Published by Fund Selector Asia – 12th July 2017
Earnings recovery and structural reforms in China will benefit consumer-oriented sectors, argues Chay Kai Kong, managing director and senior portfolio manager for Greater China equities at Manulife AM.
Chay defines “new China” companies as those that could benefit from structural changes, such as China’s growing middle class, which is demanding higher quality goods and services.
Companies involved in the internet and e-commerce have done well this year, Chay said in a media briefing yesterday, especially those that are listed in Hong Kong and the US.
Such structural growth will not only benefit internet and e-commerce companies, but also those that are involved in tourism, education and healthcare, he said.
Thanks to the growth of China’s middle class, personal consumption is expected to grow. According to joint research by The Boston Consulting Group and Aliresearch, Alibaba’s research arm, the country is expected to add $1.8trn in new consumption by 2021, which is roughly the size of Germany’s consumer market.
Chay also said he liked companies that benefit from China’s environmental protection reforms.
For example, he expects that coal power will account for 58% of China’s overall energy consumption by 2020, which is lower than the 64% share in 2015. This will translate to more consumers using other sources of other energy, such as natural gas and non-fossil fuels, he added.
Old China equities
Earnings of Chinese companies listed across the different exchanges are positive, with the exception of US-listed companies belonging to the “old China” sector, Chay said.
Since the beginning of 2017, the MSCI China Index is up by 25%. Its Hong Kong peer, the Hang Seng Index has returned 18% during the same period.
2017 first-quarter earnings (year-on-year % growth)
|
Sectors |
All China |
A-shares |
HK-listed |
US-listed |
| Overall |
21 |
26 |
10 |
22 |
| Overall, excluding financials and energy |
29 |
33 |
12 |
22 |
| New China |
18 |
17 |
14 |
29 |
| Old China |
21 |
26 |
10 |
-14 |
Source: Manulife Asset Management
Chay finds reasons for optimism in traditional sectors as well.
China’s structural reform efforts addressing the supply capacity of steel, cement and coal have helped improve the profitability of companies in these sectors, he said.
Citing an example of a steel and cement company, Chay noted that the sector’s profitability had bottomed in 2015 and it was now recovering very fast, in spite of the weakness in steel and cement prices in the last two months.
“Earnings recovery is quite robust and this should continue in the coming six to 12 months,” he said.
