SEOUL Dec 26 (Reuters) – 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 Dec
1, allowing for easier and cheaper transactions.

(Editing by Choonsik Yoo and Edmund Klamann)