In terms of price earnings ratio (“P/E”), the SHCOMP is trading at a differential premium of 144.2% against HSCEI. Is SHCOMP overvalued?
In terms of P/E, Hang Seng China Enterprise Index (“HSCEI”) usually trades at at a discount to the Shanghai Composite Index (“SHCOMP”), possibly due to “closed system” of SHCOMP as well as different constituents for both indices.
Currently, HSCEI is trading at trailing P/E of 5.97x against SHCOMP that is trading at relatively higher PER of 14.58x. The following 10-year historical P/E graph shows that HSCEI is already trading closer to its all time low P/E of 5.81x. As for SHCOMP, it is trading at relatively higher than its all time low P/E of 9.61x.
The following graph will show the premium / discount of SHCOMP against HSCEI:
SHCOMP may be potentially overvalued as the premium of SHCOMP (against HSCEI) has shot way above the mean premium differential of 56.4% in year 2015 (with a current differential premium of 144.2% against HSCEI).
Assuming a mean differential premium of 56.4%, it is envisaged that the SHCOMP may trade at a P/E of between 9.09x and 12.51x, translating into implied SHCOMP index range of between 1,722.8 and 2,372.2
|HSCEI PER (x)||5.81||5.97||6.50||7.00||7.50||8.00|
|SHCOMP PER (x)||9.09||9.34||10.17||10.95||11.73||12.51|
|Implied SHCOMP Index||1,722.8||1,770.2||1,927.4||2,075.6||2,223.9||2,372.2|
Note – SHCOMP currently trades at 2,736 (as of 5 Feb 2016)
Key implications: Dissecting the various components of the indices will yield clearer underlying reasons for the valuation differences between SHCOMP and HSCEI.
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