RESEARCH

Notwithstanding, Red Chips and H Shares are growing in importance in Hong

Kong stock market. As shown in Table 6，the average monthly turnover for Red Chips

were H K $ 8 billion in 1996, but increased sharply to HK$56.3bill ion in 1997.

35 Lo, Marvin & Chan, Edward. _The Second Encounter of the Third Kind' China-Related Companies. Amsteel Research (HK) Ltd. 14 Oct 1997:6

TheRiskandRetum CfmracterMcs ofHong Kmg Listed Hed^kips and B Shares 43

Similarly, H Shares ' average monthly turnover was HK$2 billion in 1996 and increased

dramatically to HK$24.6 billion.

Tflhle 6! Average Monthlv Turnover —— 1996 1997 % change

H S r a ffi^ ^ ^ 607.0 HSCEI HK$bn 2.0 24.6 1111.4

Source: ABN A M B O CfflNA RESEARCH

Section 4 2 Findings on svstematic risks

In this section we will compare average beta values of Red Chips and H

Shares over the last four years. As the beta estimated from market model

regressions would be severely biased ifstocks are trade infrequentlyS6, only stocks

with reasonably active trading record are included in our discussion.

(Beta o f inac t ive stocks will be deliberately deleted for certain subperiods and /

or the full period. 93 - 97，i.e. individual s tock 's bi-yearly turnover date less than 110

will be deleted f rom that period, or the turnover date less than 1100 in the full period

93 - 97 will also be deleted from the full period s tudy.)

Comparison between Red Chips and H Shares

In analyzing the comovement o f R e d Chips and H Shares in respond to market changes，

the average beta value to the whole broad market (systematic risk) of Red Chips and H

Shares are shown in Figure 9. The beta values shown in the graph below

38 Boabang Francis. "An Adjustment Procedure for Predicting Betas when Thin Trading is Present: Canadian Evidence" Journal of Business Finance & Accounting, 23(9) & (10), December 1996, pp.1333 - 13356.

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TheRiskandHeturn Characteri^ ofBong Kang listed RedChips and H Shares 45

representing the average by-yearly beta of all Red Chips and H Shares in the examined

period. The beta values o f t h e s e two groups of stocks are quite fluctuating. Beta for Red

Chips varied f rom 0.748 in the first half year of 1994 to 1.644 in the second half year of

1997. Similarly, H Shares ' beta varies f rom 0.656 in the second half year of 1996. Generally,

beta value tends to be stable when combining with other stocks in a group. That means the

beta value for individual Red Chips and H shares would be more volatile.

W h e n comparing the beta o f t h e Red Chips Stock Average calculated from the chosen

stocks and that o f H S C C I , w e found that the beta o f t h e HSCCI is consistently higher than

that o f t h e counterpart. When comparing the beta o f H - s t o c k s Average and that o f H S C E I ,

w e found that the beta HSCEI , w e found that the beta o f H S C E I is also higher than those

beta from chosen H shares. The market indexes for those particular kinds of stocks show a

larger value in beta, indicating that the stocks w e chosen is less reactive to the market

fluctuation than other Red Chips or H shares do.

Nevertheless, it is apparent that the beta values o f R e d Chips and H Shares were very

close during the first half year 1994 to the first half year 1996. Looking back into 1994，

when the development o f C h i n a suffered serious setbacks as discussed earlier, both groups

thus underperformed the market, implying that the performance o f R e d Chips and H Shares

are greatly affected by China factors. Later during the whole year of 1997，the average beta

values o f R e d Chips increased to about 1.5, indicating that the group of stocks became more

aggressive. Again, the political and China factors seem to had driven the beta value, as 1997

is the year ofpol i t i ca l handover. Red Chips had privilege of asset injection and o f u n i q u e

Guanxi o f H o n g Kong with China. H Shares, however, with their operating bases located

in the Mainland，are not subject to these benefits，appeared largely underperforming the

market.

