Rallying Chinese Stocks: How To Play China Bulls

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 |  Includes: AMAP
by: Kapitall

Summary

The MSCI Hong Kong Index had consistently outperformed the MSCI China Index from July 2010 to January 2014, rallying 160% in the period.

Recently, however, investors have been trading their Hong Kong shares for Chinese ones.

To locate momentum Chinese stocks, we screened for significant net institutional purchases and stocks that are rallying above their 20-day, 50-day, and 200-day simple moving averages.

For the last four years, Hong Kong stocks have been on fire. The MSCI Hong Kong Index had consistently outperformed the MSCI China Index since early July 2010, and Bloomberg writes that the Hong Kong index had rallied 160% over the course of the period.

These days, however, investors are ditching Hong Kong stocks. Strategists from BNP Paribas SA, Citigroup Inc., HSBC Holdings Plc, Standard Chartered Plc, and UBS AG have downgraded Hong Kong stocks over the last two months. Several financial services firms, including Credit Suisse Group AG, expect the developer-and-bank-heavy index to fare less well this year thanks to the Federal Reserve's stimulus reduction. Furthermore, according to Bloomberg, the MSCI Hong Kong Index was trading at a P/E of 16 - its highest level since 2002 - at the end of June while the MSCI China Index was trading at a P/E of 9.8.

So investors are packing up and trading their Hong Kong shares for Chinese ones. In addition to being cheaper than the city's offerings, Chinese stocks growing in appeal because of Premier Li Keqiang's insistence that the nation will meet its 7.5% growth target. In June, Keqiang wrote an editorial (paywall) in The Times, stating, "Despite considerable downward pressure, China's economy is moving on a steady course. We will continue to make anticipatory and moderate adjustments when necessary. We are well prepared to defuse various risks. We are confident that this year's growth target will be met."

Since banks and financial services companies are moving from Hong Kong to China, we decided to run a screen on Chinese stocks that incorporates this shift in investment activity. We began by screening a group of Chinese stocks with significant net institutional purchases comprising 5% or more of share float during the current quarter. Purchases of this size indicate that institutional investors - specifically hedge funds and mutual funds - are bullish towards these stocks and expect them to outperform into the future.

We then looked for stocks that were rallying above their 20-day, 50-day, and 200-day simple moving averages (NYSE:SMA) as of 12:45 PM EST. This signals that the stocks have strong upward momentum.

1. AutoNavi Holdings Limited (AMAP, Kapitall snapshot): Provides digital map content and navigation and location-based solutions in the People's Republic of China (PRC). Market cap at $1.45B, most recent closing price at $20.88.

The stock is rallying 0.22% above its 20-day SMA, 0.33% above its 50-day SMA, and 15.52% above its 200-day SMA.

Net institutional purchases in the current quarter at 11.4M shares, which represents about 39.24% of the company's float of 29.05M shares. The two top holders of the stock are GLG Partners LP with 2.5 million shares and Eton Park Capital Management LP with 2.5 million.

2. BitAuto Holdings Limited (BITA, Kapitall snapshot): Provides Internet content and marketing services for the automotive industry in the People's Republic of China. Market cap at $2.02B, most recent closing price at $46.73.

The stock is currently rallying 7.97% above its 20-day SMA, 18.66% above its 50-day SMA, and 47.50% above its 200-day SMA.

Net institutional purchases in the current quarter at 1.9M shares, which represents about 8.4% of the company's float of 22.62M shares. The two top holders of the stock are FIL LTD with 3.5 million shares and Vontobel Asset Management, Inc. with 1.8 million shares.

3. RDA Microelectronics, Inc. (RDA, Kapitall snapshot): Designs, develops, and markets radio-frequency and mixed-signal semiconductors for cellular, broadcast, and connectivity applications. Market cap at $846.39M, most recent closing price at $17.52.

The stock is currently rallying 1.39% above its 20-day SMA, 2.73% above its 50-day SMA, and 1.23% above its 200-day SMA.

Net institutional purchases in the current quarter at 1.8M shares, which represents about 7.92% of the company's float of 22.73M shares. The two top holders of the stock are IDG-Accel China Growth Fund Associates L.P. with 26.5 million shares and Warburg Pincus LLC with 17.1 million shares.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.