As trade tensions between the US and China intensify, investors are increasingly fearful of a full-scale trade war. Currently, the Shanghai Securities Exchange Composite index has fallen to 2,723 points; a level when oil prices tanked in 2016. The downfall of Chinese equities reflected increasing expectation of an impending softening of the Chinese economy.
Yet, despite the prevailing uneasy sentiments, value is emerging and bargain hunters may find it rewarding to take a bet on China over the long-term horizon. Here are 3 S-chips rated with Buy calls despite US-China trade concerns.
China Everbright Water
In its latest 2Q18 earnings announcement, China Everbright Water (CEW) reported revenue that jumped 51.9 percent to HK$1.3 billion on the back of the increase in construction revenue from several water management projects as well as the commencement of new projects.
In the quarter, six wastewater treatment projects secured tariff hikes that should bolster organic growth for CEW. As of 2Q18, total wastewater treatment capacity has hit above 5 million tonnes per day. Via the upgrading of existing projects, CEW is expected to ramp up production by 10 to 20 percent per annum. However, the group is still falling short of hitting its target of 10 million tonnes per day by 2020, which may imply that CEW may have to seek more acquisitions.
Apart from its operations, CEW has applied for dual-listing in Hong Kong, where investors are more familiar with wastewater treatment businesses. Notwithstanding that, wastewater treatment is a line that is largely insulated from US-China trade tensions.
According to Phillip Capital, CEW is rather undervalued. At the current trading price of $0.390, CEW is trading at 9.3 times price-to-earnings (P/E) against its peers’ average of 10.6 times. In terms of price-to-book value (P/B), CEW is only valued at about 0.7 times against peers’ 1.4 times. Phillip Capital reiterated its Buy call and ascribed a target price of $0.53 on CEW, representing an upside of 35.9 percent.
China Aviation Oil
China Aviation Oil (CAO) continues to ride on China’s aviation boom. With less than 10 percent of Chinese citizens holding passports, the growing number of passport holders will undisputedly add more Chinese tourists to the mix (trade war or not!).
In 2Q18, CAO’s revenue jumped 57.9 percent to US$5.8 billion driven by higher trading volume and oil prices. Gross profit rose 55.1 percent to US$16.1 million. Associate contribution rose 1.7 percent to US$16.8 million. Net profit grew 14.4 percent to US$29.3 million.
Going forward, CAO’s strong fundamentals offer a compelling value proposition. With a 33-percent stake in Shanghai Pudong International Airport Aviation Fuel Supply Corporation, CAO is poised to ride on Shanghai’s growing importance as China’s business hub. In addition, the airport is adding another terminal in 2019, which would be a growth catalyst for CAO in the short-term.
CAO’s recent acquisition of Navires Aviation helped pave the way for the group to supply jet fuel in Northwest Europe. The acquisition gifted CAO the concession rights from Schiphol Airport as well as critical supply chain contracts to facilitate the sales of jet fuel to local and international airlines at Schiphol, Frankfurt, Brussels and Stuttgart airports.
UOB Kay Hian maintained its Buy call on CAO but lowered its target price to $2.05, to reflect unfavourable foreign currency movements of the Renminbi and Singapore Dollar against the US Dollar. At the current share price of $1.56, the investors are looking at an upside potential of 31.4 percent.
YanLord Land Group
Trade disputes with the US may prove to be a boon for China’s property market. While China’s external environment is becoming challenging, the central government may turn inwards to cushion growth for the economy.
In addition, China’s housing market is starting to become more stable with inventories falling to a 50-month low. Following which, China property market watchers are seeing a rebound in transactions. These two factors bode well for Chinese developers like YanLord Land Group (Yanlord).
In 2Q18, Yanlord posted an earnings beat with revenue growing 125.9 percent to Rmb9.7 billion. The developer delivered 3.6 million square meter in gross floor area, representing an increase of 184.1 percent, though partially offset by lower average selling price.
Going forward, Yanlord is looking at Rmb14.2 billion of accumulated pre-sales pending to be recognised with advances received amounting to Rmb11.5 billion. In addition, the company achieved contracted sales of Rmb13.1 billion in 7M18 and it still has Rmb47 to Rmb50 billion worth of saleable resources.
OCBC maintained its Buy call on Yanlord but trimmed its target price to from $2.24 to $2.13 to account for weaker Renminbi against the Singapore Dollar and higher finance costs assumptions. The target price reflects a potential upside of 42 percent, based on the current trading price of $1.50.