TheRiskmdRetum Characteri^ ofHong Kong listed RedChips andHShares 47

Individual Red Chips

Table 7 repor ts t he be tas fo r individual R e d Chips in t he ful l per iod 93 - 97 and

ten subperiods. These be ta va lues represent t he systemat ic r isk an investor will b e

taking w h e n invest ing in a single stock. Some s tocks are m o r e aggressive，while the

others are m o r e defensive. The bi-year ly be ta coeff ic ient range wide ly across all s tocks，

from a l ow of - 0 .219 (Gzit ic Hau l ing Ho ld ings in later half year of 1995 ) to a h igh of

2 .499(China M e r c h a n t Hold ings in f irst half of 1997).

B e t a va lues o f individual s tocks also change substantial ly from one subper iod to

another. F o r example，China Merchan t has the lowest be ta va lue of 0 .443 in the later

half 1994，however, its be ta va lue is the highest in the first half year of 1997. W h y

might observed Be tas in one per iod differ from Be tas in a second per iod? B l u m e (1975)

and Levy (1971) have done extensive test ing of the relat ionship be tween Be ta s over

t ime. One reason for this great variat ion in be ta is that the risk of the security might

change. A second reason is that the B e t a in each per iod is measured wi th a r a n d o m

error，and the larger the r andom error，the less predict ive power Be t a s from one per iod

will have to Betas in the next period.

The f inding reveals the e lus iveness in risk measurement . Pas t data can only tell u s

the ex-post risk undergone by a stock，which m a y b e dif ferent from ex-ante risk it will

undergo in a subsequent period. It could be diff icult to predict the individual R e d Chip

pe r fo rmance based on past beta.

TheRi^m4Rrnrn amraaeri^0mngK0”gmedReiMi¥—_m 48

M o k (1990) men t ioned tha t t he re jec t ion of cons tan t b e t a over t i m e is n o t t o o

surpr is ing in v i e w of frequent changes in a f i r m ' s fondamental s t ruc ture and t h e ever -

chang ing e c o n o m i c env i ronment .

Ano the r poss ib le exp lana t ion could b e tha t B e t a va lue m a y b e dr iven b y th in -

t rad ing e f f ec t s par t icular ly in t he early yea r s o f t h e analysis，so tha t general ly the s tocks

have lower b e t a u p o n its l ist ing in t he early years，but b e c o m e aggress ive gradually.

T h e fluctuation of b e t a va lues of individual s tocks w e r e m o r e volat i le t h a n t h e

w h o l e g r o u p average. C h a n g e in securi ty be ta s d i f fer f r o m s tock t o stock. S o m e wil l g o

up , some wil l g o down . These changes t end to cancel ou t in a por t fo l io (a g roup o f

s tocks) and the re w o u l d b e less change in t he actual B e t a o n por t fo l io t han o n

individual stocks.

Individual H Shares

Table 8 repor t s t he be tas fo r individual H Shares in 8 subperiods, ( insuff ic ient da ta

t o const i tute t he ful l per iod analysis 1993-1997) . T h e bi -year ly be ta coef f ic ien t also

range wide ly across all s tocks，from a l ow of - 0 .026 ( D o n g F a n g M a c h i n e r y in t h e

later h a l f o f 1996) t o a h igh o f l .897(Harbin P o w e r E q u i p m e n t in later h a l f o f 1997).

It is interest ing that B e t a va lues o f m o s t H Shares w e r e h igh in the bear marke t , i.e.

1.394 in the later h a l f y e a r of 1997, whi le they w e r e l ow in the bull marke t , i.e. 0 .711 in

t he first half year of 1997. I t seems tha t H shares responded sensit ively in a bear

marke t bu t do not respond accordingly in a b o o m market . In other words , they w e r e

consistently underper fo rming .

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The msk and Return Characteristics ofHong Kong Listed Red-Chips and H Shares ^0

H Shares w e r e ove rwhe lming poor compared wi th other H o n g K o n g listed stocks.

D u r i n g the u p per iod in the first h a l f y e a r of 1997，only four H Shares ' be t a va lue w e r e

greater than one. (Maanshan I ron & Steel - 1.045，Jilin Chemica l - 1.026, Tianj in

Boha i _ 1.144 and China Shipping D e v e l o p m e n t - 1.564). However , during the d o w n

per iod in the second half year of 1997，all H Shares except three compan ies

(Guangdong K e l o n — 0.955，Qingling M o t o r s 一 0 .765 and Guangshen Ra i lway 一 0 .811)

had a be ta m o r e than one.

