What Shanghai Analysts Say to Buy as Hong Kong Link Nears

By Kana Nishizawa  

Photographer: Kevin Lee/Bloomberg

Customers walk past Qingdao Haier Co. Ltd. refrigerators at an appliance store in... Read More

For international investors seeking advice on which stocks to buy through the Shanghai-Hong Kong exchange link, the message from Chinese analysts is clear: pile into consumer shares and avoid raw-materials companies.
More than half of 17 Shanghai stocks eligible for the program with unanimous buy ratings are in consumer industries, according to data compiled by Bloomberg. Qingdao Haier Co., an appliance manufacturer, and Tasly Pharmaceutical Group Co., a seller of Chinese medicine, are projected to climb more than 30 percent in the next 12 months. That compares with forecasts for declines of at least 20 percent in Aluminum Corp. of China Ltd. and Zijin Mining Group Co.
Foreign investors will gain access to more than 180 consumer-related companies in Shanghai when the link starts on Nov. 17, making it easier for them to add exposure to
the part China’s economy that Morgan Stanley estimates has grown to 47 percent of gross domestic product from 43 percent in 2008. While analysts were overly optimistic about consumer shares a year ago, Eastspring Investments says the stocks are poised to rally now as China’s 1.3 billion people increase spending.
“As more and more Chinese people start to make more money, you can see where consumption stocks, especially the discretionary stocks, have that potential for a lot of growth over the next few years,” said Ken Wong, a client portfolio manager at Eastspring Investments, which oversees $115 billion and plans to invest in Shanghai shares through the exchange link. “We see a lot of potential upside.”

Growth Forecast

While analysts see consumer stocks gaining, China’s economy is forecast to grow at the slowest pace in 24 years. GDP will expand 7.4 percent this year, according to the average estimate of 51 economists surveyed by Bloomberg, down from 7.7 percent in 2013 and the weakest since 1990.
A gauge of mainland-traded consumer discretionary companies in China’s CSI 300 Index climbed 2.1 percent yesterday while consumer staples added 3.1 percent as the Nov. 17 start date was set. The Shanghai Composite Index added 2.3 percent to the highest level since November 2011. It slipped 0.2 percent today.
Shanghai Jahwa United Co., a maker of cosmetics and household products, and Shantou Dongfeng Printing Co., a producer of packaging for cigarettes, are also among the highest-rated Shanghai stocks, according to data compiled by Bloomberg on companies with at least five recommendations.

‘Abundant’ Analysis

Credit Suisse Group AG, Citigroup Inc. and Sanford C Bernstein & Co. are among brokerages producing more research on Chinese stocks as investors around the world get ready for unprecedented access to the $4.2 trillion market.
“The stock connect program has garnered a lot of attention lately, with the potential suite of opportunities it opens up for cross-border investing,” said Binay Chandgothia, who helps oversees more than $30 billion as a managing director and portfolio manager at Principal Global Investors. “There has been an abundance of analysis from the research community on how best to use to play it.”
The program allows a net 23.5 billion yuan ($3.8 billion) of daily cross-border purchases, a limit that regulators have said will be reviewed if the link is a success. Eligible companies in Shanghai include dual-listed shares, along with those in the SSE 180 Index and SSE 380 Index.
The SSE 380 has a weighting of almost 20 percent in consumer-related companies, versus 5 percent for the Hang Seng China Enterprises index. President Xi Jinping is counting on domestic consumption to reduce the world’s second-largest economy’s dependence on exports and infrastructure spending.

SAIC Dividend

Analysts’ bullish recommendations on consumer shares 12 months ago didn’t pan out. While their recommendations implied a 34 percent gain in the CSI 300 Consumer Staples Index of Shanghai and Shenzhen listed shares, the gauge actually gained just 2.3 percent. Their forecast for a 24 percent increase in the consumer discretionary measure was more than twice as big as the realized gain of 9.9 percent.
Liquor and dairy makers that don’t have Hong Kong listings will benefit from demand for consumer shares through the link, Dai Ming, a fund manager at Hengsheng Asset Management Co. said by phone from Shanghai.
SAIC Motor Corp. will attract foreign investors because of its big dividend payouts, he said. The Shanghai-based automaker, whose 6.6 percent yield is more than twice as big as that of the Shanghai Composite, jumped 5 percent yesterday. The stock, which slipped 2 percent today, may rally 23 percent in the next 12 months, according to the average estimate of analysts surveyed by Bloomberg.
“China’s high-end manufacturing and consumption names will benefit,” said Wu Kan, a money manager at Shanghai-based Dragon Life Insurance Co., which oversees about $3.3 billion.