Yuming Ying, manager of the China Eagle Fund, a Hong Kong-based hedge fund, confirms he will start increasing his net exposure to the Hang Seng Index if the markets take another dive.

The China Eagle Fund, which invests predominantly in China concept firms listed in Hong Kong, currently has over 50% net exposure. If the Hang Seng Index falls to 18,000 or even 16,000, he will increase net exposure further based on an in‐house model.

Moreover, if the Hong Kong index did fall to 16,000, bringing it to a level where market valuation was similar to what it was during the financial crisis, the fund would substantially increase the net exposure of the portfolio by ramping up to 100%.

He thinks that could be the level the index falls to if Europe has another period of financial world‐is‐about‐to‐end panic (which it appears to be having about every two weeks right now).

“The effect of Muddy Waters’ research has cast a lot of shadows," he says, referring to the sceptical reports on certain Chinese companies’ book‐keeping and the veracity of their asset portfolios. "Everything is now being questioned.

“However, SMEs now are very cheap, some are close to their net cash level, but even cash-rich companies are being hit hard.”

Ying says that a Hong Kong listing does confer more trust than a Nasdaq listing for a Chinese company, given that a Hong Kong listing has to get consent from the China Securities Regulatory Commission, whereas any firm can elect to go to the US via a back‐door listing.

He expects a virtuous cycle to begin once cynicism rules and share prices have bombed out, at which point funds that are able to rationally quantify matters like ‘how much cash has this company got?’ can re‐enter and start accumulating.

An area of current examination for China Eagle is apple juice companies, two of which are listed in Hong Kong. He sees these as bargains, trading at 70% price-to-book value and at a forward price-earnings ratio of three times.

He believes their earnings could rise six-fold this year. In 2010, the apple juice price soared, but these firms’ earnings did not, as they were locked into contracts set by their multinational customers that were calculated at the previous year’s price.

Due diligence‐wise it just takes a little bit of work to figure out how much apple juice they have bought in the last year, and being multinationals, they aren’t secretive about it. So it’s quite an easy job for an analyst thinking laterally.

China Eagle won AsianInvestor's 'Best China Fund' award in our 2011 performance awards.