Key Points

• Shanghai correction has retraced 100% of 2015 rise
• Pullback was 56% of 2014-15 bull market gains
• But China equities nowhere near previous highs
• Sub indices and ETFs for China looking strong
• Hong Kong stable
• Tokyo still strong
• India cruising
• Are we now close to a resolution that says the China pessimism is truly unfounded?
• Another look at Dongfang Modern Agricultural

Recent pull backs in the Shanghai and Shenzhen markets has had the bears out in real force and the drivel detector sensor is flashing wildly in neon overkill. But watching all the markets is telling me a very different story.  They say it is still not Armageddon just yet and probably not for a long time. Could something really be happening that is bringing about the financial Armageddon scenario into play or is it just the usual suspects peddling another way to the End of the World? We have all been told this so often now and one day it just might happen. One day, but not now. As you should now know Paradigm is Lead Manager for its first ever IPO with the Chinese citrus grower Dongfang Modern Agricultural and it’s the first IPO for me since 2008 and making it about IPO number 35 all up. The China market pullback does not faze me nor the company’s sponsors and so far not the investors. I have mentioned that I first visited China in 1982 and have made about 20 visits in the past ten years, presenting to and meeting thousands of people from about a dozen major cities and some regional and rural areas throughout China.  As I have also probably said I see very little that suggests to me that China is straining and nothing showing me a real slowdown is underway. I have been watching the Asian markets carefully and readers will know I have been calling for a strong Shanghai market for a few years given that GDP rose 137% in RMB (and 193% in US$ and 100% in Purchasing Power terms) from 2007 (the time of the peak in the Shanghai market) to 2014 when the market ended a 65% decline.  Strange that the economy expands and the share market contracts! PE ratios for many companies are still single digit despite the speculation in the Shanghai and Shenzhen markets! The assessment here suggests that the equity market in China still has a long way to go to the upside and even just to get back to the 2007 highs! First of all, look where we are now. To me, a normal pullback and the market had not reached anywhere near the previous highs. Shanghai Composite 1996-2015 The comparison of the Shanghai index against the FT 25 Index shows the top 25 hardly overextended at all.  The pull back is classic.  Off to new highs.  These blue chips are doing just fine. China Globalx Financials Index This says bull market only just starting and still on <10xPER. China Globalx Industrials Index Only just starting here too. China certainly is an immature market with high volatility but look at the Hong Kong Hang Seng. Hong Kong Hang Seng Index And for a bit of history and volatility just see what happened when Shanghai opened in 1991. Clearly an immature market. Up 1300% then down 73% before running 300% to new highs.  All within 24 months. And how are the other major markets round the region coping with China’s supposed meltdown? Japan?  Yawn.  India?  Cruising. Japan’s Nikkei India’s National Exchange Nifty Index And China’s steel industry still hasn’t collapsed. Steel consumption in China has been lower but exports to ASEAN and now India are rising and should exceed 100mt in 2015. And China port iron ore inventories have been down more than 25% from the highs. An apology here on incorrect comments about the low volumes in the iron ore futures markets.   The data on the Dalian Commodity Exchange gives stupendous volumes of over 1,500 million tonnes per month which is about the same volume as annual seaborne trade.  It seems everyone trades in it. So the outlook on these simple indicators is not one of collapse but probably a bottoming and resumption of world growth. Don’t forget that Dawes Points has highlighted the current or looming deficits in most LME metals and the continuing declines in their LME inventories. Australian resources stocks are so cheap and the latest production data pre the formal June Qtr Reports show some cash laden gold companies on very low single digit PERs. More on this next time but for the moment let’s just focus on China. So coming back to Dongfang Modern Agricultural with its 200,000 tpa of citrus and camellia fruit produce generating A$175m revenue and A$75m forecast earnings and looking for another twenty years EPS growth, what is there not to like? The IPO roadshow starts this week and include presentations through Wholesale Investors (www.wholesaleinvestors.com.au) on Wednesday 15 July in Sydney ( I am presenting) and Melbourne on Friday 24 July in Melbourne.  You can register online to attend. Talk to me  +61 2 9222 9111 bdawes@psec.com.au Or Les Szancer 0418 260 937 or  +61 2 9191 0427   lszancer@psec.com.au For Dongfang the publically available numbers in RMB and A$ look like this (and special note should be made of EBITDA Return on Investment (RoI) and the 35% RoI after the IPO): Dongfang Modern will be available through  ASXBookbuild  so if you do not have an account with Paradigm you can apply for shares through your broker. 14 July 2015 Edition #38