Following our earlier article on the key market themes in China, we zoom into the top stock picks in CIMB’s handpicked China Model Portfolio.
CIMB’s 6-Stock China Model Portfolio
- Geely Automobile Holdings (Geely)
Geely is best positioned among domestic automakers for long-term market share gains via its technology-sharing with Volvo Cars. According to CIMB, Geely’s new SUV products and Lynk & Co brand will be the main drivers of earnings growth and margin expansion for the next few years. As such, it will justify a high price-to-earnings (P/E) ratio for Geely.
BUY, TP HK$35.62 (Current share price: HK$20.80)
- Brilliance China Automotive Holdings (Brillance Auto)
Brilliance Auto is likely to see the strongest shipment growth in FY19 via its BMW joint venture as the current facelifts of popular BMW models could boost sales. Thanks to strong growth in China’s consumer spending and brand loyalty among luxury car owners, luxury car sales are expected to be driven higher with the release of new car models.
BUY, TP HK$27.18 (Current share price: HK$18.34)
- New Oriental Education
K-12 after-school tutoring services is CIMB’s preferred segment to invest in China’s education industry.
This is because CIMB expects the segment to be a key beneficiary of Gaokao reform in two areas. Firstly, the extended exam preparation cycle where elective exams can be taken earlier in the school year. Secondly, additional attempts are now allowed for the English exams. On the back of exam standardisation, nationwide players like New Oriental Education should see record offline K-12 enrolment grow at strong 3-year compound annual growth rate (CAGR) of 30.7 percent as expansion into new cities pick up speed.
With a low market share, re-rating potential still exists for New Oriental Education as one of the largest nationwide tutoring service providers. The ongoing education reforms will aid New Oriental Education in raising market share significantly as they expand into new cities and capture market share from region-specific players by providing higher-quality services. New Oriental Education’s current CY18 price-to-earnings growth ratio stands at an undemanding 0.75 times.
BUY, TP US$112.40 (Current share price: US$82.77)
- Ctrip.com International Ltd
Ctrip shares recently tumbled due to the negative impact from the change in Ctrip’s default bundling option. However, moving forward, CIMB sees strong upside potential for Ctrip’s strong earnings growth prospects from its solid international expansion and penetration into lower-tier cities.
By leveraging on Skyscanner, Ctrip’s international air ticketing recorded trip-digit yoy growth in 3Q17 with revenue from Skyscanner increasing 250 percent year-on-year. CIMB believs that the growth in transportation revenue from international air ticketing will offset the lower cross-selling revenue from the change in Ctrip’s default bundling option.
Furthermore, as Ctrip continues to expand its presence in lower-tier cities, user traffic in second-tier cities has seen a 60 percent increase year-on-year. Ctrip’s Qunar has also been recording hotel revenue growth exceeding 80 percent year-on-year for 3 consecutive quarters since 3Q17.
BUY, TP US$56 (Current share price: US$44.63)
- Henderson Land Development
Henderson Land Development is picked as one of the property plays that will benefit strongly from China’s farmland conversion theme. According to CIMB’s analysis, the potential net asset value accretion for Henderson Land Development could go up by as much as 26 percent.
In addition, CIMB has identified Henderson Land Development as one of the most proactive developer in asset disposals. Based on CIMB’s estimate, Henderson Land Development has up to HK$66 billion worth of assets to be disposed. This accounts for 30 percent of its market cap.
CIMB also notes that Henderson Land Development is a value play at its current valuation. Henderson Land Development is currently trading close to its historical low at 46 percent discount to its net asset value (NAV). On top of its valuation discount, it offers decent yield of 3.2 percent with 10 percent bonus shares every year.
BUY, TP HK$67 (Current share price: HK$49.30)
- Agile Group
Another property play that CIMB recommends is Agile Group. Agile is one of the Great Bay Area plays with about one third of its land reserves located in the area. Moving forward, CIMB expects these projects to enjoy better selling prices and higher profit margins. At the same time, stronger than expected price and volume from Agile’s Hainan project should help to further secure its high margin.
Based on CIMB’s estimates, Agile’s earnings per share will rise by an average of 46 percent per annum over FY17 to FY19. Like Henderson Land Development, Agile is also trading at an attractive valuation of about 35 percent discount to NAV. It has an undemanding 6 times FY18 P/E and seven percent yield.
BUY, TP HK$14.40 (Current share price: HK$11.12)