Chinese equities
23 Sep 2019 | By Vincent Che

Chinese Stocks Have Flown Under the Radar But That’s About to Change

Our quantamental investment process helps to uncover compelling stock opportunities in China’s equity market, which is poised for rapid expansion.

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Vincent Che, portfolio manager for the Merian China Equity Fund, names three compelling stocks that you may never have heard of and explains why the country’s equity market is poised for expansion.

The Chinese stock market is as large as Europe’s yet significantly overlooked by international investors. We think this under-allocation will change because of the wealth of potential opportunities on offer and the improving access to China’s capital markets.

The Stock Connect program, for example, makes it easier for international investors to own A-shares, the domestic China listings that include nearly 4,000 companies. The market capitalization of the Chinese stock market, including Hong Kong and the mainland, is forecast to as much as double in 10 years. [1]

We see good opportunities over the long term as China focuses on sustainable, high-quality economic growth after a period of rapid expansion. We expect this to result in more efficient companies generating improved returns and see this as an attractive backdrop for equity investors.

The Merian China Equity Fund, which is managed by Ping An Asset Management (Hong Kong), focuses on companies with strong fundamentals in the consumer, healthcare, utility and financials sectors, as well as trading opportunities in the materials and industrial sectors.

We use a “quantamental’’ investment process, which we believe is rare among our peers. This combines advanced, systematic top-down quantitative techniques with fundamental, bottom-up equity research to maximize alpha opportunities.

Keeping in mind the relatively unexplored nature of China’s equity market by international investors, we offer three stocks that we like and that you may have never heard of:

Jiangsu Hengrui Medicine is a leading drug manufacturer with a strong sales force, first-in-class oncology franchise and one of the highest R&D budgets in China.

We see healthcare in China as a long-term growth industry with strong fundamentals: aging population, increasing government healthcare spending, expanding insurance coverage and rising disposable income and health awareness

Hengrui has the strongest existing product portfolios among listed Chinese drug companies and is a market leader for oncology products. It also has an enviable product pipeline, including innovative molecules under development, which we believe will enhance the franchise and improve profitability. We expect Hengrui’s top- and bottom-line growth to continue to outperform the industry.

ENN Energy Holdings is a natural gas distributor that we believe is well-positioned for potential downstream energy market reform. The business consists of smaller gas-fired power plants that supply regional customers such as industrial parks, airports and suburbs, with a certain distance to city centers.

The structural shift of coal to gas helps the business, with the ultimate goal to secure increasing coverage of downstream clients as concessions expire and the gas/electricity market opens up.

ENN can expand this business quicker than peers given that it has a more diversified natural gas supply, and it has a customer plan that can achieve the same energy cost as coal despite higher gas prices by improving energy efficiency.

Midea Group manufactures and installs household electrical appliances, compressors and components. It has leading positions in air conditioning, washing machines, refrigerators and the small-home appliance market. It has also entered into the automation industry through the acquisition of Germany’s Kuka.

Midea has competitive advantages in a wide range of products, strong production capabilities, vast channel coverage as well as a strong management team and efficient operational structure.

[1] Morgan Stanley research

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