Inves tors must be very carefol in choos ing H Shares. Fundamen ta l analysis could

b e important . The poor managemen t , inferior products combined wi th inf lexible

bus iness operat ions could hamper their earning potentials.

Sectoral portfolios ofRed Chips

W h e n looking at the change of sectoral be ta o f R e d Chips over 10 subperiods (Fig

10)，most sectors fo l low the similar p a t t e m except the Oil and M i n i n g sector, which

f luc tua te the mos t over time，especially dur ing the period be tween 96 and 97. In fact ,

this sector can be very dif ferent from the marke t due to its industrial specif ic elements .

Whi le be ta o f m o s t sectors are relatively stable over time，we can also observed

an upward t rend in be ta value for most o f t h e sectors from t ime to time，indicating the

growing sensitive of Red Chips in respond to the market change. Conglomera te

enterprises receives the greatest impact.

Fig 10 •

The Change of Sectoml Beta ofRed Chips Over lOSubperiods(1993 -1997)

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TheRiskandR^rn Characteri^0fHongKonghMRed^hwsandHShares 53

Sectoral portfolios ofH Shares

W h e n looking at the change of sectoral beta o f H Shares over 8 subperiods (Fig 11)，it

is found that the beta value of H Shares are rather fluctuating, especially for the

Chemical and Infrastructure Sector. Their beta values are rather difficult to forecast.

One possible reason may be their main business entities are located in the Mainland in

which the economy environment is quite different f rom that in Hong Kong. Therefore

it might be normal even i f t h e i r share price comovement is quite different f rom H o n g

Kong market. Moreover，Chemical H-shares have also persistently underperformed the

Hong Kong broad market, (i.e. Higher beta value when the market is bearish and lower

beta value when the market is bullish) Their prices have weakened as global chemical

pricing has drifted down，? However, thinking in another way, they might be supervised

by inferior management and thus their products are not competitive in the market.

Therefore，no matter how good is the economy，their operation still incurs losses, and

the situation might be even worst when the economy environment deteriorates.

3 7 McElligott, Suzanne. _H-Share Market Attracts Foreign Investors" Chemical Week, 28 Aug - 4 Sep 96’ pp. 48.

Th.mkmdReturn CharacteHsths^gK-gL^^d^^^fh^^^^^^^^ff^^^^^^____^

Srrtion 4 ^ …译 nnd Retiim Ke1ationshm ln this section, we will discuss on the beta value of Red Chips m the Full

period 1993 -1997. Although only nine Red Chips have been listed for more than

five years, the result - beta values are more reliable due to less thin trading effects

for these stocks. It will then proceed to look at the risk and return of the Red

Chips. The risk is divided into systematic and nonsystematic components, in

which investors would know by how far they can reduce the risk by diversifying.

F o r t h e five year pe r iod as a w h o l e , as s h o w n in Table 9，Ka W a h B a n k has t h e

lowest beta value of 1.065 and Guangdong Investment has the highest beta value of

1.356. E v e n t h e l owes t b e t a o f R e d Ch ips is a b o v e 1 over t he f i ve years , ind ica t ing

tha t t h e R e d C h i p s b e l o n g t o aggress ive g r o u p o f a s s e t s .

W e can see from F igu re 12 tha t t h e sectoral g roup ing o f R e d C h i p s has bea r ing o n

its b e t a va lue o f t h e M per iod 1993 - 1997. All R e d C h i p s h a v e be t a s we l l a b o v e 1；

t he P rope r ty & Cons t ruc t ion sec tor ha s t he h ighes t beta . T w o s tocks in th i s sec tor h a v e

t he b e t a va lue a b o v e 1.2. T h e sec tor w i th lowes t b e t a is B a n k i n g and F inance , bu t their

be t a va lue are still a b o v e one , sl ightly b e l o w t h o s e o f o t h e r sectors . R e d C h i p s p r o v e d

t hemse lves t o b e aggress ive s tocks.

T h e vi tal statist ics such as the ave rage annua l ized re turns , t he overal l r i sks b e i n g

m e a s u r e d b y the va r i ance o f r e t u r n s and b e t a va lues fo r t he — pe r iod are s u m m a r i z e d

in Table 10. O n average . R e d C h i p s had an ave rage annua l ized re tu rn o f 2 8 . 5 4 % , and

an ave rage va r iance of re turns o f 0 .106%. T h e average annua l ized marke t re turn is

14 .43%, and an average va r i ance o f re turns o f O . 0 2 % .

