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5 Asian stocks for your pick list

Glenn Freeman  |  10 Dec 2019Text size  Decrease  Increase  |  
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A bank, retail property developer and hygiene products company are among these five new additions to Morningstar's list of undervalued Asia large- to mid-cap stocks.

As a category, the Morningstar Asia Large-Mid Cap Index is trading at a discount of 27 per cent, with healthcare companies are the cheapest according to Morningstar research.

Of the new additions, mobile telecommunications company China Unicom is the cheapest, trading at a 36 per cent discount to the fair value estimate set by equity analyst Dan Baker.

China Unicom (XHKG: 00762)

Economic Moat: None
Morningstar Rating: Five-star

The company is the only Chinese operator with a licence to offer 3G mobile services using the global WCDMA standard.

It continues to trade at a discount, even after a disappointing third-quarter 2019. A 6.1 per cent drop in mobile services revenue in the quarter was offset by 7.7 per cent growth in fixed-line revenue – but Baker still made a minor fair value estimate cut, to HK$12.80 from HK$12.90.

The company was trading at HK$6.87 at the last market close.

"We believe China Unicom stock is undervalued at these levels and with continued strong execution should win back investor confidence after a long period of operational disappointment from 2008 to 2016," Baker says.

He expects China Unicom to grow operating earnings at an average of 14 per cent annually over the next five years.

Wharf Real Estate Investment Co (XHKG: 01997)

Economic Moat: Narrow
Morningstar Rating: Four-star

Wharf Real Estate Investment Co's (WREIC) main assets are the Harbor City and Time Square shopping centres, which saw retail sales fall 35 per cent and 30 per cent during the third-quarter.

But Morningstar equity analyst Phillip Zhong is confident the company's full-year results will be positive, dismissing "current market pessimism" as unwarranted.

He expects further deterioration of retail sales during the fourth-quarter, but believes rental revenue is much less sensitive.

Zhong points to the previous market cycle as proof. When the city's retail sales bottomed in mid-2017, WREIC continued to eke out rental growth of 4 per cent.

"While the current quarter’s decline is more severe, we believe the duration should be short," he says.

Zhong is optimistic about a V-shaped recovery after the Hong Kong political protests subside.

WREIC was trading at HK$42.05 at the latest market close, a 23 per cent discount to Morningstar's HK$55 fair value estimate.

Hengan International Group (XHKG: 01044)

Economic Moat: None
Morningstar Rating: Four-star

The largest producer of sanitary napkins and nappies in China, Hengan's first-half earnings were lower than Morningstar analyst Allan Cheng expected. This prompted a 6 per cent drop in his fair value estimate, to HK$66 a share from HK$70. But he remains optimistic about sales growth.

China’s per capita consumption of hygiene products significantly trails that in many other countries. Cheng expects rising income to lift this consumption in the coming decade, especially in rural areas.

He also believes the company could steal substantial market share from domestic manufacturers as more stringent effluent standards come into effect.

Shares most recently closed at HK$51.75, a 22 per cent discount to Morningstar's fair value estimate.

Agricultural Bank of China (XHKG: 01288)

Economic Moat: Narrow

Morningstar Rating: Four-star

The Agricultural Bank of China's shares trade at a similar discount to Hengan, closing at HK$3.20 versus a fair value estimate of HK$4.50 as at Monday 9 December.

Morningstar equity analyst Iris Tan points to fluctuating revenue for the bank. Credit costs fell in the third-quarter, largely because of lower credit costs. But over the half, operating profits slowed to 3.1 per cent from 5.5 per cent due to higher operating costs caused by seasonal factors.

"We believe such revenue fluctuation is a result of the different asset-and-liability structure of the bank, and the effect is short term," Tan says.

She points out that the bank's third-quarter net interest margin increased by 2 basis points from the second quarter "indicating the negative impacts are gradually easing."

Tan believes the market has been too concerned about the bank's slower growth relative to its peers, which she attributes mostly to short-term causes.

"Following the People's Bank of China's liquidity injection and tighter regulation on structured deposits, we believe the competitive pressure will ease in the coming quarter," Tan says.

Hon Hai Precision Industry Co (XTAI: 2317)

Economic Moat: None
Morningstar Rating: Three-star

Hon Hai, a Taiwan-based electronics manufacturer that supplies components to Apple's iPhone models, beat Morningstar's net margin expectations for third-quarter 2019.

This saw a fair value estimate increase to TW$104, from TW$88 – largely due to a stronger outlook for operating margins in 2019 and better revenue and operating income forecast for 2020.

Morningstar equity analyst Kazunori Ito believes the market has underestimated the extent of Hon Hai's profitability turnaround and hasn't priced-in the group's 2020 revenue growth potential – despite the recent 20 per cent increase in the company's share price.

He believes the company is better positioned than competitors Pegatron, Wistron and Foxconn given its expertise in designing premium OLED displays for iPhones. "Further, we think investors could allocate capital to the parent Hon Hai group instead of FII to capture the 5G iPhone upgrade cycle," Ito says.

Hon Hai is currently trading at TW$91, roughly in-line with Morningstar's fair value estimate.

is senior editor for Morningstar Australia

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