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Are ‘cheap’ stocks still attractive after recent rallies?

Analysts point to mass-consumption plays with undemanding valuations and stable growth

PUBLISHED : Wednesday, 10 August, 2016, 4:46pm
UPDATED : Wednesday, 10 August, 2016, 10:41pm

Food and beverage, home appliances and healthcare are among the best-performing A-share market sectors since early this year.

And it may not be too late to buy them at an attractive price, as investors can still find bargains among relatively cheap stocks, analysts said.

The CSI Health Care Index, a measure compiled by China Securities Index to gauge the performance of companies in that sector, has rebounded 23 per cent from its yearly low on January 28.

The home appliances and food and beverages (F&B) sectors have also jumped 18 per cent and 30 per cent, respectively, from the trough in January, outperforming the benchmark Shanghai Composite Index, which has risen 14 per cent from its lowest level of this year in January.

“Valuations in those defensive sectors have moved higher, but relative valuations are still at historical lows,” said Ting Gao, a strategist for UBS Securities.

“In today’s range-bound market, these steady-growth sectors still look quite attractive,” he added.

After recent rallies, consumer defensive stocks have seen their valuations jump above the historical mean, according to data compiled by UBS Securities.

In today’s range-bound market, these steady-growth sectors still look quite attractive
Ting Gao, strategist at UBS Securities

The current TTM PE (trailing twelve-month price to earnings) of white goods and drinks makers are already higher than their five-year average TTM PE by 28 per cent and 25 per cent respectively. The current TTM PE for the healthcare sector is also 13 per cent above the five-year average.

However, relative valuations, which compare one sector’s TTM PE to that of non-financial stocks as a whole, paint a different picture.

Among the sectors, food processing and packaging and traditional Chinese medicine segments have the biggest discounts against their five-year historical averages, trading at a current relative PE of 0.98 and 0.99 respectively. Their historical average relative PE are 1.38 and 1.41.

Beverage manufacturing, white goods, and biotech and pharmaceuticals are trading at 0.82, 0.6 and 1.44 respectively, also lower than the historical averages of 0.91, 0.65, and 1.65.

Moreover, “institutional allocation percentages (of those consumer defensive and healthcare stocks) are still at a low level historically,” said UBS analysts in a recent research note.

By end of the second quarter, mutual funds had overweighted F&B, home appliances, and healthcare stocks by 2.3 per cent, 1.5 per cent and 4.3 per cent relative to market weights, they said.

The numbers are lower than the five-year historical average weights of 6.2 per cent, 2.6 per cent, and 6.2 per cent.

“Notably, F&B and health allocations are far lower than their historical peaks – 14 per cent and 12 per cent respectively,” UBS analysts said.

The Swiss investment bank has “Buy” recommendations on Shenzhen-listed Suofeiya Home Collection, Robam Appliances, Semir Garment, chicken meat producer Fujian Sunner Development, Shanghai-traded bus maker Zhengzhou Yutong Bus, Huahai Pharmaceuticals, home appliance manufacturer Qingdao Haier, among others.

Analysts from China International Capital Corp (CICC) share the optimistic views.

“As the interest rate is near historic lows, we recommend value strategy (in stock investing),” said Hanfeng Wang, who led a group of analysts on a recent CICC research report.

The 10-year Chinese Government Bond (CGB) yield rate has fallen to around 2.75 per cent, near the record low level reached earlier 2016.

Amid current low interest rates and weak demand, investors should stick to mass-consumption plays with undemanding valuations and stable growth, as well as high dividend yield names
Analysts from China International Capital Corp

“We believe this is a reaction to a sluggish economy, concerns about deflation pressure, and expectations of looser monetary policy,” CICC analysts said.

As market sentiment turned cautious, the benchmark Shanghai Composite remained range-bound, fluctuating between 2,800 to 3,100 in the past five months.

“Amid current low interest rates and weak demand, investors should stick to mass-consumption plays with undemanding valuations and stable growth, as well as high dividend yield names,” they added.

Sectors recommended include traditional defensive sectors like F&B, healthcare, home appliances, and automotive companies.

Top stock picks include home appliance suppliers Midea Group and Qingdao Haier, food and beverage makers Henan Shuan and Heibei Chengde, and agricultural products maker Heilongjiang Agriculture.

CICC analysts also advises investors to watch sectors related to fiscal policy and state-owned enterprise reforms.

“The environmental protection sector has lagged for a long time, and may benefit from the reinforcement of fiscal policies,” they said.

“Companies related to supply side and SOE reforms are worth watching.”

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