It has been an eye-opener for most China stock investors during the recent government clampdown. Many are still wrapping their heads around it and everyone has a view of why the Chinese government is taking such measures.
One of the lessons investors have picked up from this episode is this – don’t go against the Chinese government on what they think is right or good for the people.
On the flip side, it might be better to invest according to what the Chinese government wants to develop or achieve. Here are 5 stocks that I think, can potentially benefit from China’s policies.
#1 – Anhui Conch Cement (SEHK:914)
Cement is a boring business but it doesn’t make it less important. China has been spending to improve its infrastructure over decades and cement companies have boomed as a result.
To give you an idea of their scale, China alone accounted for about 30 percent of low- and middle-income countries’ infrastructure spend in 2011!
China is a huge country with rising affluence. The need for more built-up area and infrastructure spending is not going to stop anytime soon.
One major construction project would be the Greater Bay Area (GBA) – a megalopolis to rival places like New York. The purposes are to connect city dwellers over a large area (reduce density) and to spur economic growth in the region.
GBA is estimated to have 70 million people and that is more than the entire 66 million population in the United Kingdom. It will contribute 12% of China’s GDP.
GBA will need more roads, railroads, houses, offices and other buildings. All these are good news to cement companies.
You are not short of cement stocks in China and you might be overwhelmed by the options. I would say Anhui Conch Cement is the market leader and by going with the best, we usually won’t be too wrong.
Anhui Conch Cement has the largest market share in China and is currently number 2 in the world.
Anhui Conch Cement’s diluted EPS grew at 36% per year in the past 5 years. It has a solid ROE of 24% and a low debt to equity ratio of 6%.
Current Dividend yield is attractive at 6% and PE is just 6x. That gives us a PEG ratio of just 0.5 (below 1 means cheap).
Share prices are down currently as demand has fallen and inventory has been building up. I see it as a good opportunity to buy when a cyclical sector is on a downtrend so you get much cheaper prices and you sell when the sector recovers.
An additional boost to Anhui Conch Cement would be China’s Belt Road Initiative (BRI) where China is partly funding infrastructure projects in other countries along the trade routes. It would be no surprise that China would use their own companies to supply raw materials and construction services in these projects.
Currently, Anhui Conch Cement has a small exposure to overseas markets (see table below) but who knows, this segment could increase because of the BRI in the future. For example, the company is setting up a cement plant in the Ulyanovsk Region in Russia which is expected to be completed by 2021. Anhui Conch also has the Qarshi Conch project in Uzbekistan which just started producing cement.
Anhui Conch Cement trades in a lot size of 500 shares on the Hong Kong stock exchange. That would be approximately S$3,750 minimum investment. But you can just buy 50 share CFD with Phillip Futures without commission.
#2 – Haier Smart Home (SEHK:6690)
China is the factory of the world and I bet it produces a good number of things which are in your house. This export-oriented strategy has propelled China into the second-largest economy in the world and brought fortunes for her people.
But given the increasingly hostile attitude towards China, the Chinese government know that they cannot solely rely on the goodwill of foreigners to buy their stuff. China still wants to grow. So how?
The government proposed the Dual Circulation economy whereby apart from exports, the country will spur domestic consumption. It has a super huge 1.4 billion consumers in the country that could contribute significantly to GDP growth.
That’s where a homegrown home appliance brand like Haier Smart Home can prosper. The Chinese are nationalistic and would support their homegrown brands more than foreign ones (except maybe luxury products).
Haier is among the big three home appliances companies in China together with Midea and Gree. While Midea and Gree are known for their air-conditioners, Haier takes the number one spot for refrigerators and washing machines. Such strong positioning and brand association are a competitive advantage by themselves.
I mentioned the Greater Bay Area previously and this development will help Haier too. This is because more new homes will be built, which means more refrigerators and washing machines are needed! So, Haier could benefit from these Chinese policies.
Haier’s diluted EPS has grown at an average 13% per year for the past 5 years. Its latest PE ratio is at 22x while PEG ratio is at 0.6. It paid out a dividend yield of 1.5%.
The stock isn’t obviously undervalued currently but the prospect is definitely a bright one.
Haier Smart Home trades in a lot size of 200 shares on the Hong Kong stock exchange. That would be approximately S$1,040 minimum investment. But you can just buy 50 share CFD with Phillip Futures without commission.
