Nov. 4 (Bloomberg) -- China’s stocks may extend this year’s rally as valuations are undemanding given the acceleration in the nation’s economic recovery, according to Haitong Securities Co., the nation’s second-biggest brokerage.

The Shanghai Composite Index has surged 71 percent this year, as Premier Wen Jiabao’s stimulus package and record new loans helped sustain the rebound in the world’s third-largest economy. Stocks trade on the index at 22.97 times estimated earnings, according to Bloomberg data.

“At 22 times next year’s earnings, stocks on the Shanghai Composite are reasonably valued,” Zhang Shulin, Shanghai-based strategist at Haitong Securities, wrote in a report dated yesterday. “There exists room for valuation upside in the light of the economic recovery.”

Zhang joins Prudential International Investments Advisers LLC and China Galaxy Securities Co., the country’s fourth- biggest brokerage, in saying China’s stocks will continue a rally that’s made the Shanghai gauge Asia’s third-best performer this year.

Prudential’s chief investment strategist John Praveen said China’s benchmark index will rise between 20 percent and 25 percent next year. “China’s rally until now has been driven by liquidity, and the next phase of rally is likely to be driven by earnings recovery and solid GDP growth,” Praveen said in an interview from Seoul yesterday.

Loan Growth

New loans tripled to 7.37 trillion yuan ($1.08 trillion) in the first half from a year earlier after the government eased restrictions to revive the economy. China’s gross domestic product grew 8.9 percent last quarter, the fastest pace in a year.

Profits in the nation are “very likely” to increase more than 20 percent in 2009 from a year earlier, Galaxy analysts led by Qin Xiaobin said in a report yesterday. The brokerage forecast the Shanghai Composite may reach 3,400 this quarter, a gain of 9 percent from yesterday’s close of 3,114.21.

China’s listed companies posted a 1.9 percent decline in net income in the third quarter, in line with expectations, Citic Securities Co. said Nov. 2. Full-year profit may rise 25 percent in 2009 and 23 percent in 2010, Citic said.

Haitong recommended investors increase their equity holdings and preferred shares of home-appliance makers, automakers, banks and insurers.

To contact the Bloomberg News staff for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

Last Updated: November 3, 2009 20:45 EST