Value Partners is making a compelling argument for why quality China A-shares may present significant upside potential, citing two major factors: deep undervaluation and Beijing’s push for a “value-up” strategy.
The firm’s proprietary Free Cash Flow to the Firm (FCFF) Cycle Index currently sits at 2.6, marking its third-lowest reading in two decades. The only weaker readings were recorded during the 2008 global financial crisis and the peak of the Covid-19 crisis in early 2020.
“Roughly half of the 5,000 companies in our China A-shares universe have pre-announced their annual results,” Value Partners stated. “Based on our FCFF framework, we believe fundamentals are near a bottom, raising hopes for a recovery.”
China’s “value-up” initiative, modeled after similar programs in Japan and South Korea, is also boosting confidence. A key element is a refinancing facility provided by the People’s Bank of China (PBoC), which allows companies and major shareholders to borrow at 2% interest to repurchase shares on the open market. The RMB500 billion quota creates an attractive arbitrage for companies with strong cashflows and sustainable dividends.
“The facility enables companies to borrow cheaply and reinvest in stocks yielding 3% to 4% dividends, making it a healthy arbitrage opportunity,” Value Partners noted. “We foresee incremental capital flowing into stable, high-dividend stocks, supporting a re-rating for quality companies.”
In addition, the China Securities Regulatory Commission (CSRC) introduced measures in January to channel more long-term funds into equities. Insurance companies, for example, must now allocate at least 30% of new-premium income into the stock market—most likely targeting conservative, dividend-paying blue chips.
A third supportive measure focuses on private pensions, with the government offering tax incentives for pension savers to invest in high-quality stocks. According to Value Partners, dividend-paying companies stand to benefit from this trend as well.
With these policies and attractive valuations in place, Value Partners is optimistic that China’s A-share market is poised for a rebound.
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