Best buys from the 880 Shenzhen stocks under the connect scheme
Analysts give their stock picks after green light given to the Shenzhen Hong Kong stock connect scheme
Home appliances, liquor, finance and IT are some of the stocks analysts see as the crown jewels among the 880 Shenzhen listed firms that international investors will be allowed to trade before Christmas.
After gaining State Council approval on Tuesday for the long-awaited Shenzhen and Hong Kong Stock Connect, Hong Kong Exchanges and Clearing said the new cross border scheme will kick off within four months and no later than Christmas.
Under the scheme, international investors using Hong Kong based brokers can trade 880 stocks listed in Shenzhen, including 270 on the main board, 410 on the SME board and 200 on the Nasdaq-style ChiNext board. The ChiNext board will be for professional investors only due to its speculative nature.
Mainland investors can also buy and sell 417 Hong Kong stocks via the cross border scheme using mainland brokers.
Stock picks from Swiss lender Credit Suisse include white liquor makers Wuliangye and Yanghe, automation firm Inovance, video surveillance maker Dahua and its peer Hikvision, and technology firm Tianshui Huatian.
Credit Suisse also recommends electronics exporters Luxshare Precision, telecom firm Wangsu as well as acoustic components maker GoerTek which sells products to big brands such as Sony, Samsung and Lenovo.
“We recognise that Shenzhen-Hong Kong connect will provide foreign investors with more access to diversified choices of stocks only listed on the Shenzhen Stock Exchange and have not been covered by the Shanghai and Hong Kong stock exchanges. It can also support A shares for MSCI inclusion in the future,” Credit Suisse research analyst Li Chen wrote in a research note on Wednesday.
“We recommend investors look at unique choices which have no similar peers listed on both the Shanghai or Hong Kong stock exchanges.”
Mainland brokerage Sinolink Securities said in a research report on Wednesday that liquor, Chinese herbal medicine and military defence stocks will be popular targets of foreign institutional investors, given that they are the unique sectors in the A share market. Meanwhile, high-dividend and low valuation sectors, especially home appliances makers, will also benefit.
Stock picks by Sinolink include white liquor maker Wuliangye Yibin Co and Luzhou Laojiao, Yunnan Baiyao Group, Beijing BDStar Navigation, GF Securities, home appliances maker Midea Group and Gree Electric Appliances of Zhuhai.
dit Suisse believes international investors will pay attention to the Shenzhen listed stocks which are not listed in Hong Kong.
Alexander Lee, an analyst with Singaporean lender DBS, said non-bank financials and Hong Kong listed small caps would benefit from the newly launched stock connect scheme and an A share market recovery.
“An A-share market recovery has direct earnings impact to brokers, life insurance, and asset managers. We expect Chinese financial institutions to gain market share as cross-border trades become more prominent,” DBS said.
DBS’ stock picks under the new connect scheme include Chinese brokerages such as China Everbright, Value Partners, Citic Securities, Haitong Securities, GF Securities, Central China Securities and Guotai Junan, as well as insurance companies Ping An Insurance, China Life. It also likes sportswear retailer Li Ning, wind turbine maker Xinjiang Goldwind Science & Technology and software company Kingdee International Software Group.
Gao Ting, an A-share strategist at Swiss lender UBS Securities, said the net profit growth for Shenzhen listed stocks in the past three years was around 15 per cent on average, compared to a negative growth for Shanghai’s stock market last year.
“Shenzhen has lots of stocks representing China’s new economy”, Gao said on Wednesday. “It has 20 per cent IT companies while Shanghai only has 5 per cent.”
Shenzhen’s stock market has 75 per cent non-state-owned firms, while in Shanghai there are over 60 per cent of state-owned companies listed on the exchange.
“International or institutional investors care a lot about valuation, so maybe there will be limited money flow to Shenzhen at the beginning of the linkup. But for investors who prefer growth stocks, there will be some worth buying,” Gao said.
Gao said that firms in China’s emerging sectors like IT, health care and new materials, with comparatively bigger market cap, 20 to 30 per cent earnings growth and 20 times price-to-earnings ratio, may be the most welcome Shenzhen stocks for overseas investors.
However, Aidan Yao, senior emerging Asia Economist at French lender AXA Investment Managers, said from a valuation perspective, mainlanders will be more interested to trade in H shares listed in Hong Kong than international investors would be to trade in Shenzhen stocks.
Hang Seng index stocks are trading at a 12 times price-to-earnings ratio, which is cheaper than 17 times for Shanghai, while both are much lower than the high PE ratio of 46 times for Shenzhen.
“The hefty valuation of the Shenzhen market may be a big hurdle for offshore institutional investors to overcome, constraining the northbound flows in the Shenzhen Hong Kong Stock Connect. On the flipside, the Hong Kong market presents better value for mainland investors looking for diversification and yield pick-ups,” Yao said in a research note on Wednesday.
“If one looks at the A and H dual-listed stocks, the onshore A shares have been trading at a 20 to 50 per cent premium over H shares since the inception of the [Shanghai] stock connect. While stronger southbound flows this year have led to a narrowing of the differential, a 25 per cent value discount still presents an attraction for the H shares.”