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TheRiskundmurn CharacterisHcsofHongKmgMReMdpsmdHSkares 56

Fig. 12 Beta v a l u e of Red Chips by S e c t o r (Full Period 1 9 9 3 -1997)

1 .600 "~~"

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INV.

1偏

3:

. oiOO«/

o 0.034%

33.766%

0,067%

66.234%

|j

_讓

隱爾

. ；

- 15

雇

。:酬

0.0

40%

41

.郷

^

!i£

!!^

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ctor

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04

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11

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.8鄉

0.

1震

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| Tr

ansp

orta

tion

CO

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1.

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1304

|^

—-~

^;;:^

~mi

請。

》,讓

I 續％

31厕

。册/。

6鶴

f

Red

Chi

ps A

vera

ge

二

‘ g 宗

*The

ave

rage

ann

ual

retu

rn r

ates

are

con

vert

ed f

rom

dai

ly r

etur

ns (

Ann

ual r

etum

= D

aily

Ret

um x

260

) 赛

.*Fo

r th

e pe

riod

93

- 97,

the

aver

age

annu

al m

arke

t ret

urn

rate

is

14.4

3%’

the

vari

ance

is

0.02

%

|

Sym

met

ric

Ris

kSqB

eta

* M

arke

t Ris

k (V

aria

nce

ofM

arke

tRet

um)

'^

Uns

ymm

etri

&is

k =

Tota

l Ris

k -

Sym

met

ric

Ris

k

^

TheRiskundRemrn Charact^McsofHmgKmgL_ReiMdps-^^^ 58

That m e a n s for every uni t o f r i s k，R e d Chips prov ide 1 .0356 return，while the

average o f a l l s tocks o n the S tock E x c h a n g e o f H o n g K o n g prov ided 2 .775 ofre turn .^^

In other words , a l though the m e a n re turn ra te fo r R e d Chips in last f ive years w a s

nearly doub t t he marke t rate, they w e r e even m o r e volat i le in w h i c h inves tors should b e

jus t i f ied fo r m o r e return, i.e. higher level r isk w a s no t commensu ra t e wi th a h igher

r e t u m rate. W e can also compare our f inding wi th the marke t index from table 11,

Fo r AOI，the re turn per unit of risk is 2.62，whereas that of H S C C I is a round 1.29，

w h i c h is slightly higher than our calculated one.

D e c o m p o s i n g the total r isk o f R e d Ch ips into Systemat ic and Unsys tema t i c risk,

w e found that there w a s about 6 8 % o f r i s k be longed to the Unsys temat ic risk，in w h i c h

inves tors can b e el iminated th rough diversifying.

Table 11 Dai ly Re tu rn and Variance of d i f ferent indexes

i i i i i i i m i i i p l l ^ i i l I l f H J ^ i P H ^ J

5 S T " 0 . 0 5 6 5 % o m n o . o i i 9 % 一

v S i ^ 0 . 0 2 1 5 % 0 . 0 5 4 0 % _ %

MeanA^ariance 2.62 ^ 0.18

We can also see that the return per unit risk of H K C E I is only 0.18, wh ich is

exceptionally low w h e n compared wi th other t w o indexes.

38 Calculation Formular - average annual return 12601 variance

Thenkkandmurn amracteristksofmmgKrngmedRedai^^^^^^^f^f^^ 59

CHAPTERV

CONCLUSIONS

L o o k i n g ahead , w i th m o r e M a i n l a n d enterpr ises ra is ing fixnds in H o n g K o n g , t he

n u m b e r o f R e d C h i p s and H Shares is expec ted t o increase rapidly. T h e R e d C h i p s and

H Shares w o u l d t he r e fo r e f o r m a g r o w i n g and impor tan t segment o f t h e H o n g K o n g

s tock marke t .

In fact，there are m a n y potent ia l R e d Ch ips wa i t ing t o b e added to t he index in one

year t ime w h e n M f i l l i n g the requi red l is t ing pe r iod in H o n g K o n g , such as Be i j i ng

Enterpr i ses , S h u m Yip Investment，China R e s o u r c e s Be i j i ng Land，China Telecom，etc.

