Yahoo Finance Are Chinese Stocks Ripe for Your Picking?
2023 was unkind to the Chinese market, marred with an ongoing property crisis and a patchy recovery from the nation’s strict three-year COVID-zero policy.
Further compounding these issues, foreign direct investment reached a 23-year low as companies sought to diversify away from China amid heightening tensions and diminished confidence resulting from major tech crackdowns from late 2020 to 2022.
While both the Hang Seng Index (HSI) (^HSI) and the Shanghai Stock Exchange Composite Index (SSE) (SSE: 000001) lagged, the global market index, MSCI World Index, has significantly outperformed both within a year.
This disparity was most clearly outlined in early January this year when the Shanghai and Hong Kong markets plunged to their 52-week lows.
Source: S&P Global Market Intelligence
However, April marked a turning point for both markets.
China reported a strong first-quarter GDP growth of 5.3%, beating market expectations.
Additionally, the government has also recently introduced several market policies that helped lift market sentiment.
A nationwide program to provide a RMB 300 billion re-lending facility to support the real estate industry was introduced.
China also issued a key document, the “Nine-Point Guideline” with measures to reinvigorate the country’s capital markets over the next 10 years.
Since April, both markets have rallied, with HSI climbing over 10%, prompting investors to reconsider entering these markets.
Cautious optimism
While these are encouraging signs for the market, investors should remain cautious.
Growth in early 2024 was largely driven by festive activities, but the subsequent months have underperformed.
For example, retail activities slowed down in March and April, losing momentum. Furthermore, housing prices continued to slump, further exacerbating the property sector’s woes.
Given the ongoing uncertainty of China’s economic outlook, investors should look for industries that have demonstrated resilience during this period, rather than speculating on the recovery of certain sectors.
There is also always a looming risk that Beijing may introduce sudden regulations which can severely disrupt many industries.
For instance, when the government launched a crackdown on the video game industry in December last year, major players like Tencent (SEHK: 0700) and Netease (SEHK: 9999) saw billions wiped off their market values overnight.
When selecting a company to invest in, a vigilant approach is necessary.
Industries that are defensive and companies with business models with less risk of government intervention are recommended.
Lastly, these companies should preferably carry minimal debt and maintain sufficient liquidity while generating healthy free cash flow.
It’s also important that they do not rely too much on exports as their primary source of revenue.
Winners and laggards
Examining the performance of multiple indexes on the Hong Kong Exchange over a three-year span allows us to identify which industries have remained resilient amid the ongoing crisis.
The energy, telecommunications, and materials industries have emerged as the top performers.
In contrast, the healthcare, property, and industrial sectors were the worst performers.
The information technology sector, comprising investor favourites such as Alibaba (SEHK: 9988) and BYD Electronic (SEHK: 0285), plunged by over 48%.
Here are three Chinese stocks that have performed well throughout this period.
China National Offshore Oil Corporation (CNOOC) (SEHK: 0883)
CNOOC is China’s largest offshore oil and gas producer.
The state-owned business covers oil and gas exploration and development, refining services, and other operations in the energy industry.
The first quarter results for fiscal year 2024 (1Q 2024) were notably impressive.
Revenue saw a substantial increase of 14.1% year on year, rising from RMB 97.7 billion to RMB 111.5 billion. This significant growth was largely driven by an increase in oil and gas sales, which jumped by 21.3% year on year.
Profit also soared by 23.7% year on year, from RMB 32.1 billion to RMB 39.7 billion, despite low international oil prices.
The company ramped up its oil and gas exploration and development, along with advancements in efficiency, leading to a total net production of 180.1 million barrels of oil equivalent, marking a 9.9% year on year increase.
In addition to the record production level, the average cost of barrels of oil equivalent also decreased by 2.2% year on year.
Guidance remains positive, bolstered by the two new discoveries and four successful appraisals of oil and gas structures.
Examining its balance sheet, cash at bank and on hand grew by 21.8% year on year, reaching a comfortable total of RMB 183.4 billion. Current assets are largely sufficient to cover current liabilities, with a quick ratio of 2.1x.
CNOOC also generated a positive free cash flow of RMB 31.4 billion.
A dividend of HK$0.66 per share was announced in March 2024, which is scheduled to be paid in the latter half of this year.
China Mobile (SEHK: 0941)
China Mobile is a leading Information and communication technology (ICT) services provider in mainland China and Hong Kong.
As of April 2024, the company boasts over 997 million mobile customers and 799 million 5G users, ranking it as one of the world’s largest telecom operators.
Like CNOOC, China Mobile is also a state-owned enterprise.
For 1Q 2024, operating revenue grew by 5.2% year on year, from RMB 250.7 billion to RMB 263.7 billion.
Profits followed a similar trend, with a 5.5% year on year increase from RMB 28.1 billion to RMB 29.6 billion.
The telco’s mobile and broadband businesses showed year on year improvement.
Customer registrations for mobile and 5G packages both inched up by 0.5%.
Customer registrations for 5G Network grew more robustly by 5%.
Wireline broadband customers rose by over 2%
Additionally, average revenue per user (ARPU) per month also increased from RMB 44.9 to RMB 47.9.
A positive free cash flow of RMB 22.4 billion was also reported for the period.
A dividend of HK$2.4 per share was declared which will be paid on the 26th of June this year.
Haitian International (SEHK: 1882)
Haitian International is one of the leading global companies in the manufacturing of plastic injection moulding machines.
The company generates most of its revenue from Mainland China through the sale of its machinery.
In its most recent annual report for fiscal year 2023 (FY2023), the company reported a modest 6% year on year growth in revenue, from RMB 12.3 billion to RMB 13.1 billion.
Likewise, profits also shot up by 10% year on year, from RMB 2.26 billion to RMB 2.49 billion.
This revenue and profit growth were mainly attributed to a strong rebound in the second half of 2023 and increased sales across multiple regions including Europe, North America, and Southeast Asia.
Looking ahead, domestic sales in 2024 are expected to remain robust as the Chinese government continues to expand fiscal stimulus measures such as incentives for equipment upgrades.
The company generated a positive free cash flow of RMB 896.9 million.
A dividend of HK$0.66 per share was recently paid for FY2023, an increase from the previous year’s dividend of HK$0.55 per share.
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Disclosure: Aw Kai Rui does not own any of the stocks mentioned in this article.
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