The recent resurgence of the S-shares (Singapore listed China shares) are by no means of a feint. Although S-shares have been battered severely since the end of last year due to concerns over inflation and US sub-prime woes, We noticed that the battering has been overdone and several S-shares are now undervalued as a result.

Year-to-date, the FTSE ST China Index has fallen 35.3% as compared to 8.2% for the STI. This has pushed the PE of even the high quality S-shares to singledigit valuations. A comeback underpinned by undemanding valuations and decent earnings growth seems quite certain for S-shares.

DIFFERENT LEAGUE
Comparing S-shares with China domestic A-shares and H-shares, S-shares have been trading at steep discounts after the correction in 2H07. Higher costs was the main reason for the debacle as costs ran ahead of revenue. An example would be frozen food supplier Synear Food, which issued a profit warning for its 1Q08 results, triggering downgrades from some analysts. Over the past 3 weeks, S-shares have recovered faster than the broader market with the FTSE ST China Index gaining 24.4% versus 14% for the STI. Assuming S-shares are now trading at 6 times FY08 PE, a fall in earnings by 30% would still see FY08 PE in the single-digit range. These figures are considered attractive compared with China domestic plays which have double-digit to triple-digit PEs.

GROWING PRC ECONOMY
The PRC economy is expected to grow 10% and 5% in GDP and CPI in 2008 respectively despite a difficult period. Recovery is likely to take place in 2H08 while export growth and earnings concerns may be slightly dented in 1H08. The robust PRC economy coupled with strong corporate growth and yuan appreciation remains intact, which are required ingredients for a bull market. The Chinese government would rein in on inflation by cooling property markets and restricting some of its exports to ensure the domestic market is best served. In the mid-to-long term, the PRC economy will continue to rise but at a slower pace.

QDII PRESENCE
The first-ever fund manager conference was organized to get Qualified Domestic Institutional Investor (QDII) funds acquainted with PRC companies listed on the Singapore Exchange in March 2008. Singapore is among a handful of approved foreign markets for the scheme. Others include the United States, Britain and Hong Kong. The conference featured big names such as COSCO Corporation and Yangzijiang Shipbuilding. The combined quota for the QDII funds has reached US$42b and is more likely to invest in S-shares compared to other shares as they have a presence in PRC. Investment from these funds would definitely provide an injection of liquidity into the S-shares market on a long-term basis. Despite the recent sustained losses by QDII funds on Shanghai and Hong Kong shares, QDII managers said they remain confident that more funds will be launched in the months to come.

POISED FOR COMEBACK
Given the recent buying of Sshares, we believe that S-shares are showing signs of recovery and poised for a comeback. The QDII presentation by the S-shares companies would also boost the attractiveness of China plays in Singapore. Stocks that are likely to outperform are those in the consumer or consumer-related sectors that possess good fundamentals and enjoy strong support from the Chinese government. It is time to move your money.