H Shares are great in f luenced b y t he e c o n o m i c env i ronmen t o f China. C o n t i n u o u s

economic r e f o r m is expec ted t o benef i t Ch ina in long term. Shor t t e r m deve lopmen t ,

however , is expec ted to b e a diff icul t p rocess as the e c o n o m y fa l ls in to the p rospec t s o f

bankrup tc ies and u n e m p l o y m e n t .

F r o m our analysis, H Shares w e r e found consis tent ly u n d e r f o r m i n g the marke t in

the last f e w years. For R e d Chip, a l though the m e a n re turn w e r e h igher than the

marke t , actually investor of R e d Ch ips s tocks are taking a r isk level h igher than it

should be. W e c a n n o t j u s t i f y t h e h igh risk involved t o the return.

TheRiskan4Remm Char<MicsofHongKmgl^^H^d^^h^P^^^^f^^f^^^^^^___^

Since the m i n i m u m capital requires to obtain one lot o f R e d Chip or H share is

relatively smaller than some b lue chips, small retail investors are attracted to these

companies , especially dur ing the booming market . Therefore , small investors should

bear in mind that the return from these t w o kind of stocks are not sufficiently just i f ied.

They should look for fundamenta l w h e n picking u p their choice.

Inves tors are advised to look for stocks wi th stable earnings s tream and strong

financial backing. Companies wi th good management and a strong market posit ion are

also key among the selection. Therefore , investors could consider red-chip companies

wi th proven management ability and strong backing f r o m controll ing shareholders.

Good management and posit ive industry ftmdamentals will ul t imately drive and sustain

share prices.

In addition, investors are advised to avoid concentrat ing on any single stock. F rom

our analysis, there w a s 6 8 % o f u n s y s t e m a t i c risk o f R e d Chips wh ich can be el iminated

by diversifying.

However , for H Shares, the companies still need t ime to get improved and

structurally reformed.

rheBhkmdReturn CkaraaerisHcsofHongKongmedRed-CkipsandHSkares 61

RECOMMENDATIONS FOR FURTHER

RESEARCH

Beta is a risk measure that arises from the relationship between the r e tum on a

stock and the re tum on the market. The Single-Index Capital Model is applied in this

study，in which the Red Chips and H shares' stock performance is measured in

correlation to the broad market. However，the risk of a firm should be determined by

some combination of the f i rm 's fimdamentals and the market characteristics of the

firm's stock. Beaver, Kettler, and Scholes (1970) had examined the relationship

between seven f irm variables and the Beta on a company ' s stock. The seven variables

were 1) Dividend payout, 2) Asset growth, 3) Leverage，4) Liquidity, 5) Asset size 6)

Earning variability, and 7) Accounting Beta.

I f t h e s e relationships o f R e d Chips and H shares could be determined，it would

lead to a better understand o f B e t a and to better forecast Betas of these China related

stocks.

^ _ ^ ^ 5 M ^ ^ 5 I ^ 5 § _ _ ^

Appp

pHix

1. V

ital S

tatis

tinQ

nn

Risk

and

le-t

iim o

f Red

Chi

ns (1

St S

ub P

erio

d 93

JA

N -

JUN

)

r^

|o.|_xj._,

lBetaValue

|tStatistics

|AdjustedRSquare |StandardDeviation

BusinessDavs _TumoverDav_

二一

二二

5

^ ^

Oo:

二

lf

9 l2

i UNIONBANKOFHONGKONG

0.925

5.497

0.187

16,¾%

1¾

ConEnterprises

CfflNAMRCH.HOLD^S

0.576

2.752

0二

0.92%

^ W

CHmTRAVELOTL.

U14

7.869

0.324

4.16%

二

^ GUANGDONGm

L617

10.788

0.476

14.99%

129

121

Prop

erty&Q)ns^ction

CfflNAOS.LAND&W.

U46

9.358

0,405

|332%

129

m

CHmRES.ENTREP.

