China reopening stocks: endure short-term pain for Wall Street’s top picks with 20 to 130 per cent upside potential

Investors will need to persevere with short-term Covid-19 crisis to enjoy big upside in Tencent to Trip.com and Kingdee, reports showed
Index targets mean Chinese stocks could advance by 8.5 per cent to 22.8 per cent from the levels at end-2022

China stock market

Jiaxing Li

Published: 8:30am, 3 Jan 2023

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With China set on a reopening path in 2023, will the new year help investors recover some of the US$2.8 trillion of value destruction in the local onshore market last year?

Local investors are hoping it will bring a lot of cheers, more so after many saw their investments in mutual funds turn sour last year. Foreign investors, with US$1 trillion of stake in the market, are relishing the zero-Covid pivot they had clamoured for over the past two years.

“The zero-Covid policy has disproportionately hurt Chinese domestic demand, the service sector in particular, but has inflicted less damage on goods-related supply chains,” said Chen Zhao, global strategist at Alpine Macro. It is logical to expect that the rebound will primarily be concentrated in final domestic demand, including capital and real estate investment, he added.

With economists turning increasingly upbeat on China’s growth outlook, here is a recap of some of the top picks from Wall Street analysts in sectors that are expected to rally the most from the reopening tailwinds.

Consumption

Consumer-facing sectors including hotels, catering and entertainment will be the biggest beneficiaries, according to Goldman Sachs. Many companies suffered “significant” earnings erosion over the last three years, and could become profitable again for the first time since 2019.

“Our economists expect China to deliver 4.5 per cent real GDP growth in 2023, with consumption leading the charge in [the] second half and contributing to two-thirds of their full-year GDP growth target,” the bank said in its 2023 outlook report.

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Goldman’s top picks include China Tourism Group Duty Free, China Resources Beer and casino operator Sands China. Online travel agency Trip.com, apparel brand Anta Sports and China Eastern Airlines are also among its top buys.

Internet

Major verticals including e-commerce, online delivery, online advertising and gaming will start to turn around once investors see “concrete and convincing” data on consumption improvement, JPMorgan Chase said in its China equity strategy report last month.

Its China reopening shopping cart includes Tencent Holdings, Pinduoduo and JD.com, with 20 to 50 per cent upside versus the bank’s price targets. Alibaba Group Holding, the owner of this newspaper, is also rated by the US bank due to its currently low valuation and expectations.

After a slew of regulatory crackdowns, weak domestic consumption, and geopolitical headwinds, Chinese internet companies are now trading 23 per cent cheaper than their peers in the US, the widest gap in six years, Goldman said. A rerating is possible, given an improved regulatory environment and policy transparency, it added.

Healthcare

China’s unexpected policy U-turn on Covid controls appeared to be chaotic on the ground. Many cities including Beijing and Shanghai have experienced medical supply shortages. Some residents are even planning to go to Macau to get mRNA vaccines unavailable at home. Funeral services stocks have jumped as infections surged.

The prevailing Covid-19 strain in China is “the most infectious” Omicron sub-variant so far, analysts at Morgan Stanley said. More effective vaccines and oral drugs “are still in great demand” to protect the more vulnerable segments of the population”, they added.

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Wuxi AppTec and WuXi Biologics, both among the bank’s reopening beneficiaries, could see at least 130 per cent upside versus its stock price targets. Hangzhou TigerMed Consulting and Beijing Tongrentang are also trading 35 to 40 per cent below their price targets, it said.

Infrastructure

Infrastructure investment, which often functions as a countermeasure to shore up economic growth, could continue expanding in 2023 while the property market remains in the doldrums, JPMorgan said. New players including energy, IT and healthcare will be in focus amid China’s green and digitalisation push, it added.

Contractors for traditional infrastructure like underground pipelines and large-scale transport systems also have a favourable outlook due to their low price-earnings ratios and high dividend yields, it said.

China National Building Materials, the nation’s largest cement manufacturer, can see over 100 per cent potential price increase, JPMorgan said. Solar panel maker Long-i Green, optical communications manufacturer Zhongji Innolight and software developer Kingdee International have 67 to 96 per cent upside potential, the bank added.

Technology

As the tech-rivalry between the US and China intensifies, China is likely to double down on its drive for self-reliance to counter tech decoupling and supply chain risks, analysts at Citigroup’s wealth management unit said in their 2023 outlook report.

The Chinese government has already invested more than US$150 billion in the chip sector in the past decade, and there is more to come with the hi-tech competition gaining traction.

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“We expect additional progress to restoring capital market activity, including more IPOs from the tech sector,” Citigroup said. Areas of focus will include food, energy, secure supply chains and core technologies, including semiconductors, it added.

Companies that are likely to benefit from China’s tech localisation include Hua Hong Semiconductor, BOE Technology and Sanan Optoelectronics, all rated as buy at Goldman. “Little giants” or high-quality state-owned tech companies hand-picked by Chinese authorities for supports, could also outperform, it said.

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