Natalia Malykh: ‘The Chinese stock market is a strategic asset that cannot be ignored’

An analyst of Finam FG about prospects of Russian investments via Hong Kong Exchange

Chinese shares have notably depreciated this year: the basic CSI 300 index has fallen approximately by 17% because of the coronavirus lockdown. Nevertheless, financiers think that China’s stock market has “some possibilities for recovery” because the country is starting lifting restrictions in big cities. The Celestial Kingdom can become a world leader in GDP in dollars outrunning the USA, thinks head of the Stock Analysis Department at Finam FG Natialia Malykh. In an op-ed column for Realnoe Vremya, the analyst estimated the prospects of investing via Hong Kong Exchange.

A country with a huge consumer market and high entrepreneurial spirit

We consider the Chinese stock market a strategic asset that cannot be ignored. By our estimate, the Celestial Kingdom can become the world leader in GDP in dollars outrunning the USA after 2030. This is the most populous country with a huge consumer market and high entrepreneurial spirit. According to China’s Ministry of Industry and Informatisation, small businesses generate 60% of GDP and 80% of employment. If an investment is made via Hong Kong Exchange, for Russian investors currency-related risks are limited to the dependence of the Hong Kong dollar rate to the American currency (1 USD is converted into 7,75-7,85 HKD).

Recent lockdowns because of a stringent anti-COVID-19 policy restrict the country’s economic growth potential this year and became one of the main reasons for a fall in exchange indices. The benchmark of CSI 300 Mainland shares and Hong Kong’s Hang Seng have reduced by some 17% in local currencies since the beginning of the year.

But there are signals that mobility restrictions will soon be softened, consumers will reduce to the normal life, businesses will relaunch and logistic problems will be solved. The number of new infection cases in Shanghai is said to suddenly fall (217 cases as 14 May). To compensate for losses because of the downtime, Beijing can launch a huge package of public expenditure and reduce the income tax rate for small businesses from 25 to 20% this year. According to Bloomberg in mid-April, the package of budget expenses could reach $2,3 trillion and focus on transport and digital infrastructure development. Relatively low inflation in the country (in April, CPI was only 2,1% YoY) will allow keeping interest rates at a stimulating level.

The party’s adherence to long-term decarbonisation policy

Due to this, China Railway Group (CREC) — a construction company implementing infrastructural projects in transport, energy and development is well positioned. In its history, CREC has built over two-thirds of China’s railways, including 90% of electric railways. Financial forecasts for this year promise a growth of income, revenue and profitability, while the shares themselves are evaluated at just 5,7x of annual incomes of 2022 and fetched almost twice as cheaper than its capital with P/B 0,57x. We assess the potential of these shares at 45%.

We also note the party’s adherence to a long-term decarbonisation policy. Beijing’s plans for expanding the capacity of RES in the country as well as the latest dynamics illustrate good prospects of green energy companies. Since March 2021, the installed capacity of RES in the country has risen by 60% and can show 9% annual increase by 2030. The country plans to reach carbon neutrality by 2060. Global X ChinaClean Energy ETF at Hong Kong Exchange including companies from solar, wind, nuclear and hydro energy seem to be interesting for us. We recommend buying Global X China Clean Energy ETF with a target price of 145,8 HKD and 23% potential.

As for specific companies in electrical energy, there is an option of China Longyuan Power, also at Hong Kong Exchange. It is a Chinese electrical energy holding that is first of all known as one of the largest wind power stations in the PRC. The company manages a 26,7 GW generating park of which 89% are RES. The amount of overdue subsidies of Longyuan Power provided the Chinese government for the construction of green generation exceeds the company’s annual revenue and can be paid as soon as 2022. Our recommendation to buy with the target price of 19,000 HKD envisages potential of 28%.

Chinese authorities’ intention to support internet platforms

The long-suffering technology sector shouldn’t be brushed off either. Long-term prospects stay in force, while the cost of many technology companies is already low and considers many risks. If we look at the exchange-traded funds of Chinese internet companies at foreign exchanges KraneShares CSI China Internet ETF (KWEB), its rate has shrunk almost four times since the peaks in February 2021 when the Communist Party started to actively change the game rules. Now the fund’s rates have been supported for many years, and we consider the current prices interesting to enter. The Communist Party hasn’t been heard to complain about the IT sector for a long time, and several weeks ago, the authorities announced their intention to support internet platforms to stimulate the economy. A meeting between regulators and leading IT companies can become a driver in the near future. We like the shares of Baidu, Alibaba, among some tech companies listed at Hong Kong.

To enter Chinese shares, one can, for instance, buy a basket of shares — Hang Seng ETF at Hong Kong, which will be rebalanced by the management company from time to time. The investor will get 64 biggest and profitable shares of HKEX with diversification in sectors and issuers.

About three-fourths of the index is held by the financial sector (38%), technologies (25%) and consumption (12%), while the biggest companies are HSBC, AIA, Alibaba, Tencent, Meituan. Dividend profitability is above 3%, while a fee is just 0,10%. After a 35% decrease since the February 2021 peaks, Hang Seng’s index has reached the long-term support zone where recovery can start if the sentiment improves. We estimate the annual yield at 33%.

Natalia Malykh

Neither the article nor the issuers are an advertisement. Investments may not guarantee profitability, the responsibility falls on the private investor. The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial board.