Alpha Picks: March Conviction Calls
The Chinese equities market remained volatile in Feb 22 as escalating geopolitical tensions and fresh regulatory scrutiny of China’s tech sector frazzled investors. Despite the setbacks, we expect the markets to continue their slow recovery, based on our expectations that peak regulatory risks have passed with most of the bad news already priced in and for more uplifting policy signals during the “Two Sessions” meeting.
• Review of February. The MSCI China Index and HSI remained volatile in Feb 22 as surges in COVID-19 infections, escalating tensions over Ukraine and market concerns of a possible fresh round of regulatory crackdown on China’s tech sector sapped risk appetites. Consequently, both indexes fell 4.0% and 4.6% respectively, amid policy easing signs. Zijin Mining (2899 HK/ BUY) remains the best performer among our stock picks, rising 11.6% in Feb 22.
• For March, Chinese equities should trend higher as long as there is no escalation in hostilities between Ukraine and Russia. In particular, we expect more growth-supportive fiscal policies to be announced during the Two Sessions. Valuations have also continued to bounce off bottoms, with the MSCI China Index’s and HSI’s 12-month forward PE at 11.5x and 10.5x respectively, providing significant scope for shares to rally. Hence, we will make a measured increase in our portfolio beta and add CATL, CSPC, Haitian, HKEX, Jiumaojiu, Tongcheng-Elong and ZTE to our BUY list.
• Add CATL (300750 CH) as we see the company as a key beneficiary to the burgeoning EV market globally from its expanding battery supply contracts with global OEMs.
• Add CSPC (1093 HK) due to low geopolitical risk exposures and the expectations for the company’s steady earnings growth to continue in 2022.
• Add Haitian (603288 CH) as we see the price hikes contributing to earnings growth in the coming months and subsiding COVID-19 cases to allow for further expansion in the food processing and retail channels.
• Add HKEX (388 HK) based on expectations of strong inflow from Chinese companies seeking homecoming listings.
• Add Jiumaojiu (9922 HK) due to its cheap valuation and expectations that gradual reopening will provide significant scope for the company to rally.
• Add Tongcheng-Elong (780 HK) as we see the promising vaccination progress as a potential driver for earlier border reopening.
• Add ZTE (763 HK) as we see it as a key beneficiary to the potential stimulus measures under China’s push to accelerate high-tech infrastructure this year.
• Drop Netease (9999 HK), Venus MedTech (2500 HK) and Xinyi Solar (968 HK) to cut losses.
• Maintain BUY on BYD (1211 HK), CR Beer (291 HK), JD.com (9618 HK), Li Ning (2331 HK), Longyuan Power (916 HK), Mindray (300760 CH), Wuliangye (000858 CH), Yili Group (600887 CH) and Zijin Mining (2899 HK).