Hong Kong shares snapped a ten-day winning streak on Friday, as the Hang Seng Index retreated from 2012 highs, dragged down by China Unicom's 7.6 percent slump after posting disappointing third quarter corporate earnings.
The Hang Seng Index lost 1.2 percent on the day, closing flat on the week, snapping seven weeks of gains. The China Enterprises Index of the top Chinese listings in Hong Kong shed 1.6 percent on the day and dropped 2.2 percent this week.
The CSI300 Index of the top Shanghai and Shenzhen listings lost 1.9 percent to close at its lowest since September 26. The Shanghai Composite Index shed 1.7 percent. Both indices broke below a tight 70-point trading they had held to so far this month. On the week, the CSI300 shed 3.6 while Shanghai lost 2.9 percent, in their first weekly loss in four weeks.
Turnover on both Hong Kong and China markets was lower than Thursday. "I still think there is potential for more gains in Hong Kong, the market is consolidating strong gains now, but inflows are picking up and investors are adding beta," said Alan Lam, Julius Baer's Greater China equity analyst. In Hong Kong, China Unicom recorded its worst daily loss since April 1, 2009 when it slumped 8.1 percent. The country's second-largest mobile phone operator posted a 27 percent rise in third-quarter net profit, lagging market expectations.
China Unicom is now down more than 22 percent this year after surging 47 percent in 2011. This compares to the 16.9 percent gain on the Hang Seng Index and the 5.2 percent rise on the China Enterprises Index for 2012. But it is still trading at a 31 percent premium to its historical median 12-month forward earnings multiple, according to Thomson Reuters StarMine, suggesting further weakness could be in store as investors rotate into growth-sensitive counters with cheaper valuation.
Positive earnings, along with more data confirming a stabilisation in the Chinese economy could make counters such as Bank of China (BOC), which was the first among China's "Big Four" banks to post earnings on Thursday, a popular option. On Friday, BOC reversed early gains to end down 0.3 percent after the country's fourth-largest lender bettered expectations with a strong third-quarter corporate earnings showing after cutting back on bad-loan provisions.
Bank of China is now up 9.8 percent this year and currently trading at a 38 percent discount to its historical median 12-month forward earnings and a 46 percent to its historical median 12-month forward price-to-book value, according to StarMine. Its "Big Four" rivals, Agricultural Bank of China (AgBank) slipped 1.5 percent and China Construction Bank (CCB) shed 1 percent ahead of their expected third-quarter earnings later on Friday.
Offshore Chinese markets outperformed onshore peers for a third straight week. Much of the A-share underperformance this week was driven by weakness in the resources-related sector, which has driven the recovery in mainland markets after a one-week holiday at the start of October.
On Friday alone, the Shanghai material sub-index slumped 3.2 percent after Maanshan Iron & Steel's bigger-than-expected third-quarter loss sparked more profit taking on recent outperformers in the sector. Both the CSI300 and Shanghai Composite indices were standout underperformers in Asia on the day and were cited for worsening losses in other Asian stock and currency markets, but ended the day off its lows.
Retails investors were partly spooked by Chinese media reports on Friday that fund managers were not too optimistic about prospects for the fourth quarter after consultancy data showed funds posted total loss of around 75 billion yuan ($12.02 billion) in the third quarter. Maanshan slumped 4.4 percent in Shanghai, while larger sector peer Angang Steel lost 4 percent in Hong Kong and 4.7 percent in Shenzhen.