U.S. listed Chinese stocks, as represented by the PowerShares Golden Dragon Halter USX China Portfolio (PGJ) have been strong this year, up over 10.5% YTD, after a bruising 2011 in which the index was down 26.4%. While concerns over the slowdown in the Chinese economy may be right-on for the short-term, based on a government clamp-down on inflation and worsening markets worldwide for its goods and services, especially in Europe, it is indeed a foregone conclusion that China will still remain the strongest among the world's major economies for the foreseeable future. As such, we believe that a well diversified portfolio focused on the long-term ought to have some weighting among Chinese equities.
It is with this background that we examine in this article the investing activities of the world's largest fund managers, managing between $50 billion and over $700 billion in 13-F assets, in Chinese stocks (ex-Chinese Internet stocks, that were discussed in a separate article that can be accessed from our author page), based on the latest available Q4 institutional 13-F filings. Taken together these mega fund managers control over 35% of the assets invested in the U.S. equity markets, but number just over 30 out of the tens of thousands of funds that invest in the U.S. equity markets. Also, taken together, they are bearish on China stocks, cutting a net $0.6 billion in Q4 from their $19 billion prior quarter position (for more general information on these mega funds, please look at the end of the article).
The following are the Chinese companies (ex-Internet companies) that these mega fund managers are most bullish about (see Table):
China Mobile Ltd. (CHL): CHL is a Hong Kong-based digital wireless voice and data services company primarily in mainland China, serving over 600 million customers. Mega funds together added a net $61 million in Q4 to their $986 million prior quarter position in the company, and taken together mega funds hold 0.5% of the outstanding shares. The top buyers were Royal Bank of Canada ($33 million) and Wells Fargo ($26 million), and the top holders were Wells Fargo ($291 million) and Fidelity Investments ($208 million). CHL reported an in-line Q4 just two weeks ago. Its shares trade near 52-week highs, at a current 11.2 P/E on a TTM basis and at 2.1 P/B, compared with averages of 15.2 and 1.7 for its peers in the non-U.S. wireless communications group. Also, as a comparison, its closest peer China Unicom Ltd. (CHU) trades at a current 50.6 P/E and at 1.2 P/B.
Spreadtrum Communications Inc. (SPRD): SPRD is a Chinese fabless designer of baseband processor and RF transceiver solutions for wireless communications market. Mega funds together added a net $22 million in Q4 to their $81 million prior quarter position in the company, and taken together mega funds hold 13.3% of the outstanding shares. The top buyer was Fidelity Investments ($27 million), also the top holder at $53 million.
SPRD shares were cut in half by early January from last year's November highs, despite reporting impressive quarter results, due to concerns about its long-term competitive position. In the latest Q4 reported exactly a month ago, those concerns finally came to bear as the company, despite beating Q4 analyst revenues and earnings, guided Q1 revenues and gross margins significantly lower. A number of analysts, most notably JP Morgan and Needham, downgraded the stock. Its shares have been flat since the negative Q4 forward guidance, and they trade at a current 5.7 P/E and 2.4 P/B compared to averages of 19.2 and 1.7 for its peers in the electronic components semiconductor group, while earnings are projected to fall from $2.78 in 2011 to $2.40 in 2013.
Yingli Green Energy (YGE): YGE is a Chinese manufacturer engaged in the design, development, marketing, manufacture, installation, and sale of photovoltaic products, including PV cells, PV modules, and integrated PV systems, as well as poly-silicon ingots, blocks, and wafers. Mega funds together added a net $2 million in Q4 to their $43 million prior quarter position in the company, and taken together mega funds hold 8.5% of the outstanding shares. The top buyer was Credit Suisse ($6 million), also the top holder at $28 million.
YGE shares have plummeted recently from their $6.27 high set last month over concerns about German subsidy cuts, tariffs and anti-dumping charges against Chinese solar companies in the U.S., and a mixed Q4 reported exactly a month ago in which it beat analyst earnings estimates but came up short on revenues. YGE shares are currently trading near all-time lows, and at 0.7 P/B and 0.25 PSR (price-to-sales ratio) compared to averages of 0.5 and 3.3 for its peers in the solar group.
The following are some additional Chinese companies (ex-Internet companies) that mega funds bought in Q4 (see Table):
- Renesola Ltd. ADS (SOL), a Chinese manufacturer of mono-crystalline and multi-crystalline wafers for solar power products, in which mega funds together added a net $2 million in Q4 to their $13 million prior quarter position in the company; and
- Jinkosolar Holdings Co ADS (JKS), a Chinese manufacturer of silicon wafers, solar cells and solar modules with a global sales network spanning across Europe, North American and Asia, in which mega funds together added a net $4 million in Q4 to their $7 million prior quarter position in the company.
Besides these, mega funds based on their Q4 trading activity indicated that they are bearish on the following Chinese stocks (see Table):
- Focus Media Holdings Ltd. (FMCN), that operates the largest out-of-the-home digital advertising network in China using audiovisual flat-panel displays, in which mega funds together cut a net $125 million in Q4 from their $530 million prior quarter position in the company;
- Trina Solar Ltd. (TSL), a vertically-integrated Chinese manufacturer of mono-crystalline ingots, wafers and cells to the assembly of high quality solar modules, in which mega funds together cut a net $14 million in Q4 from their $93 million prior quarter position in the company;
- China Unicom Ltd. , a Hong Kong-based provider of cellular, paging, long distance, data and internet services in the People's Republic of China, in which mega funds together cut a net $16 million in Q4 from their $141 million prior quarter position in the company;
- LDK Solar Co. (LDK), a Chinese manufacturer of multi-crystalline solar wafers that are the principal raw material used to produce solar cells, in which mega funds together cut a net $5 million in Q4 from their $60 million prior quarter position in the company;
- Suntech Power Holdings (STP), a Chinese manufacturer of photo-voltaic cells and modules for worldwide distribution, in which mega funds together cut a net $4 million in Q4 from their $41 million prior quarter position in the company;
- JA Solar Holdings (JASO), a Chinese manufacturer of mono-crystalline and multi-crystalline solar cells for solar modules and systems, in which mega funds together cut a net $9 million in Q4 from their $25 million prior quarter position in the company;
- Deer Consumer Products (OTC:DEER), a Chinese manufacturer of small home and kitchen electronic appliances, in which mega funds together cut a net $2 million in Q4 from their $5 million prior quarter position in the company; and
- Xinyuan Real Estate ADS (XIN), a China-based fast-growing real estate developer, engaged in the development of large-scale, multi-layer and high-rise residential buildings, in which mega funds together cut a net $2 million in Q4 from their $3 million prior quarter position in the company.
Note to Table: The companies selected to be included in both the Top Buys and Sells and Top Holdings categories in the Table were picked on both an absolute basis, i.e. the highest dollar amounts of buys and/or sells, as well as those amounts relative to their market-cap. That way, the list is not biased towards the largest companies in the group.
General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.