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10 discount China-Hong Kong stocks as trade war bites

Lex Hall  |  20 Jul 2018Text size  Decrease  Increase  |  
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A trade war may be simmering but there remain attractively priced companies in China and Hong Kong across many sectors, including building materials, telcos, consumer brands and energy, say Morningstar analysts.

Chinese stocks have fallen 30 per cent since their peak in January as trade tensions between the US and China intensify. However, several big names are insulated from the turbulence, according to Morningstar analysts Lorraine Tan and Iris Tan.

According to their July report on the trade war and the risks it presents, they say the fall in share prices has led to some greater discounts for Morningstar's fair value estimates in industrials, technology names, industrials and energy plays.

"Most of these are internet companies such as Tencent and Baidu," the report says, "which while they may be subject to greater scrutiny on potential acquisitions of US entities, should see little other impact from the trade war,” the report says.

"We remain selective with the China banks, on rising debts risks. Price falls in other sectors also present opportunities to pick up market leaders and solid brand names in the consumer space."

China stocks Tencent

Chinese stocks have fallen 30 per cent since their peak in January amid trade tensions

Building materials: long-term price outlook bearish but coal is short-term positive

"A recent visit with the coal and power companies in China indicate that coal prices are likely to hold firm for the next 12 months. Share prices of China Coal and China Shenhua Energy, which trades on 0.79 times our fair value estimate for its relatively superior financial strength with debt/capital at 26 per cent. We see little risk to its ability to pay dividends, with an attractive 2018 dividend yield of 5.2 per cent to provide support."

Telecommunications services: China Mobile remains attractive

"All three China telcos we cover are narrow-moat-rated based on the industry's efficient scale that prohibits new entrants. As a result, China's telco industry remains one of our favourites. The impending China Tower Corp IPO could provide a long absent positive catalyst to this sector especially if returns are as enhancing as those seen by US tower companies. China Mobile is trading on just 0.67 times our fair value estimate."

Consumer cyclical: MGM China set to recover as Alibaba regains its appeal

"MGM China Holdings had been sold down on disappointing gross gaming revenue growth recently, but which we think should recover following the World Cup. Because we think the impact of a trade war should be contained, we believe China's discretionary consumer spending should largely be intact, and particularly, we remain positive on the of the effect of a 10 per cent rise in per capita disposable income in China over these next few years to 2020. MGM China should see benefits from its new Cotai facilities and we expect it to see above-market EBITDA growth. This will lead to strong EPS growth of 60 per cent in 2018 and 38 per cent in 2019. It is trading at 0.77 times our fair value estimate.

"Alibaba is also at 0.77 times our fair value estimate, and similar to MGM China, we see this as a good buying opportunity. Although the stock was initially resilient to the trade war talks, a sell-off from its mid-June all-time high puts Alibaba back at an attractive price level."

Consumer defensive: Kweichow Moutai attractive in an expensive field

"Wide-moat-rated high-end liquor maker Kweichow Moutai is trading just shy of our fair value estimate and if the margin of safety increases, we think it could mark a good entry point for this China A-share leader. The premiumisation trend in China is expected to benefit Moutai, which is already China's leading grain liquor brand. We're looking for above-market EPS growth with 2017-2019 CAGR of 22.1 per cent. Moutai has the highest forward return on equity, or ROE, of 34.9 per cent among the names we cover in this sector."

Energy: oil price outlook weak but stocks offer good dividends

"China's three oil and gas majors are likely to hover at their current price levels with current oil prices not expected to move much higher, in our opinion, as we see US shale oil supply rising and China's oil demand growth to ease as activity slows. Our fair value estimates incorporate a long-term sustainable oil price of US$60 a barrel and based on this, the companies are trading close to our fair value estimates presently. Positive catalysts for both PetroChina and Sinopec may come from spin-offs of their oil and gas pipelines into a national grid company, and for the latter, the listing of its petrol stations in Hong Kong. We see these companies as dividend plays for now with Sinopec being relatively more attractive in this regard at 8.7 per cent forward dividend yield."

 

 

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Lorraine Tan, CFA, is director of equity research, Asia, at Morningstar US; Iris Tan, CFA, is a senior analyst, China financials, at Morningstar US

Lex Hall is a Morningstar content editor, based in Sydney.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.



is content editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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