1.122

7.309

0.292

15.35%

29

0 GUANGZHOUm

0.974

5.513

0.188

17.67%

1¾

121

Transportation

IcO

NT.M

AR—

R

0.969

柳

0-U

9 2

2^

i22

U^

App

pndi

x 9.:

Vita

l Sta

tistic

s on

Risk

and

Ret

iim o

f R

ed C

bips

(2nd

$ub

Per

iod

93 J

UL-

DEC

)

Sector

|StockName

|BetaValue

|t Statistics

|AdjustedRSquare |StandardDeviation

Business Davs

TumoverDav_

BankingandFinance~KAWAHBANK

0^

^~

.194

U%%

;3;

m UNIONBANKOFHONGKONG

0.854

7.132

0.276

11.98%

132

Ul

ConEnterprises

CHINAMRCH.HOLDINGS

0.668

3.130

0.063

21.35%

\32

\23

CHINATRAVELINTL.

0.844

4.590

0.133

18.40%

132

28

GUANGDONGINV.

0.943

5.673

0.192

16,63%

132

1¾

Industrial

CHINAAEROSPACE

0.573

1,439

0.008

39.83%

132

J21

DENWAY^.

0.702

3.333

0.072

21.08%

m 128

Oil&Mming

ONFEMHOLDINGS

U43

5.575

0.187

20.51%

1¾

128

Property&Constmction

CHINAOS.LAND&INV.

1.152

7.258

0.283

15.87%

132

128

CHINARES.ENTREP.

0.778

4.359

0.121

17.85%

132

128

GUANGZHOUINV.

1.149

6.084

0.216

18.89%

132

128

SHOUGANG CCRD.INTL.ENTS.

1.320

5.191

0.165

25.43%

132

124

Transportation

CONT.MARINER

0.386

1.830

0.018

21.12%

132

121

App^nHix S: Vital St.tktir.. nn Risk ard Retiim of Red Chips (3rd Sub Feriod 94 JAN - JUN)

1^

|Sto

ckN

ame

|Bet

aVal

ue

|tSta

tistic

s |A

dius

tedR

Squa

re

|Sta

ndar

dDev

iatio

n Bu

sines

sDav

s T

umov

erD

av_

B:a

ndF

inan

ce~

KA

WA

HB

AN

K

0：^

^¾

""

二

二：

lf

9 lJ

s UNIONBANKOFHONGKONG

0.860

7.605

0.307

11.31%

i2y

ConEnterprises

CHINAEVERBRIGHTINTL.

0-925

6.943

0二

13.3二

129

112

CHINAMRCH.HOLDINGS

0.498

3.143

0.06

;,=o

二

^ CHINATRAVELINTL.

0.869

7.749

0.316

\\^o

129

m

GUANGDONGINV.

0.992

10337

0.453

9 60^

^9

22

POLYINYESTMENTHDG.

0.794

5.112

0.164

15.53%

U9

Electric&Electronics

STONEELECTRONICTECH.

0.553

4,033

0.107

13,72%

129

120

Industrial

CHINAAEROSPACE

0.658

4.178

0.114

l5J5

%

129

J2

CHINAFOODS

0.762

5.590

0.191

13.63%

29

13

DENWAYINV.

0.599

5.170

0.l67

11-59%

^9

22

GZITICHUALINGHDGS

0.362

2.261

0.031

16.00%

1¾

119

Prop_&Co_ction

CHINAOS.LAND&INV.

0.794

8.779

0.373

9.(M%

129

122

CHINARES.ENTREP.

0.776

6.489

0.243

11.%%

^9

122

GUANGZHOUMV.

U12

8.319

0.348

13.37%

1¾

^1

SHOUGANGCCRD.GRD.GP.

0.943

5.256

0.172

17,94%

129

m SHOUGANG CCRD.INTL.ENTS.

1.076

7.172

0.283

15.00%

1¾

^2

Transportation

CONT.MARINER

0.318

2.582

0.042

1132%

1¾

116

AppP.ndix 4：

Vital -t.tktin. on Risk —

T?Piiim nfRed Ch

ins (4th Sub Period 94 M^

- DEC)

1^

|stoc

kNam

e |B

etaV

alue

|tS

tatis

tics

|Adi

uste

dRSg

uare

|S

tand

ardD

evia

tion

Busin

essD

avs

Tum

over

Dav

Sl^

^gan

dFin

ance

K

A^

BA

NK

O

i^

^^

^ 0.

