With China’s A-shares’ inclusion into the MSCI Emerging Market index, interest in Chinese shares is on the rise. In addition, if you are an investor looking to gain exposure to Chinese shares, which are some of the recommended shares to watch? According to UOBKH, here are the five best Chinese shares with strong fundamentals to watch out for.
Investors Takeaway: 5 Fundamentally-Sound Chinese Shares To Watch Out For (And 3 To Sell)
- Anta Sports
Anta Sports recorded strong sales growth in 1Q18 with a 20-25 percent year-on-year growth for the Anta brand. Its non-Anta brand sales had an even more outstanding growth, i.e. 80-85 percent year-on-year. Among its non-Anta brand, Fila sales (which accounts for 24 percent of group revenue in FY17) rose by 70 percent year-on-year, exceeding the management’s guidance and the market consensus.
UOBKH notes that Anta’s share price has been down since its peak in May largely due to profit taking. UOBKH expects its 2Q18 performance to remain robust as management commented that its April figures remained “solid”. This could lead to an upward re-rating of market consensus for earnings forecast.
BUY, TP HK$50.00; Current Share Price: HK$42.55
- Beijing Capital International Airport
Beijing Capital International Airport share price managed to outperform the Hang Seng Index over the last 1.5 months. UOBKH warns that its share price could start taking a breather as profit taking takes place. However, UOBKH believes that the long-term outlook for Beijing Capital International Airport is still positive, given its relatively low gearing and strong cash flow. Thus, UOBKH recommends investors to accumulate lower as Beijing Capital International Airport share price retraces.
BUY, TP HK$14.10; Current Share Price: HK$8.48
- The United Labs
The United Labs is on the cusp of beating market expectations, according to UOBKH. There are three fundamental reasons why UOBKH is bullish on The United Labs.
Firstly, the average ex-factory price of 6-APA is moving towards the market price after the expiry of the 6-APA long-term contract. Secondly, The United Labs’ ability to self-supply phenylhydantoin (the raw material used in the manufacturing of API amoxicillin) helped to resume the normal operations of related production lines. Thirdly, sales of insulin and other finished drug products grew over 25 percent year-on-year in 1Q18. 1H18 net profit is expected to grow over 200 percent year-on-year.
BUY, TP HK$11.10; Current Share Price: HK$8.12
- Guangzhou Automobile Group (Guangzhou Auto)
Another company that managed to beat consensus estimates was Guangzhou Auto. Guangzhou Auto posted upbeat 1Q18 net profit of Rmb3.9 billion (+98 percent quarter-on-quarter). Its 1Q18 net profit was more than 30 percent of consensus 2018 full-year estimate.
UOBKH notes that Guangzhou Auto’s strong earnings beat came from stronger-than-expected gross margin. Moving forward, UOBKH expects May-June sales growth to improve as sale of the new Honda Accord ramps up. The launch of the GS4 facelift model and Toyota C-HR will also be unveiled in June, which could drive up sales. UOBKH highlights that Guangzhou Auto’s current FY18 forward-PE of 5.6 times is attractively priced.
BUY, TP HK$18.40; Current Share Price: HK$8.35
- YiChang HEC ChangJiang Pharmaceutical (HEC Pharma)
HEC Pharma is one of the value pharmaceutical plays that UOBKH recommends. According to UOBKH, HEC Pharma’s current share price is undervalued.
Currently trading at 13.6 time FY19 forward-PE and 0.5 times price-to-earnings growth, UOBKH believes that this largely underestimated HEC Pharma’s strong earnings expansion (25.8 percent CAGR in 2017-20). Its current share price also implies that the market is assigning a “zero value” to the company’s solid Research & Development pipeline that includes multiple late-stage innovative drugs in HCV/HBV/oncology and 10-20 key generic products to be launched in 2018-20.
One potential catalyst for HEC Pharma is the potential inclusion into SZ-HK Connect in August 2018 which might be a catalyst for the share price.
BUY, TP HK$64.12; Current Share Price: HK$40.45
Sell Kingsoft, Tencent, TAL Education
With the delay of new mobile game launches and below expectations game monetisation, UOBKH recommends investors to drop Kingsoft in the near term as its valuation is becoming too rich.
Another gaming company that UOBKH recommends selling is Tencent. Near-term pressure due to a lack of new game revenue contribution, lower-than-expected game monetisation and uncertainty in PUBG game monetisation will create drag on the share price of Tencent.
TAL Education’s share price has risen more than 15 percent over the past two months. Despite strong revenue growth prospect driven by FY19 forward-enrolment growth of more than 60 percent and penetration of online courses into lower-tier cities, UOBKH thinks that it is a good time to lock in profits.