We believe China equities are one of the best assets to be invested in 2013.
We expect China stocks to rally strongly over 2013, and in particular seek to identify stocks that will more than double in value over the course of the next year. We are bullish on Hong Kong listed China stocks, including those of retail, technology, manufacturing and exporting companies.
First the macro reasons. Why should we be buying in China now?
We expect ongoing recovery and growth in the US, with stabilization in Europe. With a HUGE amount of negativity currently "priced in", or actually in our view "overpriced in", and continued growth in many emerging markets, including across Asia, we see many stocks in Asian countries, and especially China as very good value.
Investors have over the last few years been withdrawing and "saving cash", hoarding, tightening, not investing. There is a huge amount of investment money on the sidelines which can very quickly reverse the other way, especially into the Hong Kong stock market, which is what we believe is about to happen, with fuel added to the rebound by ongoing internal stimulus from China in 2013 and a move from local Hong Kong investors from property into Hong Kong stocks.
There are a few other factors that make us think we are close to the perfect time to buy stocks HK stocks listed in China, based on historical data with a realistic chance of certain stocks doubling and tripling in 2013.
1 - China's 10 year political transition is complete. The lead up to this produced uncertainty. 2013 will bring renewed stability, growth and investment. So we plan on buying early in 2013, with a view to hold for at least a year, and with a view to investing in stocks that we expect to at least double.
2 - Buying in times of a perceived crisis creates a "crisis margin", and selling in times of confidence creates a confidence margin. We are still now very much in "crisis" bias (although moving towards "recovery") so we belive now is a good time to buy, well before full confidence re-emerges (by which time prices of course will also be significantly higher).
3 - Capital inflow and outflow of Hong Kong means you will get more volatility, both on upside and downside - great for investors who buy when others are selling. 2013 will see continued money inflow into the Hong Kong stock market.
4 - US treasury yields are at record lows, and yield curve likely to lengthen - likely to be less that 1% for 10 years. This means super cheap borrowing and demand for higher yields (ie stocks). (Also it likely means the Govt in Hong Kong will impose high deposit ratios for property (ie less leverage), boosting stocks in terms of relative attractiveness to property (on the basis that leverage is harder to get for stocks than property). We believe that the relative attractiveness of stock vs property will result in a surge in funds flowing into Hong Kong listed stocks in 2013.
5 - If/when China has announces stimulus plans, expect China capital to be invested in Hong Kong, and in Hong Kong stocks. And remember also, there is also plenty more stimulus the US and Europe can provide if they wish.
6 - The Hang Seng, and China stock markets, right now have some of the lowest PEs in the world - super cheap by historical standards and close to record historical lows (ie a record low "tide"). Again, to be a strong reason to believe the market is at rock bottom, making these markets highly attractive to us.
7 - Increased focus on Government taxing in EU and US will lead to money flowing to "low tax", and "tax-haven" countries, which include Hong Kong and therefore Hong Kong listed stocks.
8 - People seeking to preserve asset and currency value will also move money from Europe to Hong Kong.
9. - China's quarterly GDP and export and manufacturing numbers have all bottomed and all indicators show a recovery in China has started.
Our top China stock picks for 2013:
We have strong buy recommendations for the following Hong Kong listed China stocks, all of which we expect to outperform the Hang Seng index over 2013 by a multiple of 3. Many of these companies may not be too familiar to investors so we will also provide a brief overview of their respective businesses.
CHINA ALL ACCESS (HK Stock code 00633)
Target price (12 months) $2.4
Target price (24 months) $3.5
NANDASOFT (HK Stock code 008045)
Target price (12 months) $.9
Target price (24 months) $1.4
CHINA STARCH (HK Stock code 03838)
Target price (12 months) $.65
Target price (24 months) $.9
HISENSE KELON (HK stock code 00921)
Target price (12 months) $4.80
Target price (24 months) $6.50
EPRO (HK Stock code 08086)
Target price (12 months) $1.4
Target price (24 months) $2.6
SIJIA GROUP (HK Stock code 01863)
Target price (12 months) $2.80
Target price (24 months) $3.90
KUNMING MACHINE (HK Stock code 300)
Target price (12 months) $4.50
Target price (24 months) $5.90
A few comments on each stock:
CHINA ALL ACCESS (HK Stock code 00633):
CHINA ALL ACCESS is engaged in the provision of satellite communication application solutions and services, wireless data communication application solutions and services, and call centre application solutions and services.