二

二

；；；

；芸

UNIONBANKOFHONGKONG

0.915

7.052

0213

1198%

i3i

ConEnterprises

CHINAEVERBRIGHTINTL.

1.475

6.481

0.240

2116

%

jl

122

CHIN

AM

RCH.HOLDINGS

0.443

2,791

0.050

5.87%

二

二

CHINATOAVELINTL.

1-074

7.641

0.306

4.05%

^ =

GUANGDONGINV.

1.279

1_6

0,434

2.Wc

^6

TOPGLORYINTERNATIONAL

1.472

8.749

0.368

16.83%

131

12b

Ele_nic&Elec_ics

STONEELECTRONICTECH.

1.016

3.699

0.089

27.46%

131

126

Industrial

CHINAAEROSPACE

1.650

9.744

0.420

|6.93%

131

lg

CHINAPHARMACEUTICAL

1.364

6.997

0,269

19.50%

^ 二

DENWAYINV,

1-158

5.303

0.173

21.84%

3 ^5

GZITICHUALINGHDGS

0.472

2,373

0.034

19.88%

131

117

Property&Co_cta

CHINAOS.LAND&INV.

1.053

8.969

0.379

llM

|3;

二

CHINARES.ENTREP.

1.000

7.299

0.287

13.70%

^6

GUANGZHOUINV.

1.551

11.912

0.520

13.02%

131

26

SHENZHENINTL.HDG.

0.766

4.444

0.126

17.24%

131

U9

SHOUGANGCCRD.GRD.GP.

2.099

7.750

0.312

27.08%

131

25

SHOUGANG CCRD.INTL.ENTS.

1.986

8.798

0.370

22.5

1%

131

125

Transportation

CONT.MARINER

0.875

4.129

0.110

21,19%

131

115

Ann

endi

x 5:

Vita

l -^t

.tktin

. on

Ris

k an

d R

etiim

ofR

ed C

hips

(5t

h Su

b Pe

riod

95 J

AN

- J

UN

)

Is

^ lst

nnk

Nam

e |B

etaV

alue

|tS

tatis

tics

|Adj

usted

R Sq

uare

|St

anda

rd D

evia

tion

Busin

essD

avs

Tum

over

Dav

_ B

ankm

gand

Fina

nce~

KA

WA

HB

AN

K

0^

^~

= 二

二

I'l

UNION BANK OF HONG KONG

0.874

7.083

0.276

12.34%

U^

iM

ConEnterprises

CHINATRAVELINTL.

0.980

7.008

0.272

13。99%

130

|21

GUANGDONGINV.

0.985

9,877

0.428

9.97%

130

2 TOP GLORY INTERNATIONAL

0.883

6.798

0.260

12.99%

130

121

Electronic&Electronics

SHOUGANGCCRD.TECH.HDG.

0.996

4.125

0.110

24.15%

13

0 JJ^

STONEELECTRONICTECH.

0.542

1736

0.048

19.80%

130

m

Industrial

CHINAAEROSPACE

1.546

8.615

0.362

17.94%

130

Ul

CHINAPHARMACEUTICAL

0.920

4.358

0.122

21.11%

130

1?

DENWAYINY.

1.277

5.265

0,172

24.26%

130

121

SHOUGANG CCRD.CEN.HDG.

0.871

5.067

0.161

17.18%

130

117

Oil&Minhg

CNPCHONGKONG

1.066

5.145

0.165

20.73%

130

121

Property&Constmction

CHINAOS.LAND&INV.

0.701

5.465

0.183

1183%

130

1^

CHINARES.ENTREP,

1.261

7.143

0.279

17.65%

130

121

GUANGZHOUINV.

1.273

10.456

0.456

12.17%

130

121

SHENZHENINTL.HDG,

0,577

2.668

0.045

21.64%

130

104

SHOUGANGCCRD.GRD.GP,

1.405

6.131

0.221

22.92%

130

120

SHOUGANG CCRD,INTL.ENTS.

1.277

6.720

0.255

19.00%

130

120

Trading

GUANGNANHOLDINGS

0.605

7.445

0.297

8.13%

130

121

ORffiNTALMETALSHDG.

