In the Chinese zodiac, 2024 is the year of the dragon. For stocks in China, some major global banks are forecasting a resurgence by China equities as the year of the dragon symbolises prosperity and good fortune.
Here we look at a few themes that may rise in the year of the dragon.
1) Electric Vehicle stocks
Tesla CEO Elon Musk stated in January 2024 that Chinese automakers will ‘demolish’ global rivals without trade barriers, underscoring the intense competition faced by the US electric vehicle market leader from companies like BYD (SEHK: 1211), a stock which Buffett invested in the early days. BYD has since overtaken Tesla as the top selling electric vehicle company worldwide, producing more than 3 million cars in 2023 while Tesla produced 1.6 million.
Other stocks that are strong players and worth watching are NIO (NYSE:NIO) and Xiaomi (SEHK:1810). In December 2023, NIO received a US$2.2 billion investment from Abu Dhabi’s CYVN, an investment company which will help fuel its expansion. NIO is unique for its Battery as a Service offering. Its call to fame is its speed in providing a fresh full battery pack to owners of NIO EVs, allowing for car owners to swap their batteries for fresh ones, with the entire process taking less than five minutes rather than having to wait nearly an hour for a full charge.
A dark horse in this sector is Xiaomi (SEHK:1810), better known for its smartphone and household appliances. Xiaomi’s first EV model has just received approval and production will commence soon if not already. Xiaomi is a late comer to this space but very determined to succeed in the EV space as it’s founder Lei Jun, once called the Steve Jobs of China left his oversight role in Xiaomi to devote all his time to the EV endeavour.
2) Renewable energy stocks
While other countries falter in their push towards carbon neutrality, China has kept up with its commitments and is on track to see its CO2 emissions decline.
Names worthy of mention include China Longyuan Power (SEHK:916), Xinjiang Goldwind (SEHK: 2208) who are wind farm operators and wind turbines manufacturers respectively.
LONGi Green Energy Technology (SHSE:601012) and Xinyi Solar (SEHK: 0968) are both world leaders in solar photovoltaic solutions which convert sunlight into electrical energy.
China Everbright environment (SEHK:257) is the largest environmental protection company in China and a leading player in Asia’s environmental protection industry as well as the world’s largest waste-to-energy investor and operator. China Everbright builds and sometimes operates large projects such as waste to energy projects, water treatment, integrated energy solutions. The focus in the market thus far has generally been on harnessing natural resources and less on environmental protection and at the same time recycling or obtaining energy which makes China Everbright a refreshing opportunity.
3) Tech and semiconductor companies
Chinese tech companies have seen their valuations diverge substantially from US tech companies due to the nearly 3-year long regulatory crackdown, continued geopolitical tensions and a weak consumer spending economy in China. The regulatory crackdowns have subsided, and there is now a switch in tune to supporting platform companies as well as driving consumer spending.
Tencent (SEHK:0700) is the biggest Chinese listed tech company by market capitalisation, and recently its founder, Pony Ma, said that he believes Tencent has overcome the worst of times as the Chinese authorities have resumed approval of licenses for domestic games. Tencent relies on a favourable consumer spending environment as it generates a significant portion from consumer spending in games, companies carrying out advertising on its WeChat and other platforms, and from consumers increasing the frequency and value of transactions on WeChat Pay.
The US has placed tariffs and restrictions prohibiting the purchase of advanced semiconductors and manufacturing equipment on Chinese semiconductor companies. In response, the Chinese government has spared no expense in supporting the industry, providing subsidies, tax credits and other incentives to help Chinese chipmakers catch up with Western competitors. The market leader which would benefit from the support is SMIC (SEHK:0981), the biggest and partially state-owned pure-play semiconductor foundry company.
4) China Banks
The theme for 2024 for Chinese banks would be to support growth and focus their support on certain sectors such as the property sector, small businesses as well as local governments in their infrastructure spending, effectively also acting as a lender of last resort.
To mitigate the risks that banks and borrowers face as well as to stimulate borrowings, the Chinese government has started 2024 with a 0.5% cut to the banks’ reserve ratio, and the central bank could embrace a looser monetary policy, with the option to lower the loan prime rate – a reference for China’s mortgage rate and subsequently drop the policy rate of its medium-term lending facility.
China’s top five lenders – Industrial and Commercial Bank of China (SEHK:1398), Agricultural Bank of China (SEHK:1288), Bank of China (SEHK:3988), China Construction Bank (SEHK:0939) and Bank of Communications (SEHK:3328) are all designated as global systemically important banks by Chinese regulators and the Switzerland-based Financial Stability Board (FSB).
These banks also generally have a good track record of increasing earnings and dividends to investors that track the economic growth of China.
This means that should any of these banks fail, it would trigger a wider financial crisis and threaten the global economy. In layman’s term, these banks are too big to fail.
5) Stocks with the Dragon name
Some investors believe that companies with the Chinese ‘dragon’ character will outperform in the lunar 2024 year.
In November 2023, six of the top 10 gainers on the Shanghai Stock Exchange had the Chinese character for “dragon” in their names, which in English is either the Chinese Hanyu “long” or the English word “dragon”.
Due to the auspicious tidings of the word, there are countless Chinese companies with the dragon character. Some noteworthy mentions are China Longyuan Power (SEHK:916) and LONGi Green Energy Technology (SHSE:601012) which we also mentioned as potential renewable energy plays, Ginlong Technologies (SZSE: 300763) which is an electrical equipment manufacturer, Longfor Group (SEHK:960) a real estate developer and investor company, and Nine Dragons Paper (SEHK:2689), a paper manufacturing company.
This may be a taking it a step too far but we note that 2024 is the year of the wood dragon, and Nine Dragons Paper, a paper manufacturing company is wood adjacent.
For investors who prefer a broader mandate, there are the HSBC China Dragon Fund (SEHK:820) and the Nasdaq Golden Dragon China Index (NASDAQ: HXC).
Closing statements
We shared names of Chinese stocks that may rise in this upcoming year of the dragon. These companies are mainly in four sectors, namely EV, Renewable Energy, Tech and Semiconductors and Banking. For speculators, stocks with the ‘dragon’ word in their names could be possible trading plays.
As Chinese stocks enter their third year of underperformance, we already know that these Chinese stocks all face similar risks from the same macro themes. Investors who are looking to invest should be comfortable with the prevailing risks and look to diversify their portfolios accordingly.