The Group's wireless data communication application solutions and services segment is showing stable growth. For example its intelligent information terminal ("Jinwutong") and intelligent surveillance system. The "Jinwutong" business has also expanded from the traffic police application to various fields including fire control, logistics, public security and others, thereby further expanding the scope of the company's market. The business of intelligent surveillance systems is now focused mainly on traffic management, city management, thermal power, fuel gas and other industries.
The company's satellite communication application solutions and services segment is also showing steady growth. The company has developed more equipment compatible with satellite communication system, such as panoramic camera and satellite integration terminal to upgrade and improve the existing systems. They company is developing users in several new industries, including prison administration, reserve duty and water supply.
The company's call centre application solutions and services segment is small, representing approximately 1% of the total business. Customers were from various industries including telecommunications, banking, broadcasting and television industry and traffic control and others. We believe there are ongoing new opportunities in different provinces and different industries for this business.
We have strong confidence in the company management structure, a factor that is important to us when we select companies to invest in. China All Access is audited by one of the "big 4" accounting firms, namely KMPG, a fact that we think adds value in terms of the reliability of the company's earnings (always important to us as we look at to find companies with China business that we believe are undervalued based on reported financials).
We love the growth, technology, and area of business of this company and think it has great opportunities ahead over the next decade. The company is poised to do well In view of the government's policy of promoting information technology industry and the fast growing market demand for such products and services.
The company's operating profit margin and net profit margin has grown strongly since 2009. The company has also increased it dividend payout % over this time (which we generally like) although with this type of company we are also quite happy to see it retain earnings for reinvestment for future growth.
Turnover, operating profit, and net profit has increased consistently ever year since 2007. A trend we love to see as value investors.
PE is 6.3 which we feel is cheap for a company with this kind of growth potential.
The company trades around is current NAV of $1.38.
NANDASOFT (HK Stock code 008045):
NANDASOFT is engaged in development, manufacturing and marketing of network security software, Internet application software, educational software and business application software. The Company also provides systems integration services including information technology consulting, sales of computer hardware products and trading of IT related equipment.
The company stands to benefit significantly from the focus and support China will provide on the IT industry in China over the coming 3 years.
Nandasoft is emerging as a leader in the research and development of mobile platform and cloud computing and its focus on this area will position it very well to meet future market demands and opportunities in China.
The Company won the R&D and industrialisation project of cloud computing support software (platform security software) accredited by the Ministry of Industry and Information Technology of the PRC. The objective of the project is to develop a cloud computing platform security software with its own intellectual property rights, making a breakthrough on the critical security technology of supporting system on cloud computing and establish a security system applicable to the cloud environment, through which to promote the healthy growth of cloud computing technology, further strengthens domestic information security.
Nandasoft is also focusing on IT/Healthcare which is another big priority area for China over the next 3 years. The company is working on a project which aims to integrate many health resources across China, improve the utilisation rate of medical resources, and create a new model of innovative real-time health services, which promotes the development of the elderly care and health services industry and the health services industry with new technologies.
We have strong confidence in the company management structure. One of our researchers met senior management of this company, and seemed impressed with the vision, and their strategies towards achieving that vision.
Since 2007 the company's return on equity and return on total assets has consistently risen each year. These ratios are important to us in companies we consider investing in.
Nandasoft's net profit margin has also continued to rise consistently, each year since 2007.
We believe these trends are likely to continue, and accelerate over 20013-20015.
Nandasoft's PE is 4.4, which indicates to us that the company is extremely cheap. If this sector "heats up" the company could easily reach a PE of 20 valuation based on its current earnings.
The company trades below its NAV of $.37.
One consideration to bear in mind is that the stock of this company is not, historically, traded in high volumes. Rather the stock is tightly held, making it hard to accumulate large positions in the stock quickly. We think stock traded volumes in this company will pick up as the China IT sector becomes more active.
