China conglomerates are an almost unavoidable part of an investor's portfolio. As core constituent members of all the main indices, at least some of these stocks must be bought if one is to track the market.
The good news about China conglomerates is that they are big and, therefore, diversified. This makes their returns steadier. The bad news is that they are big and, therefore, complicated. This makes it difficult for an investor to latch on to a particular narrative of any given stock that explains why it should be bought or sold.
Nevertheless, analysts presented here give it their best shot, outlining the names they like and dislike.
Danie Schutte, CLSA
Buy: Cheung Kong (Holdings) (1), Swire Pacific (19)
Sell: Hopewell Holdings (54), Citic Pacific (267)
Schutte favours Cheung Kong and Swire mainly because they have large holdings of Hong Kong property as office rentals move into an up cycle. They also have low debt and a lot of cash and traditionally trade at a discount to net asset value (NAV). 'All these property stocks have done poorly. But they are trading to their cash position and they have healthy balance sheets,' Schutte says.
Cheung Kong and its Hutchison Whampoa subsidiary are both raising cash in IPO markets through spin-off listings.
Schutte notes that gearing at Cheung Kong is set to fall to a low 2.4 per cent. The firm recently sold down mainland real estate through the listing of the Hui Xian reit, which is 33.4 per cent owned by Cheung Kong. Hui Xian's US$1.6 billion IPO raised the NAV of Cheung Kong.
In March, Hutchison oversaw the US$5.5 billion IPO of Hutchison Port Holdings Trust in Singapore.
Schutte likes Swire because it is also cash rich and it is riding high on the office property upturn.
Schutte is pessimistic about Hopewell because she thinks its mainland toll roads will get less traffic after the opening of a coastal highway next month.
Schutte is negative on Citic Pacific because she thinks an iron ore mine the firm has in Australia will not get the boost in production that the market is anticipating.
'The market is expecting a big ramp-up in production, and we think it will be disappointing in the first 18 months. Their track record is not good, and we believe things are behind schedule,' Schutte says.
Callum Bramah, Macquarie
Buy: Swire Pacific (19), Wharf (Holdings) (4)
Bramah likes Swire and Wharf specifically for their large holdings of Hong Kong property. Swire owns a lot of Grade A office space, for which leases are generally being renewed at a premium. As leases usually run for three years, the outlook for revenues is for stable growth.
'We like the landlords in Hong Kong. We believe they are at an inflection point, where rental reversions are moving from negative to positive. The outlook is for office rental income to increase over the next four years,' Bramah says.
Bramah is bullish on Wharf because it owns the Times Square and Harbour City malls. Both are magnets for mainland tourists.
According to a Deutsche Bank report, over the three-day holiday in May, 304,000 mainland visitors travelled to Hong Kong and 'hundreds of them queued outside the dozens of designer shops at Harbour City'.
Wee Liat Lee, Samsung Securities
Buy: Wharf (Holdings) (4)
Lee has a 'high' target for Wharf for the same reason as Macquarie's Bramah: it owns malls that attract a lot of mainland shoppers.
Lee also sees solid growth for Wharf in its residential flat sales on the mainland, where he expects it to hit a sales target of 14 billion yuan (HK$16.7 billion). 'We looked at all the projects in China and it looks like sales are doing well,' Lee says.
The views stated here belong to analysts, and are not stock calls by the South China Morning Post