3 high-quality Chinese stocks trading at a discount
Morningstar equity analysts say buying opportunities remain in the world's second-largest economy, despite renewed investor fears of a US-China trade war.
Mentioned: Beijing Enterprises Holdings Ltd (00392), Guangshen Railway Co Ltd (00525), Tencent Holdings Ltd (00700)
Morningstar equity analysts say buying opportunities remain in the world's second-largest economy, despite renewed investor fears of a US-China trade war.
US President Donald Trump sent shock waves through global markets on Sunday with a tweet threatening a 25 per cent hike on the current 10 per cent levies on $200 billion worth of Chinese goods.
In its latest China outlook, Morningstar downgraded its China GDP growth forecast to 3.25 per cent from 3.5 per cent after incorporating the likelihood of scenarios of conflict between China and the US.
Morningstar equity analysts have identified a handful of Chinese stocks they say should benefit from the country's middle-class boom and switch to natural gas as part of their monthly compilation of best stock ideas.
Chinese internet giant Tencent still undervalued
In November, Morningstar equity analyst Chelsey Tam told investors that Tencent Holdings has good growth prospects over a 10-year timeframe and was severely undervalued by the market.
Six months later, Tam still believes Tencent still has numerous growth opportunities. These include:
- advertising
- online video
- music streaming
She forecasts a 17 per cent compound annual growth rate in operating profit over the next decade.
Tam says Tencent's network effect continues to be very strong, with more than 200 million Mini program daily active users and 1 billion monthly active users and 800 million payment users of the WeChat/Weixin platform.
"The large user base of Tencent's services will give the company many monetisation opportunities in the long run," she says.
The stock is was trading at a 24 per cent discount to Tam's unchanged HK$ 499 fair value estimate as at 3pm Wednesday, Hong Kong time.
BEH: War on pollution should boost gas demand
Beijing Enterprises Holdings, or BEH, is the listed flagship of the Beijing municipal government, with a strategic focus on public utilities and a 40 per cent stake in the major Shaanxi-Beijing natural gas pipelines - the major source of natural gas supply for Beijing and northern China.
Morningstar equity analyst Jennifer Song believes China's long-term promotion of natural gas over coal – part of it's fight against air pollution – should drive sustainable and robust gas demand in Beijing, thereby benefiting BEH.
Around 75 per cent of group net income is derived from natural gas transmission and distribution.
Song think the market does not fully appreciate BEH's "decent growth outlook" and "robust cash flows". The stock trades at a 28 per cent discount to Song's HK$58 fair value estimate as at 3pm Wednesday, Hong Kong time.
Guangshen Railway: Enormous acquisition opportunities
Guangshen Railway Co is one of the key railway operators in China's coastal province of Guangdong in southeast China, bordering Hong Kong and Macau.
Morningstar's Song says Guangshen's focus on passenger railways and China's railway reform will boost Guangshen's profitability and long-term investment value – despite concerns such as growing costs and a transitions to high-speed rail.
"We remain upbeat on China's railway reform, but expect a slower pace for passenger tariff hikes, given the government's priority to support the economy through a series of cost-cutting plans."
The company was trading at HK$ 2.76 at 3pm Hong Kong time, an almost 50 per cent discount to Tam's HK$ 5.80 fair value estimate.
Additionally, Song says several actions allowing railway operators to monetise land and securitise railway assets indicate the sector's reform is making progress.
"We think Guangshen, with 25 years of operating experience in high-speed rails, is well positioned to benefit from enormous acquisition opportunities from its parent, which owns China's longest high-speed rails, in order to expand its high-speed assets."
Morningstar Premium subscribers can discover the full list of Global Equity Best ideas here.