0.771

3.695

0.089

20.86%

130

118

Transportation

CONT.MARH^R

0.807

5.346

0.176

15.09%

130

115

|cOSC

O P

ACM

C

0.51

3 3.6

94

0.089

13

.90%

13

0 I

121

Apr^n^iv - Vital St3tkt^.. nn Ri.k —

RctumofEe^^hip^ _

SnbPeri||||^^^^^

^_

__

_^

nr-

rz

keta

Val

ue

ltQt.t

ictW

U

dmst

edR

Sgua

re

|Sta

ndar

dDev

iatio

n |B

usin

essD

avs|

Tiim

over

Dav

|Sector

StockName

_二

_tMatisiic^

i_

^ ^

130

126

BankingandFinance

KAWAHBANK

.^=

二

o258

21.50%

130

126

UNIONBANKOFHONGKONG

1.456

6.769

0.25S

ConEnterprises

CHINAEVERBRIGH==f.

=3

1-249

Om

^^%

fsJ

126

CHINAMRCH.HOLDINGS

0.608

j.32

二】-

i26

CH

INA

TR

AV

EL

INT

L.

1舶

4

.04

0,U

6 ™

GUANGDONGINV,

0.936

-8

0.2:

6,=

工

^6

TO

PGL

OR

YIN

TE

RN

AT

ION

AL

0.73

9 2.

021

0.02

3 36

,59%

Elec_ic&Electronics

SHOUGANGCCRD.TECH.HDG.

1-343

;.二

二

JoS

130

126

STONEELECTRONICTECH.

0.537

1.449

O.UUS

)"uo/o

Industrial

CHINAAEROSPACE

Om

3-196

。.二

f.^

I3S

m C

HIN

AFO

OD

S 1.

448

^.12

2 ：二：

^

CHINAPHARMACEUTICAL

二6

;.7

. ：

；

lfo

122

DENW

AYIN

V.

1.252

3.5

82

0m4

$.g

GZITICHUALINGHDGS

-0.219

-0.669

= =

J ；

n9

LEGENDHOLDINGS

0.644

2.118

0.026

二

3』

SHOUGANGCCRD.CEN.HDG.

1-250

3.962

0.102

31,55%

ijU

On&Mining

CNPCHONGKONG

^16

二

。。。二

^

lfo

U0

ONFEMHOLDINGS

0.116

0.422

-0.006

•,。

Prop

erty

&Co_

ctio

n CHINAOS.LAND&INV.

0.941

5.93

7 ^‘

™

二=

二

|^6

CHINARES.ENTREP.

0.489

1.670

0.014

29M%

3』

二

GUANGZHOUINV.

0.819

4.389

0.24

m J

\f

SHO

UG

AN

GC

CR

D.G

RD

.GP.

1-

268

4.27

9 0.

8

= f

^ ^6

SHOUGANGCCRD.INTL.ENTS.

0.909

4.438

0.127

20.49%

130

Trading

GUANGNANHOLDINGS

0.264

1-211

0:

^1.82%

130

m

ORffiNTALMETALSHDG.

0.437

1.232

0.004

35.50%

130

U)

|CQ

SCQ

PACM

C

0.38

4 10

19

0.023

M

_—

—1

^ ^

-rrr

nih

1.、叫

1 Q

t^t;P

Q n

n T

i.k a

nd R

mO

fd

Cbip

s (7

th 触

P

_d

% T

AN -

JUN

)

|&hV

alue

lt

St.t

i.ti..

|A

dius

ted^

.Snn

.re

|Sta

ndar

dOcv

iatio

n B

us

ine

ss

^ Tn

mov

^Dav

Sector

StockNamc

—

^ 0411

13.77%

130

⑵

BankingandFinance

KAWAHBANK

]'1\]

【二

0'367

14.41%

130

120

UNION BANK OF HONG KONG

1.254

8.706

讀

ConE

nter

prise

s C

_AM

RC

H.H

OL

DM

)S

1.^

=

二

Is.S

'l3

0 m

CHINATRAVELD>OL.

L631

^M9

^™

15 01%

130

121

GUAN

GDON

GINV

. 1—

.

二

二

130

U6

POLYINVESTMENTHDG.

0.434

.2

O-g

二

⑵

TOPGLORYINTERNATONAL

0.992

6.676

&2¾

14.i

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OtberData Sources:

Data Stream

HIS Services Limited

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