PARTS of the Chinese equity market are showing opportunities at current price levels, argues Pendal emerging markets portfolio manager James Syme.
Syme and his team members — who manage Pendal Global Emerging Markets Opportunities fund — believe the EM equities asset class is dominated by bottom-up investors who, in the aggregate, alternatively underreact and then overreact to top-down developments.
“Sometimes over-reaction can occur to the downside, when groups of stocks within markets sell-off indiscriminately to unjustified levels on top-down concerns,” says Syme.
“We believe that’s happening in parts of the Chinese equity market — and that real opportunities are being presented at these price levels.”
Does that mean China equities are set to outperform the broader emerging market benchmark?
No, he cautions. “The property sector continues to struggle and the loss of market share in US imports will not easily be regained.”
But there are opportunities if you know where to look, argues Syme.
Chinese retail sales in September were up 5.5% year-on-year, but that broad measure hides greater strength in particular segments, he says.
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For example restaurant and catering sales were up 13.8% annually, while tobacco and alcohol sales gained 23.1%.
Below Syme outlines three stock examples which are held in Pendal Global Emerging Markets Opportunities fund:
Tsingtao Brewery is China’s second biggest brewer, with a 15% domestic market share.
As well as benefiting from the cyclical recovery, Tsingtao is a beneficiary of the down-shifting of Chinese consumers away from more expensive foreign brands into the company’s own premium brands, and also of a political preference for domestic brands, Syme says.
“In recent results the company showed strong growth in average selling prices and margins.
“In the first nine months of 2023, the consensus forecast for the company’s forward earnings rose 30.5%, but the stock itself declined 16.8%, putting it at an all-time low P/E ratio.”
Trip.com is China’s dominant domestic online travel agency providing full travel booking services domestically and internationally.
Again, the company is performing very strongly, says Syme.
“Chinese Valentine’s Day in late August saw booked hotel room nights reach a record high.
“The third quarter of 2023 saw profitable results from all listed Chinese airlines and revenue per room reach a record high for Chinese hotels.
“The shift online was hugely accelerated during the pandemic, helping Trip.com gain market share and achieve economies of scale reflected in rising margins.
“As well as domestic and international tourism, recovery in China in music festivals, business conferences and exhibitions should remain supportive.
“Yet, in the first nine months of 2023, the consensus forecast for the company’s forward earnings more than doubled but the stock itself declined slightly.”
Meituan and Tencent
Elsewhere in the consumer e-commerce space, Meituan’s continued success as a business seems to be ignored by equity markets.
The pattern is the same at online giant Tencent, Syme says.
“Tencent’s under-performance is particularly stark given the current global investor enthusiasm for stocks with AI exposure.
“Tencent is likely to be a global leader in the space, combining its existing technological strengths with a major investment program in a Chat-GPT-style artificial intelligence ‘Large Language Model’.
“You wouldn’t know that from the share price though.”
What it means for investors
This is not a ‘buy-the-dip’ argument, stresses Syme.
“It is not a deep value argument — we remain growth-at-reasonable-price investors.
“But what we are seeing within the Chinese equity market are stocks with supportive top-down conditions, strong and steady earnings growth, upbeat results and guidance from management – and valuations that look attractive relative to peers and to the stocks’ own valuation histories.
“As always with our process, it is crucial for the top-down and bottom-up investment cases to align.”
James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
Find out more about Pendal Global Emerging Markets Opportunities Fund here
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