World Views | Crazy trading on China’s Nasdaq has its own logic

Old habits die hard. China’s Nasdaq-like ChiNext board has staged a comeback this year, rallying 17% to trade at an average of — yes, really — 70 times earnings. Is this misguided enthusiasm by an investor base that infamously engineered a stomach-churning crash just five years ago?
All the conventional wisdom points to irrationality. The ChiNext is composed mostly of young, small and volatile enterprises, whereas blue chips are far better placed to weather the coronavirus outbreak. First-quarter earnings reports from China’s domestically listed companies just drove home the point.
The data show an irrefutable connection between market value and earnings resilience. Companies with a market cap of more than 100 billion yuan ($14 billion) increased their sales and operating profit at the median, despite the virus-related lockdowns. By contrast, the median smaller company recorded a double-digit decline in earnings.
What’s surprising, though, is that not all earnings for ChiNext members are bad. The new-economy market is a story of ice and fire. While more than half of companies reported a drop in net income, almost a quarter posted earnings growth of at least 30%. In other words, performance was either sub-zero or very hot, with little in between.
That makes the ChiNext an attractive market for stock pickers who fancy they can pick the hot prospects from the frozen waste. This makes sense for investors, since China has no equivalent of the FANGs — the mega-cap technology stocks that have made the U.S. equity market the world’s best performer. In China, the well-loved large caps are in booze and drugs — and these are already richly valued and crowded.
A case in point is Kweichow Moutai Co., maker of the fiery liquor known as baijiu and the world’s most valuable distiller. Moutai’s 1.6 trillion yuan market value is now equal to the entire gross domestic product of Guizhou province, where the company is based. How much upside can there be left for an alcohol producer whose basic product costs just shy of 2,400 yuan, or close to $340 a a bottle? That’s more than the minimum monthly wage in China’s capital, Beijing. Unlike FANG members Amazon.com Inc. and Netflix Inc., Moutai surely can’t be considered a play on middle-class consumption.
Chinese investors also have a different vision of value. For them, value isn’t about cheap metrics such as low price-to-book or price-earnings ratios. Rather, it’s determined by how fast a small cap can morph into a blue chip. This explains why investors love Contemporary Amperex Technology Co., which supplies batteries to Tesla Inc. They hope it can become as indispensable to Elon Musk’s electric-car maker as Sunny Optical Technology Group Co. did to Apple Inc.
To be sure, this is all risky business. Beijing recently approved plans to move to a registration-based system for initial public offerings on ChiNext. That means a flood of new companies with even less vetting will be arriving on the board. It’s also worth noting that the quarterly earnings of these young and inexperienced companies aren’t audited.
But then traders on ChiNext aren’t buying stocks so much as options. They’re sifting for China’s future FANGs. Shuli Ren, Bloomberg