Chinese stocks provide big opportunity amid fear and confusion

A leading fund manager has suggested “dramatic” western media coverage of China’s recent spate of regulatory interventions has amplified the sell off in Chinese stocks.

Platinum Asset Management (ASX: PTM) is one of the most prominent investment managers in the Asia Pacific Region. Co-manager of the firm’s Asia ex Japan strategy, Cameron Robertson, says he believes the fear and confusion currently surrounding Chinese stocks provides opportunity for investors.

“In recent months, while China has dominated news flow and Western media coverage has been dramatic, we continue to believe China remains a great source of prospective money-making opportunities for investors.

“When we see fear and uncertainty, and hear people referring to a market as ‘uninvestable’, this is a siren call for investors with a contrarian bent,” said Robertson in an investor briefing.

“China is changing and growing, as you would expect of a developing country. Alongside that, the regulatory environment is evolving.

“Having recently established an agency responsible for policing monopoly practices, it’s no surprise there’s a catch-up effort there.

“It has been a bit of a cowboy business culture in China in some ways. Establishing clearer legal and regulatory frameworks, and enforcing them, is part of the process of becoming a more mature country.

“This single-eyed focus on risks arising from regulation and government intervention misses the broader context. A strong, well-functioning regulatory presence is not altogether bad, though the transition from not having regulatory oversight, to having it, is bumpy. The end destination is not one to fear. 

“Large companies like Alibaba have come under scrutiny for policies preventing brands from selling through competing online sales channels. This was an explicit exploitation of their monopoly position in e-commerce.

“Here we would be shocked if companies were brazen enough to do these things, but some investors are decrying crazy regulatory overreach… With nerves fraying, we hear the old tropes about a scary, foreign country.

“We continue to believe China remains a great source of money-making opportunities and we’re continuing to scour the country for entrepreneurs and interesting businesses that are mispriced.”

The Chinese stocks Platinum has been buying

Robertson named internet and payments giant, Tencent (HKG: 0700) and lesser-known robotics company, Leader Harmonious Drive Systems (SHA: 688017) as two Chinese stocks that he believes have very strong outlooks.

Robertson on Tencent

“Tencent is an example of how we navigated this period. In the global strategies we were reducing our exposure through most of last year and in the Asian strategies from the fourth quarter of 2020.

“We were openly of the view that, while still a good company, the market was increasingly ascribing it a full valuation and risk-reward was becoming less attractive.

“As the stock sold off with escalating fear, we’ve been adding back to Tencent.

“Compared to earnings, or to book value, the Chinese market is trading at a significant discount to the rest of the world, near its all-time lows. We go through these cycles and bouts of fear. But, we also, later have bouts of optimism, focusing on this wonderful growth opportunity.

“Historically, it’s proven to be a really attractive point to be getting into the market when it’s scared and hence adding back to old favourites like Tencent.”

Tencent’s stock price is down almost -30 per cent in the past six months.

Robertson on Leader Harmonious Drive Systems

“We own Leader Drive, the number two global manufacturer of harmonic drives – a key component in robotics.

“Their customers include high-profile Western players like Universal Robots, the clear market leader in cobots, or collaborative robots.”

Leader Harmonious Drive Systems share price has risen by more than 35 per cent in the past six months. It currently has a market cap of around $13.8 billion.