Morgan Stanley China watch: 5 Chinese stock tips
In case you want to invest in the equity markets over the long term, China is an attractive option to consider right now. While you might be concerned over the lack of transparency, high debt levels, and political risks associated with the country, you also need to account for China’s increasing GDP numbers, expanding middle class, and a rise in the purchasing power of its population that should drive consumer spending higher.
China Shenhua Energy (SHA: 601088)
A company that engages in the production and sales of coal and power as well as railway, port, and shipping transportation, China Shenhua Energy is the first stock on our list. Its coal segment produces coal from surface and underground mines and sells it to power plants, metallurgical as well as coal chemical producers, and provincial electric grid companies.
China Shenhua Energy ended 2020 with recoverable coal reserves totaling 14,42 billion tonnes. The Coal Chemical vertical produces and sells methanol, polyethylene, polypropylene, and other sets of by-products to enterprises.
The company’s Power segment generates and sells electric power to grid companies. This business generates electric power through coal, thermal, wind, water, and gas. Its Railway business provides transportation services while the Ports segment offers loading, transportation, and storage services. China Shenhua’s Shipping segment provides shipping and transportation services.
Morgan Stanley has a 12-month price target of HKD 20.69 for China Shenhua Energy. Comparatively, the stock closed trading at HKD 17.2 on Friday, May 7.
Morgan Stanley confirmed, “We believe Shenhua has the strongest balance sheet among its peers under our coverage, which should provide dividend upside for the stock.”
The analysts expect Shenhua to take advantage of rising coal demand in 2021 after a shortage of the product was experienced towards the end of 2020.
China Shenhua’s capital-intensive business generates predictable cash flows, allowing the company to pay annual dividends of $2.14 per share, indicating a forward yield of a tasty 12.5%.
China Resources Land (HKG: 1109)
Valued at a market cap of HKD 267 billion, China Resources Land is an investment holding company. It invests in commercial, office, hotel, and apartment properties. At the end of 2020, China Resources Land had a land bank of 68.087 million square meters. The company operates hotels and offers construction and related property development services. In addition to these businesses, China Resources also sells furniture.
Morgan Stanley explained that China Resources has a robust credit profile that allows it to access cheap capital to fund growth. The investment bank has a 12-month price target of HKD 46.46 on the stock indicating a discount of over 25% from current levels. After accounting for the stock’s forward yield of 4%, total returns will be closer to 30% in the next year.
China Resources Land stock price has more than doubled in the last five years.
Sun Hung Kai Properties (HKG: 0016)
Sun Hung Kai Properties develops and invests in properties for sale and rent in Hong Kong, Mainland China, and other international markets. It develops and sells properties that include residential estates, offices, shopping malls, industrial buildings and hotels, and serviced apartments.
As of June 2020, the company’s land bank consisted of 57.5 million square feet of gross floor area in Hong Kong and another 68.1 million square feet of gross floor area in Mainland China.
Sun Hung Kai also provides property management services as well as construction-related services such as landscaping, electrical, and fire prevention systems.
Further, the company offers voice, multimedia, and mobile broadband services including data center services such as infrastructure, facility management, and server co-location.
According to Morgan Stanley, this leading property developer is well poised to benefit from a resilient property outlook. Residential prices in Hong Kong are forecast to rise by 2% in 2021 while retail rents are estimated to rise 10% compared to Q4. Morgan Stanley has a 12-month price target of HKD 133 which is an upside potential of over 10% after accounting for its healthy forward yield of 4.2%.
Alternatively, a sharp drop in rental prices could also send the stock of this real estate company lower by 40% in the next year.
Longfor Group Holdings (HKG: 0960)
Another property developer that makes the list is Longfor Group Holdings. It is an investment holding company that is engaged in the property development, investment, and management businesses in China. The company’s Property Development business develops and sells office, commercial and residential premises.
Its Property Investment business leases investment properties that include shopping malls and rental housing. Further, the Property Management segment provides management and related services that include hotel operations.
Longfor stock is trading at HKD 49 and Morgan Stanley has a price target of HKD 52.81 on the stock. Income investors can also benefit from a dividend yield of 3.5%. Morgan Stanley is optimistic about Longfor’s leadership position in the real estate development space given its massive land holdings in China’s largest cities as well as a strong investment property business.
While analysts expect Longfor to post strong earnings growth in the medium-term, they have also cautioned that the stock could move lower in case the opening of shopping malls is slower than expected.
Anhui Conch Cement (SHA: 600585)
The final stock on the list is Anhui Conch Cement which is a China-based cement manufacturer. It manufactures, sells, and trades in clinker and cement products in China and other international markets. The company also provides construction and installation services for industrial purposes as well logistics and mining-related services.
Morgan Stanley expects Anhui Conch Cement to experience an uptick in sales in 2021 driven by an increase in its market share in eastern China markets. According to analysts, Anhui Conch Cement shares might rise to HKD 63 by April 2022 compared to its current stock price of $31.
Investors can also enjoy a forward dividend yield of 5.3% right now. However, the stock might move lower in case property demand is lower than expected or if the government intervenes to control cement prices.