CHINA STARCH (HK Stock code 03838):
CHINA STARCH is engaged in the manufacture and sale of cornstarch L-lysine hydrochloride salt and ancillary corn-based and corn-refined products. It's a niche area that we think has huge upside as consolidation and rationalization in this industry segment takes place in China.
The company stands to benefit significantly from the gradual global recovery and stabilization of global markets, and it is well poised to increased its turnover from cornstarch, lysine and starch-based sweetener segments. China Starch is also focused on a development strategy of developing new products by using cornstarch as raw material, which will help contribute to its margins as production and sales of such products start to grow.
The Group has achieved a breakthrough its production expansion plans. With the support of the Municipal Government of Shouguang (the "Shouguang Municipal Government") of the PRC, the Group plans to expand its production capacity by relocating the existing production plant and facilities in Shouguang to a new production site as may be granted by the Shouguang Municipal Government. The proposed new production site is expected to remain in Shouguang, and the estimated annual production capacity of the new production site is also expected to be comparable to that of the existing one. The operation and production currently carried on at the existing production facilities will continue until the new production facilities are ready for production. We understand that the company will negotiate for the grant of further new production site and preferential policies with the Shouguang Municipal Government in the near future.
Since 2008 the company's return on equity and return on total assets has consistently risen. We expect this trend to continue over the next few years and the company obtains the benefits of economies of scale as it expands production. The company's operation profit margins have increased year on year since 2008, and again, we expect margins to grow over the coming years.
China Starch has a strong track record, and has been profitable every year since its public listing, and its turnover has increased strongly each year since 2007. The company consistently pays a dividend.
The company trades below its NAV of $.349.
China Starch's PE is 4.98, which indicates to us that the company is extremely cheap. We think valuation with PE of 10 valuation is appropriate, which accords with our outlook for this company to trade at $.6 by the end of 2013.
HISENSE KELON (HK stock code 00921):
HISENSE KELON (HK stock code 00921) reported fantastic Q3 results. Extremely strong results and growth and beating market expectations. We have been monitoring this company closely and we feel now is the time to buy and accumulate.
Hisense Kelon announced its results for the third quarter ended 30 September 30 2012 with turnover rising 14.66% to RMB5.28 billion and net profit jumping to 405.22% to RMB215 million.
These results are very impressive. We consider HISENSE KELON a VERY STRONG BUY.
We value the company based on current financials, at $4.80, and expect this valuation to be reflected in the stock price possibly as early as mid-2013. If the business continues to grow strongly in 2013 (which is quite possible, based on both domestic consumption and export demand) we think the stock price could surpass $5.00 by the end of 2013.
EPRO (HK Stock code 08086):
EPRO provides information technology contract and maintenance services, and IT software development and integration services, e-marketing services and mobile computing solutions. There will of course be huge demand for these products and services in the coming decade in China.
EPRO also operates e-commerce and provision of online sales platform DealExtreme - Cool Gadgets at the Right Price - DX Free Shipping Worldwide which we believe have huge potential for growth and revenues as China's on-line shopping portals are set to boom over the next decade.
DX.com is a simple, efficient shopping platform and we are very encouraged by its growth in usage to date. DX.com targets at overseas customers and sells high-quality and unique products from China to global consumers. The website has over 100,000 products for sale, across 15 categories and over 200 sub-categories. We met with management staff who operate this website recently, and they confirmed to us that the business is operating well and growing fast. The website now has regular buyers from over 200 countries and is seeing especially strong demand from countries such as Brazil, Russia and Israel. If you have not yet seen this website take a look!
EPRO's areas of business have the potential to be highly profitable, and we have identified EPRO as another smaller company, along with Nandasoft, that is placed to benefit significantly under China's 12th 5 year plan over the coming 3 years. (We are also looking at a 3rd company now and we report on that if we conclude that we like what we see).
The company's Return on Equity, and Return on Total Asset, two key ratios we look for, has grown every year since 2007. We believe this trend will accelerate over the next few years.
EPRO's turnover and operating profits have grown each year, and again we believe this trend is poised to accelerate.
