Top 8 China Stocks to invest in 2018
China’s economic development over the past 30 years had been nothing short of amazing, with GDP growing double digits in the early years to current high single digits annually. Much of China’s growth has been churning out exports to major trading partners US and EU. Recent trade war between US and China, where 25% tariffs were imposed on US$34 billion worth of exported goods to US, could hamper the export driven Chinese economic growth, threatened by tariffs on additional exported goods up to a US$200 billion.
With no resolutions in sight, Chinese stocks had taken a beating. SSE index, the bellwether China stock index for all stocks listed on Shanghai Stock Exchange, had been trending downwards and hovering around its lowest point in 3 years. In 2018 alone, the index shaved about 500 points or 15% from the start of 2018 to current levels of 2,829. Hang Seng Index, the Hong Kong stock barometer with large concentration of China stocks open for investment by international investors has also fallen off a cliff, falling 15% since the start of 2018.
Investors are cautioned against putting new money at work in Chinese equities with the escalating trade tensions. However, China’s pursuit for more sustainable growth has not wavered and investors should take the opportunity for the dip in stock prices to accumulate stocks with strong fundamentals, balance sheet and earnings wise.
The following table highlights the key picks based on a top down sector focus of the Chinese stocks with detailed rationale for the China stock picks for 2018.
|Sector Focus||China Stocks||Stock Exchange|
|Financials||Ping An Insurance||HKEX|
Chinese tech scene has seen tremendous development, fast catching up with its US counterparts with many applications in the manufacturing, retail and logistics sector. Chinese cities such as Nanjing and Shenzhen has said to rival Silicon Valley in attracting top tech talents in accelerating the pace of technological research and advancement for commercial use. Huge resources and funding are being put to work to upskill Chinese workforce and move up the industrial value chain.
At the forefront of Chinese tech e-commerce scene is Alibaba Group Holdings Limited, one of the top China stocks that investors should invest for 2018. Its early business model supporting B2B online commerce activity as an online platform had paved the way in becoming the tech giant it is today, comprising revenue streams from retail e-commerce, cloud computing, e-payments and wealth management. There are no signs of growth faltering, with latest Q1 2018 financials beating analyst forecast by a wide margin, growing 61%. Growth could come in all fronts with the adoption of tech to spur sales, and Alibaba’s thirst for acquisitions continues with latest potential investment in Suning Sports.
Tencent Holdings Limited, a tech empire well known for its mobile gaming and chat apps WeChat, is the one China stock to lookout for in 2018. Revenue and profits were outstanding in Q1 2018, rising 48% and 61% respectively. Some of the key revenue contributors include hit games “Fortnite” and “PlayerUnknown Battlegrounds” (PUBG), with Fortnite potentially gaining more active users in China post launching. Tencent aims to be a top video subscription provider, diversifying its earnings base to higher ad revenues. Its popular messaging app has reached the coveted 1 billion active user mark, marking its mobile presence dominance. Net growth frontier for Tencent would be e-payments solutions, with seamless integration from shopping to payment.
Baidu Inc, a Chinese search engine giant with ADRs listed on NASDAQ, is another tech powerhouse that investors can ride on for future growth. Q1 2018 earnings were solid, increasing 277%. Core marketing revenues from its online search business were up 23%, marking a solid quarter for Baidu. Baidu’s online entertainment subsidiary iQiyi, will be much looked at for future growth as it aims to dominate video streaming industry with huge investments in new contents. AI development is also the next frontier, with Baidu R&D team developing automation solutions for traffic control, logistics and factory operations. Growth areas are virtually unlimited where AI can be deployed for enhancing operational efficiency.
Consumer stocks with Chinese exposure are also poised to do well, with the relaxation of one child policy and burgeoning middle class households. Consumer brands with popular Chinese following and moat would do extremely well over the course of the next 10 years as rising living standards raise demand for top quality consumables at affordable pricings.
One such China stock to invest would be Tsingtao Brewery, a solid alcoholic beverage maker famous for its in-house alcohol brand Tsingtao beer. Net profit had been reported to increase 15.6% for Q1 2018, and analyst has upgraded the stock to outperform with forecast net profit coming in higher by 20%. The second largest brewery in China in terms of sales concentration is poised to improve its operating margins. Strategic Chinese investor Fosun International has recently taken a 20% stake in the brewery, replacing long standing JV partner Asahi. Future growth would be to market its premium beer brand to China’s domestic market and capturing higher market share.
Geely Automobile, a Chinese automobile manufacturer, is fast becoming an automotive powerhouse that is able to rival the likes of established brands Toyota and Ford. It was on an acquisition spree in recent years, snapping up Volvo in 2010 and Lotus in 2017. It has also minority stake in Daimler-Benz, maker of iconic luxurious automobile Mercedes-Benz. Its 2017 earnings has been impressive, rising 100% as higher sales of SUVs powered earnings upwards. Its June 2018 sales had been encouraging as well, up 48%, signaling popularity of its car models in the domestic Chinese market. Nationwide push for adoption of Electric Vehicles and hybrid cars is the next game changer for capturing the local market share where Geely has the expertise with many top notch carmakers under its wings.
Hengan International, not widely known outside of China, is actually the largest producer for sanitary napkins and baby diapers in China. With the relaxation of one-child policy, baby products makers are bound to benefit from the macro tailwinds offered by the Chinese government family planning policies. Hengan International has solid fundamentals to shoulder upon, with full year net profit rising 5.5% for 2017. Consumer stocks with pure Chinese exposure are seen as safe haven in times of trade conflict. A reasonable P/E of 19 times trailing earnings and dividend yield of 3.6% for high grade consumer stocks puts the stock under investor’s acquisition list for 2018.
Chinese financial stocks had been battered as well posed by the Chinese Government’s continuous efforts to cut leverage in the banking system. However Chinese banks has been built up by strong franchise network domestically with strong capital buffers as well as international growth exposure.
ICBC Bank (short for Industrial and Commercial Bank of China) is one such banking powerhouse that presents buying opportunity amid the global trade conflict. Earnings are still going strong for ICBC, with net profit rising 4% in Q1 2018. Main earnings contribution is derived from higher net interest income, with the cessation of interest rate cuts to spur domestic growth. The largest lender by market value will spur efforts in capturing retail customers and growing its fee and commission income which suffered a slight dip. The largest banks with solid lending practices and internal controls will come through severe economic meltdowns and grow in times of economic prosperity.
Ping An Insurance is another global insurance giants, rivaling the likes of Allianz and Prudential, insurance giants from the West. It is a one stop insurance solutions provider, with asset management arms investing insurance floats and banking outfit offering tailored financial services. Q1 2018 income remains solid, rising 11.5% backed by strong premiums from recurring and new policy holders. Both health insurance and property casualty insurance business segment saw robust premium growth. A special dividend had recent been announced to reward shareholders on the back of its 30th anniversary since the founding of the company. Ping An Insurance is bound to emerge through tougher government regulations in stronger financial footing, with consistent dividends and income growth.
Investors are bound to be rewarded by focusing in these stock categories that boasts sustainable profit growth and professional management via long term compounded capital gains. It is wise to diversify in these companies using a bottom up approach when building your investment portfolio and accumulate solid companies while holding the ship steady amidst the risk off appetite by investors in Chinese stocks. China remains an attractive investment destination for value stock hunters looking for long term investment gains.