#3 – Ganfeng Lithium (SEHK:1772)
China has committed to a carbon emissions peak in 2030 and to achieving carbon neutrality in 2060. It is important for big countries (especially the factory of the world) to commit to climate change initiatives. This is going to be a key direction.
China already sells the most electric cars in the world. However, that statistic is based on absolute numbers, which is achieved only due to China’s sheer size. Norway leads in terms of the percentage of electric car ownership.
Electric cars are greener overall with lower emissions. Simpler parts mean shorter construction time and less factory pollution.
Batteries are an important part of EVs and Lithium is a key element to make these batteries.
Ganfeng Lithium is the world’s lithium metal provider. It also produces lithium compounds – the biggest producer in China and third in the world.
I believe EVs are inevitable but there are so many brands out there currently. It is difficult for investors to correctly bet on the ultimate winner which could only emerge 10 (or more) years later.
But it is easier to bet on Ganfeng Lithium as a key supplier to the EV supply chain.
Unfortunately, investors have hopped on Ganfeng Lithium stock and pushed the share price close to its 5-year high. Investors who bought it five years ago and held it till the point of writing have seen a whopping 1,144% gain!
Ganfeng Lithium trades in a lot size of 200 shares on the Hong Kong stock exchange. That would be approximately S$5,700 minimum investment. But you can just buy 50 share CFD with Phillip Futures without commission.
If you think this stock is overvalued, you can short it via CFDs too.
#4 – Hong Kong Exchanges & Clearing (SEHK:388)
The US and China tension has been going on for years. Biden isn’t any nicer to China than Trump and I believe the rise of China has put pressure on the U.S.’s global leadership. There’s a new challenger in town and the hostility is understandable.
Many Chinese companies are listed in the U.S. and there have been threats of delisting them if they do not open their books for scrutiny.
On the other hand, we have also seen the Chinese government banning Didi from getting new users for its app because of a rumour saying that it had disclosed a large amount of data to the U.S. authorities.
The Chinese government then unleashed a slew of antitrust measures against some of the biggest companies in China, sending their share prices down. Many U.S. IPOs for Chinese companies have been pulled back too.
I think it would be increasingly difficult for Chinese companies to list in the U.S. The next favourite international capital market would be Hong Kong.
We have seen companies like NetEase, JD.com and Xpeng listing in Hong Kong following their U.S. listings. “A homecoming”, some commentators said.
Thus, the U.S. China tension can only benefit Hong Kong Exchanges & Clearing.
But the share price isn’t exactly cheap. It is quite near its 5-year high which was made in Feb this year.
The PE ratio is at 50x, which is pretty expensive for a finance stock.
Hong Kong Exchanges and Clearing trades in a lot size of 100 shares on the Hong Kong stock exchange. That would be approximately S$8,800 minimum investment. But again, you can just buy 50 share CFD with Phillip Futures without commission.
#5 – China Feihe (SEHK:6186)
This is going to be the most controversial stock in this list because it is under short-seller attacks at the point of writing. The shortists claimed that Feihe inflated their revenues and under-reported costs.
China Feihe has the largest infant formula milk market share of 17.2% in China.
It might benefit from China’s push for more kids. China has changed its two-child policy to a three-child policy in May 2021.
The government knew that it takes more than a policy change to increase the birth rate. They went all out to destroy the tuition industry and curtail gaming among kids. There’s a rumour that the government could be going after the real estate sector next. Basically, they are aiming to bring down the cost of raising children to spur more procreation.
If successful, Feihe would stand to benefit because there will be more demand for infant formula milk in the most populous country in the world. That’s a gold mine.
On the other hand, there is regulatory risk for Feihe too. Xinhua News Agency reported that infant milk marketing is making mothers choose milk powder over breastfeeding. This caused Feihe share price to plunge even though no official policies are out yet.
Feihe’s PE ratio isn’t expensive at 13x. Its PEG ratio is merely 0.2 (less than 1 is cheap). The question is whether you are willing to accept the risk of regulation and accounting issues.
Feihe trades in a lot size of 1,000 shares on the Hong Kong stock exchange. That would be approximately S$2,500 minimum investment. But you can just buy 1 share CFD with Phillip Futures without commission.
This article is written in collaboration with Phillip Futures but the views belong to the author.
Disclosure: The author holds shares in Anhui Conch Cement and Haier Smart Home at the time of writing. He may sell these holdings and/or buy the other stocks mentioned above.
Disclaimer: The author is not a financial advisor and none of these stocks should be taken as recommendations.
