Even as overall market gains fade, Chinese consumer stocks remain a buy | Wilnesh News
Almost as soon as China’s stock market rose, several investment analysts were quick to point out its weaknesses. “China’s recent rally is not justified from a fundamental perspective,” Citi emerging market strategists said in a note on Friday, which downgraded China while upgrading India. The firm is overweight Chinese Internet, industrial and technology stocks but neutral on auto and consumer stocks. Citigroup reported that among these sectors, consumer discretionary stocks have the highest expected earnings per share growth this year, about 29%. After a tepid start to 2024, the MSCI China Index has outperformed not only emerging markets but also the S&P 500, up nearly 11% year-to-date. “Although it looks like a big rise, it’s not that big,” said Ding Wenjie, investment strategist at China Asset Management’s global capital investment. “The increase in capital is not as big as we expected,” she said. She noted that most The buys are for hedge funds rather than long-only funds – primarily consumer discretionary brands in the internet technology space listed in Hong Kong. MSCI China’s largest holdings are shares of Tencent and Alibaba listed in Hong Kong. Both companies have recently used excess cash to increase share buybacks. “Our strategy has always been very focused on free cash flow,” Ding said, pointing to the defensive aspect and how recent government capital markets policies have emphasized the company’s ability to repurchase stock. Chinese investors are increasingly focusing on free cash flow, a profitability measure that reflects how much money a company generates, excluding operating expenses. Cash can be used to repay creditors or pay dividends to investors. China Merchants Securities pointed out in a webinar on the Wind Information Financial Platform last week that such signs of financial health are important for an economy whose growth is slowing after years of rapid expansion. The brokerage said relying on high levels of capital spending can no longer generate decent returns in a slowing demand environment. It is now focused on finding industry leaders with high free cash flow. Future Income investors will soon have detailed information on the financial health of well-known companies. Tencent and Alibaba will release quarterly earnings on Tuesday, while Baidu will report on Thursday. Hong Kong-based AlphaHill Capital is specifically looking for Chinese consumer brands with free cash flow growth, said Siliang Jiang, partner and portfolio manager at Hong Kong-based AlphaHill Capital. He noted that the situation surrounding China may have become more pessimistic over the past five years, but he does not expect China to repeat Japan’s “lost decades” because its market is much larger and can absorb R&D. cost. Jiang expects that Chinese consumers will start to improve in the second half of this year or next year. Some green shoots have appeared. China’s Consumer Confidence Index (CCI) has edged up over the past nine months despite falling property prices and concerns about a “household balance sheet recession.” That said, the current CCI reading of 89 is still well below Pre-COVID level ~120,” Bank of America analysts said in a note at the end of April. “We recommend investors focus on companies that can create value for consumers – value for money, functional value and/or emotional value,” the report said. The two companies they selected based on positive free cash flow were Li Auto and New Oriental educate. Based on expectations for future cash flows, analysts are also optimistic about the Beijing-Shanghai high-speed rail operator, a state-owned enterprise listed in Shanghai. They pointed out that after the COVID-19 epidemic, the increase in tourist travel will bring about the potential for price increases. Last week, Chinese media reported that many of China’s high-speed rail operators would increase fares by nearly 20% on some lines, including travel around Shanghai. Ren Liqian, head of quantitative investment at WisdomTree, said that in China’s current economic environment, state-owned transportation and utility companies are able to increase profit margins by raising prices because they have monopoly power. The company owns an ETF tracking China’s non-state-owned companies. “How long this tactical rebound lasts may depend on economic data in the coming weeks,” she said. Ren Zhengfei added: “Considering that China’s stimulus is not too strong, this means that China’s economy is not as bad as the negative sentiment.” China will release major economic data on Friday, May 17, local time. —CNBC’s Michael Bloom contributed to this report.