Also noteworthy is that DIGITAL CHINA (HK stock code 0861) has been increasing its stake in EPRO over the last few months, as has EPRO's chairman. Both of course are encouraging signs for the company's stock price.
We value EPRO at $1.3 per share based on currently available information (approximately double the company's current stock value). Of course, companies like this also have the potential to see their stock price jump crazily high as and when positive news goes "mainstream" and local and foreign investors pile in wanting a piece of the action. If this happens we will carefully monitor the price vs our assessment of value, and we might then sell accordingly if we believe the stock price is overvalued.
SIJIA GROUP (HK Stock code 01863):
We believe SIJIA GROUP is at its absolute bottom in terms of stock price. The company, based on our fundamental valuation approach, looks solid to us, and based on our methodology we value the stock at $2.8 per share. In accordance with our usual approach, we will plan to buy and will hold until we believe fair value has been achieved.
SIJIA's core business is the design, development, manufacture and sale of polymer processed high strength polyester fabric composite materials and other reinforced composite materials and downstream related inflatable and waterproof products targeting the outdoor leisure, recreation and sports consumer market.
We believe that demand for the products of SIJIA will start to increase as the company's key export countries stabilize and recover, and that there is also likely to be increase domestic demand the the company's products as the China consumer's retail spending power increases.
Sijia utilizes self-developed facilities and techniques on which has acquired national patents, to produce architectural membrane, waterproofing membrane, TPU materials, air tightness materials, inflatable materials, biogas tank materials, tarpaulin materials, wader and protective garment materials. Such materials all have certain common characteristics, including high tensile strength, antitearing, anti-stripping, flame retardancy, anti-bacteria, anti-corrosive, durable, low temperature resistance and sunlight resistance. Sijia has also expanded into high margin downstream end products (the "End Products") business, with factories located in Xiamen, Wuhan and Chengdu, which develops and manufactures clean energy products such as biogas tanks and outdoor leisure sports consumer products such as wader and protective clothing, inflatable boats, and large inflatable toys.
We like the company's emphasis on R&D and technological innovation which we believe will help the company retain its leading position in new products that are high-tech-oriented, high value-added, and high margin.
We believe that Sijia's profit margins will surge, and that it will hit a record turnover and operating profits next year.
KUNMING MACHINE (HK Stock code 300):
KUNMING MACHINE is engaged in the design, development, manufacture and sale of machine tools, precision measuring equipment and precision transducers.
The company suffered significantly since the 2008 economic slowdown, and the Euro crisis, but we feel the company is poised for a resurgence due to strength in the US, stabilization in Europe, ongoing growth in Asia, and a recovery and anticipated stimulus from China.
Addressing the complicated macroeconomic conditions and intensified market competition, Kunming Machine Tool experienced a "pull-back" pattern as most of peers did. Under the proper leadership of the Board and the senior management however, the business units firmly joined their efforts to secure smooth business operations of the Company as a whole. As such, the Company achieved record highs in sales and production volume and attained progresses and breakthroughs in the areas of marketing, production, technology development, quality control, and financial management.
We have strong confidence in the company management structure.
Since 2008 the company's return on equity, total return on assets, operating profit margin, net profit margin, and dividend payout, have all declined. However, after having spoken to people in the industry, we believe things have bottomed and that all these ratios will show positive improvement over the next 3 to 5 years.
The company's turnover has increased each year since 2009, and the company has made a consistent profit every year for the last 5 years.
PE is 13.4 which is typically higher that we prefer for companies we invest in, but given the resurgence we anticipate we feel the current price is nevertheless very cheap.
The company trades well below is NAV of $3.24. It is worth noting that this company is dual listed in Hong Kong and China. The company trades at a significant premium in China, being $6.03 per share. We believe that over time the Hong Kong listed valuation and the China listed valuation will converge.
Under "normal conditions" we believe the company should be valued at $4.00. We anticipate this value to be realized gradually over the next 12 months, and that it will hit our value price target of $4.50 by the end of 2013.
So there you go. Our top 7 China stocks for 2013. We have done our research and expect to profit. We are very open to receiving comments, and we will also update our recommendations if our views change over the year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.