If you are planning to invest in China, then there are three investment themes that you cannot miss. Maybank Kim Eng (MBKE) believes that these three investment themes will help you outperform the market in 2018.
Investors Takeaway: MBKE’s Top Investment Themes For China
1. Ecommerce: Value Is The New Preference, Not Growth
At the current valuation of internet companies in China, MBKE warns of downside risk to the sector. MBKE notes that any notable downturn in macro factors, such as softer consumption, could lead to a correction. This is especially for China consumption proxy stocks like Alibaba and Tencent. Internet companies that miss earnings expectations will also likely be significantly punished.
Go Contrarian: Switch Alibaba For Vipshop
Among the internet companies, MBKE recommends two contrarian calls: Downgrade Alibaba and upgrade Vipshop. While MBKE lauds Alibaba for its innovative social shopping platform, MBKE believes that its current risk reward profile is no longer attractive after its market cap doubled. Moreover, its outperformance was only partially supported by consensus earnings upgrade. Thus, MBKE recommends rotating from Alibaba into Vipshop.
According to MBKE, Vipshop is attractive as a margin recovery value play in light of operating momentum slowing for Alibaba. Vipshop used to be a darling of hedge funds but questionable growth outlook and declining margin trends have led to Vipshop falling out of favour. MBKE highlights this as a buying opportunity as the market is overly discounting the company’s unique flash business model and its female dominant customer base.
Alibaba: HOLD, TP US$185; Vipshop: BUY, TP US$14.20
2. Consumer “Premiumisation”
Chinese consumers are upscaling as their income improves with the economy. There is an underlying trend of Chinese consumers shifting preference towards higher end consumer products. The Chinese consumers have now become more sophisticated and recognize the value of brands. They are becoming more willing to pay for better quality products.
Health & Happiness
One of the stock that MBKE highlights as a beneficiary of consumer premiumization is Health & Happiness. Health & Happiness manufactures baby and adult nutrition and care products in France, Australia and other European countries. Health & Happiness is able to command strong pricing power, which is supported by price inelastic demand growth from affluent young parents. Its ANC brand, Swisse Wellness, should be able to leverage off an aging population and rising health awareness, given that it is the top supplements brand in Australia and top online brand in China.
BUY, TP HK$66.30
3. China Goes Green
China and green technology might seem like an oxymoron, but that is the wrong impression. Few years ago, this might be true. But today, the Chinese government is doing its best to create supportive government policies to drive greener practices among Chinese enterprises.
Having committed to Green Development over the long term in order to curb carbon emission by 64-70 percent by 2030E from the 2005 level, the Chinese government is cutting back on coal consumption and driving utilization of green energy.
Wind And Nuclear Power Is The Future: Huaneng Renewables, CGN
The wind and nuclear power sectors will see further improvement in utilization hours, mainly due to the “Guaranteed UT hours” policy target and inter-provincial transmission, and as continued policies supporting clean energy will suppress investment in coal-fired power.
Among the wind energy companies in China, MBKE’s top pick is Huaneng Renewables. Huaneng Renewables is currently trading at 6 time forecasted FY18 price-to-earnings (PE), which is around one standard deviation below its 6- year average.
BUY, TP HK$3.30
Among the nuclear energy companies in China, MBKE’s top pick is CGN. MBKE highlights MBKE as an attractive value play as it believes that nuclear power can be used to replace and supplement the base-load power generation. CGN is now trading at forecasted FY18 PE of 8 times, which is one standard deviation below its 3-year mean.
BUY, TP HK$2.80