The Confirming Of The Intrinsic Level Of The Market/Industry P/E Ratio In Chinese Stock Market

The main purpose of this paper is to establish a more reasonable calculation model of Price-earnings ratio (P/E) which is in line with Chinese stock market, and to compute the Intrinsic P/E intervals of Chinese stock market and industries. This article reasrches the calculation method of the Intrinsic P/E with comparative analysis, qualitative analysis and quantitative analysis; regression model and the three-stage valuation model.Firstly, it elucidates the connotation of the Intrinsic P/E and confirms the calculation method of the average P/E in whole market and by industries. In computing, it uses this method which is Total Tradable Market Capitalization comparing with the Total Tradable Earnings. The Tradable Earnings is forecasted by the earnings reported in semi-annual report multiplying two. It elucidates the connotation of Dividend Growth Model and researches the relevance between the Shanghai Stock Market and the Shenzhen Stock Marcket. It discovers that the market price of the two markets fluctuates samely, so it uses the Shanghai Stock Market on behalf of China's entire stock market. Then it confirms the sample range and the data range in computing process.Secondly, it researches the general characteristics of the Chinese stock market in time. It classifies the Chinese stocks by industry, earnings, the negotiable shares of the stocks and researches the characteristics of every category. It discovers that in long-term the P/E in Chinese stock market has a high volatility and the stock market belongs to the demand-driven market. The P/E has a dualistic structure from the performance; the scattering degree of the P/E by the negotiable shares of stocks icreased in 2008.Thirdly, this article reforms the intrinsic P/E regression model based on developed securities markets which is studied by Damodaran and confirms the Chinese intrinsic P/E regression model based on the emerging stock markets. Then it calculates intrinsic PEs about Chinese stock market over the years, its value in 2008 is 18.47. By comparing we have found Chinese stock market is overvalued most of the year. Especially in the years when the market is hot, there is a big market bubble and the stock market is in a strong mood of speculation. Then we make an improvement of the Gordon model and obtain a three-stage dividend growth model. In light of Chinese economy and industry development, we calculate the intrinsic P/E of the stock market (15.9~37.4) and by the industries with this model. Recently, on August 29th ,2008, the P/E is overvalued which is 14. From the point of view of the industries, recently-on August 29th ,2008, the P/E fluctuates with the reasonable range except that the Mining industry and Manufacturing are underestimated, the Agriculture\ forestry\animal husbandry and fishery industry is overvalued. The stock market bubble has basically been squeezed out.