On 11 Oct 2023, Central Huijin, the Chinese state-owned sovereign wealth fund, has increased its holdings of A-shares in four of China’s largest banks. Central Huijin has a significant stake in many State Owned Enterprises (SOE) and was established in 2003 to manage its stake as an investor in major SOEs.
Central Huijin bought 27.61 million shares in the Industrial and Commercial Bank of China (SHA: 601398) and 37.27 million shares in the Agricultural Bank of China (SHA: 601288).
It also increased stakes in the Bank of China (SHA: 601988) and the China Construction Bank (SHA:601939) by 24.89 million shares and 18.38 million shares, respectively.
In total, these purchases cost nearly RMB 480 million. Central Huijin also announced that it will continue purchasing more shares of the four banks in the secondary market in the following six months.
In the next trading day, share prices of these banks rose by nearly 5% for both their A-shares as well as their H-shares.
So what?
This move suggests 3 important takeaways for China investors like us:
i) China is backing up its biggest companies
First and foremost, this move indicates that the Chinese government is concerned about the stock market valuation and wants to show its support. By supporting the 4 largest banks with massive market capitalisation, the Chinese government is ensuring that various stock market indices and the broader stock market is being shored up.
ii) China perceives the market as being undervalued
Being concerned about its valuation also indicates that they perceive the market as undervalued. The other concern is a systemic risk from low valuations as well as limitations on fund raising to fund growth.
iii) China may support other State Owned Enterprises financially too!
Speculation is also rife as to whether this support would be extended to other SOEs. We think it is unlikely that the Chinese government, through its various investment arms will directly purchase more shares in other SOEs. This is because Central Huijin also additionally functions as the “shareholder in chief” of the entire financial sector, a role that allows the state to participate in the market consistent with global norms of corporate ownership structure without letting go of state oversight of this strategic sector.
China also intends to support its economy and achieve its 2023 GDP target of 5% and recently announced significant fiscal stimulus by issuing RMB 1 trillion of bonds. The large SOEs will be a natural beneficiary of this stimulus.
Many SOEs also have dividend policies in place to distribute profits to their shareholders. As these SOEs make profits, these dividends are channeled back to the Chinese government to meet its fiscal needs.
Here we look at 5 other Chinese SOEs which we think are safe buys.
5 China state owned stocks that are Safe Buys
For this, we looked at their valuation as well as their significance to China. To assess their significance, we look at their weightage as part of the Hang Seng China Central SOEs Index which encompasses 50 SOEs.
| China State Own Stock | Ticker (HK) | Index Weightage | 1Y price performance | 5Y price performance | P/E ratio | Dividend yield |
|---|---|---|---|---|---|---|
| CNOOC | 0883 | 8.31% | 39.5% | -7.9% | 4.43 | 10.04% |
| China Mobile | 0941 | 7.85% | 28.8% | -17.2% | 9.79 | 7.51% |
| China Res Land | 1109 | 4.04% | 3.6% | 23.6% | 6.71 | 5.1% |
| China Life | 2628 | 3.66% | 28.2% | 26.8% | 7.67 | 4.27% |
| SMIC | 0981 | 3.38% | 34.3% | 191.8% | 14.13 | N/A |
1) CNOOC
CNOOC is one of the largest oil companies in China. It is a global energy company with operations in Asia, Africa, the Americas, the Middle East and Europe. It is one of the biggest upstream oil and gas explorer and producer. CNOOC recorded revenues of RMB 422 billion and net income of RMB 142 billion.
In the current climate with conflicts in Ukraine and Israel, Oil self sufficiency or a dependency reduction is something that many governments are in pursuit of. Consequently, CNOOC’s parent who is wholly owned by the Chinese government has a 62% stake in CNOOC.
2) China Mobile
China Mobile is the largest mobile network operator by number of subscribers in China and the world. It generates RMB 937 billion in revenue and a net income of RMB 126 billion.
In November 2020, China Mobile’s stock was sanctioned by the US government. In December 2020, the New York Stock Exchange announced that it would suspend trading in China Mobile, China Telecom, and China Unicom from January 2021 and start the delisting process, causing stock prices in its main Hong Kong listing to drop.
In the aftermath of the delisting, the company announced its decision to raise up to US$8.8 billion with a Shanghai stock exchange listing in Jan 2022. The share price has broadly been on an upward trend since it bottomed in Jan 2021, increasing by 55%.
In the current modern era, telecommunication networks are a strategic asset to every government and it is no wonder that the Chinese government sought to quickly support the company with a second listing in Shanghai stock exchange and a substantial fund raise.
3) China Res Land
China Res Land is a leading SOE property developer with a strong base of recurring income. It is ranked 4th in 1H23 by gross presales (vs 5th in FY22). CR Land has a solid stream of recurring income from its scalable IP and asset light businesses that are sufficient to cover its dividend and interest costs (recurring business income expected to cover 1.97x of interest and dividend expense for FY23F). CR Land offers a well-balanced exposure to China’s real estate sector with a defensive component as its recurring business have contributed 25% of its 1H23A revenue and 43% of its core earnings. CR land generated RMB 207 billion in revenue and a net income of RMB 28 billion for FY22, a 10% decline in revenue and 20% decline in net income from FY21, considered an excellent results as compared to the other property developers, many of whom are in a state of asset fire sale to ensure survival.
With its robust business model, it is in a good position to provide confidence to consumers and at the same time take the opportunity to accumulate its land bank. It is also a key beneficiary of the REIT initiative with a potential spin-off of its commercial mall assets serving as another catalyst.
4) China Life
China Life is the largest life insurer by market share in China and generates RMB 766 billion in revenue and a net income of RMB 34 billion. China Life has a Strong brand, excellent market position and extensive distribution network in the Chinese life insurance market, with favourable long-term growth prospects.
China Life has a credit rating from Moody’s and S&P of A1 and A+ respectively. This is the same credit rating as the Chinese government which indicates the strength of the company. Most of the time, government linked entities have a credit rating that is one notch below the government’s credit rating.
5) SMIC
SMIC is the largest chipmaker and pure play semiconductor foundry in China generating RMB 50 billion in revenue and a net income of RMB 13 billion.
The semiconductor is one of increasing strategic importance due to the current requirements as well as future usage in AI and EV cars as almost all of electronic technology involves the use of semiconductors.
As competition intensified in the semiconductor industry, to maintain its technological advantage, the US government placed restrictions on several semiconductor companies in China. To Support its industry and compete on the technological front, China rolled out significant fiscal incentive packages such as subsidies and tax credits to increase semiconductor production and research activities.
tldr: 5 Chinese State Own Stocks To Buy?
We’ve shared 5 Chinese State Own Stocks here. They all have a strong track record amidst volatile markets, delivered positive 1Y share price return and 5Y positive total return, beating relevant benchmarks.
All 5 stocks also have favourable valuations and are of strategic importance to China, either due to the nature of their industry or their sizeable market share which make them safer buys.
But the question remains: Will you buy?
Share your thoughts in the comments below!
