Mark Williams

Will these five stocks hog the limelight in the Year of the Pig?

Mark Williams

Year of the Pig

Lanterns will be hung up all over China, and the world, in preparation for Chinese New Year celebrations this week. As we enter the Year of the Pig, the Shanghai Stock Exchange will be closed for a week, giving Chinese equity investors an opportunity to consider the investment prospects for the year ahead.   

 

For Chinese equities, the previous year was a fairly painful one. During the Year of the Dog, the Shanghai Composite fell over 19%*, partly due to an increasingly unstable geopolitical backdrop. We are more optimistic for the Year of the Pig. As we noted in the Liontrust New Year gallery, we think the headwinds seen in 2018 should start to soften as US monetary tightening slows down, giving less impetus for further rises in the dollar.

 

In the Liontrust Asia Income Fund, we have a 40% exposure to China and Hong Kong. Below we highlight some of our Chinese stock picks for the Year of the Pig.

 

BOC Aviation

Not only is this Asia’s leading aircraft leasing company, it’s also in the top five globally by fleet size. The aircraft leasing industry is a strong proxy to air travel growth, offering more consistent earnings than airlines, with fewer risks and double digit returns on equity. BOC Aviation benefits from a strong order book, access to cheap financing and an experienced management team. Its dividend yield is more than 4.5% and the company has also announced its intention to increase the dividend payout ratio from 30% to 35%.


 China Air  
 

China Communications Services

This leading telecom infrastructure services provider is a key beneficiary of 5G investments. Growth is mainly driven by operators' network buildout and increasing network maintenance expenditure as well as expansion into non-operator markets. CCS has a strong net cash position and improving free cash flow generation, which should support a higher dividend payout ratio.


 Chinese 5G  
 

Xinyi Glass

One of China's largest glass producers, Xinyi is the global market leader in auto glass, which accounts for around 40% of its profits. Construction glass sales (c.20% of profits) will benefit from the Chinese government's push for energy saving low-e glass and its restrictions on new float glass supply. New capital expenditure in Malaysia and Canada should drive revenue growth over the next few years.


 Car Windscreen  
 

China Mobile

The Year of the Dog could have been a tough one for China Mobile, as it faced reduced tariffs and cancelled roaming fees, yet it maintained earnings margins at 39%. Much of this resilience is due to its economies of scale and stringent cost controls. 4G new subscribers are on track, with fixed line and mobile both ahead of expectations for 2018. Trading on a 2019 price/earnings ratio of 12.3x with 5% earnings growth, the company looks a solid defensive play within China telecoms.


 China Mobile  
 

Lee & Man Paper Manufacturing

The company is the second largest containerboard manufacturer in China and ranks within the top five globally. Compared to its peers, Lee & Man is a low cost producer due to its product mix, vertical integration and economies of scale. It has also benefited from industry consolidation, tighter environmental regulations and import quotas. The company has diverse sources of supply for its key raw material, recovered paper, with 35% domestic, 33% from the US, 28% from Europe and 5% from Japan.


 Paper manufacturing  


*Source: Financial Express, 16.02.18-30.01.19, total return, local currency terms.

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Key Risks

 

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 

 

Disclaimer

 

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Tuesday, February 5, 2019, 12:59 PM