Small Chinese companies little known even in their home market are finding favour among Korean investors looking for bargains and high-growth stocks, with China's easing of capital controls and a free-trade agreement helping to stir up interest.
Seven out of 11 Chinese companies trading on South Korea's stock markets posted double- or even triple-digit percentage gains over the past three months, while the broader markets suffered losses of more than 4 percent.
Korean investors, worried about governance issues, have typically been wary of the small Seoul-listed Chinese stocks, many too tiny to consider a listing in North America or Europe. China Gaoxian, a textiles company, was delisted from the main KOSPI exchange in 2013 after an accounting scandal.
But with valuations at deep discounts of 50 percent or more to the KOSPI average, they are drawing interest from investors more willing to take risks, especially if they show solid growth prospects.
"Given how cheap these stocks were, I would say we're now in the process of normalisation," said Park Suk-jung, an analyst at HI Investment & Securities.
He said there was no worry, at least yet, to worry about a price bubble. China Ocean Resources Co, a fisheries company, has surged by five-and-a-half times during the past three months while home appliance maker Wayport HK Co Ltd has gained 73 percent.
"These are companies that have had a hard time being noticed back in the mainland, but they can enjoy a more significant profile in a smaller market such as South Korea," said Kim Yong-gu, an analyst at Samsung Securities.
A key trigger for the rally was the prospect for relaxed capital controls, which would make it easier to collect dividend payments.
The Hong Kong-Shanghai stock connect scheme, which last month gave foreign investors direct access to mainland shares, has particularly raised hopes for further opening in China.
"The dividend restrictions are coming down, which was one of the main obstacles holding back local investors from making determined bets in Chinese stocks," said HI Investment's Park.
China and South Korea also concluded negotiations last month on a free trade deal with a promise to sign it in the coming months, while a direct yuan/won market opened its doors on December 1, allowing for easier and cheaper transactions.
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