MSCI China index rose 52.3 percent in 2017, which outperformed most indices in 2017. Moving forward, UOB-Kay Hian (UOBKH) notes that there are still plenty of opportunities in the Chinese market for alpha performance. To get your 2018 to start with a bang, we highlight four more of UOBKH’s alpha picks in the Chinese market.
Investors Takeaway: 4 UOBKH China Alpha Picks To Get 2018 Off To The Right Start
- Baoshan Iron & Steel (Baosteel)
Since being selected into UOBKH’s alpha portfolio, Baosteel’s share price dived slightly. However, it has since recovered back to the level when the stock was first included as an alpha pick.
China’s cold rolled steel (CRC) prices have been holding up at around Rmb5,000/tonne at end-17. 4Q17 average CRC spread was Rmb2,704/tonne, which is up by 15 percent quarter-on-quarter. As such, UOBKH is confident that overall steel mills’ profitability should continue to expand. China’s heating season will last for four months until March 2018, which should continue to support the steel industry.
Given that UOBKH is positive on the steel outlook, UOBKH is positive on Baoshan as its top pick in the steel sector.
BUY, TP Rmb9.40
- CPMC Holdings
Recently, CPMC Holdings (CPMC) managed to convince its shareholders to approve the investment in Qingyuan JDB. UOBKH believes that the market will gradually re-rate CPMC for its investment in Qingyuan JDB. Moreover, CPMC Holdings is also potentially in the running to be included into the SZ-HK Connect. Based on UOBKH’s proprietary database, CPMC has fulfilled the market cap and liquidity criteria needed to be included into the SZ-HK Connect. UOBKH highlights that CPMC’s inclusion will be a share price catalyst.
BUY, TP HK$8.20
- Yangtze Optical Fibre and Cable
According to the 2018 working conference of the Ministry of Industry and Information Technology, the Chinese government will strengthen the coverage of the 100M broadband network in major cities. The Chinese government will also be constructing optical fibre cable networks in rural areas in 2018. Against this macro backdrop, UOBKH expects demand for optical fibre cable to remain strong in 2018. UOBKH notes that China Mobile will soon announce the results of its 1H18 ordinary cable tender of 110M fibre kilometre (fkm). The tender price is likely to reach Rmb70/fkm, which is higher than the Rmb62-64/fkm in 2017.
BUY, TP HK$40.40
- Zijin Mining
Zijin has been evolving from a pure gold company into a diversified global miner with exposure in gold, silver, copper, zinc and lead. Copper has become Zijin’s biggest growth driver in 2017, with the company expecting copper production to grow nearly 30 percent year-on-year in 2017. This is followed by zinc and lead production at 10 percent year-on-year respectively. Gold production, on the other hand, is declining at a four percent year-on-year rate. As such, UOBKH expects mined copper output to grow by a 20 percent compound annual growth rate, from 155 kilotonnes to 300 kilotonnes between 2016-2020.
Overall, UOBKH is positive on copper outlook in 2018-2020 due to two factors: supply constraint and strong demand. UOBKH notes that copper supply is being constrained by underinvestment, mines’ grade declines and strike risks. In terms of demand, UOBKH highlights that demand is underpinned by the rising adoption of electric vehicles. The tight environmental regulations in China could also mean higher copper prices. Thus, with its copper production ramping up, UOBKH expects copper to drive Zijin’s future growth.
BUY, TP HK$3.30