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Saturday, September 30, 2006

Comparison of HotStocksNot CSI and PrimePartners China Index 0 comments

The PrimePartners China Index has just been launched and will go "live" on Monday. It's high time there is an official tracking index for China stocks listed on the SGX given their importance in terms of market cap and not-insignificant deviation from general market performance on many occasions. This index comprises of 25 representative China-linked stocks, and represents about half of the value of China companies here.

I decided to do a comparison of my own HotStocksNot China Stocks Index (CSI), started in mid-June, and the PrimePartners initiative. Below is a list of the component stocks in each index. The stocks that appear in both indices are highlighted in yellow. Those wishing to read more about my initial methodology for formulating my CSI may refer to a separate mirror site covering my indices. Those wishing to read more about the PrimePartners index may refer to this newslink.



The PrimePartners index stock selections has vindicated some of my decisions in formulating my CSI in several ways. Both are remarkably close in terms of number of component stocks: 25 vs 26 respectively. Main considerations are similar: large market capitalisation, high trading volume, good spread of industries. Many component stocks appear in both indices, more than half in both indices (though there're several notable discrepancies). In fact, my CSI covers >40% more market value (at total $20.2B vs $13.8B for PrimePartners). Note that my observations may be a bit biased.

Main differences:
1. The PrimePartners index appears less accommodating towards recent IPOs, comprising less of them. Glaring omissions include China Sky, Longcheer, China Milk, China Hongxing, Luzhou. Their index shows a preference towards "older" stocks, which explains why United Food, China FlexPack and China Paper appear on their list. It's a matter of judgment; while I did believe a stock being a recent IPO was a negative in terms of its consideration for a component stock, I tend to think market value, business scale and investor interest (reflected through trading liquidity) can outweigh such considerations; after all, the index should try to cover those stocks in the radar screen of most investors where the China theme is concerned.
2. Pine Agritech is a notable discrepancy at the top of the chain. I had made a conscious decision not to double-count it with People's Food.
3. Hongguo is a very surprising omission. So is the inclusion of the rather small United Envirotech, and also inclusion of Memtech but exclusion of Longcheer (for the telco theme).
4. My adjusting index factor used to discount market cap for stocks less obviously linked to the China theme is rather unorthodox and it is not a surprise that the PrimePartners index does not have any such provision. It requires some judgment but I feel it has been particularly useful in order to reduce the importance of certain large-cap stocks. Noble, Want Want and HTL were downward adjusted using this index factor concept; it is interesting that they were not included at all in the PrimePartners index.

Finally, what I will do in the future is to include both indices in my market summaries, to provide two perspectives of the SGX China stocks. I might as well, since my fixed infrastructure for updating my CSI is already in place :-)

 

 

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