3 Chinese stocks to watch amid the rocky recovery
The EV battery manufacturer working with Ford & Tesla, one of the world's largest air-conditioning manufacturers, and a Macau gaming giant.
Many investors tipped the end of harsh COVID-19 containment measures in China would bring a strong stock market resurgence.
Initially there was a frenzy of interest. Chinese equities did experience a rally towards the end of 2022, but that interest has faded.
The domestic recovery has been slower than most expected and exports continue to be weighed down by economic deterioration in the West.
So, what now for the world’s second largest economy and the investment opportunities within?
In Antipodes' latest podcast episode, I spoke with the Lead PM of Antipodes Emerging Markets strategy, John Stavliotis.
We discuss our investment team's perspectives on China's rocky recovery, but also explain why we think investors still can't ignore exposure to the world's second largest economy.
You can listen to the full episode right here on Livewire, or search for Good Value | Pragmatic Value Investing wherever you listen to podcasts.
We also discuss 3 interesting Chinese investment opportunities in the episode, those are summarised below.
3 Chinese stocks to watch
Midea Group (SHE: 000333)
Midea is one of the largest air-conditioning manufacturers in the world. Today, investors can buy Midea, which is growing over 10% p.a., on 12x earnings.
Compare this to Japan's Daikin Industries (TYO: 6367) which is priced at 25x earnings and growing single digits.
What we like:
- An efficient cost structure and investment in distribution has allowed Midea to price competitively and grow market share domestically and overseas.
Over half of Midea’s exports are to emerging markets which are suited to their price competitive products, and structural growth opportunities exist from higher penetration as well as upgrades to higher priced, lower energy intensive units.
Midea will also benefit from a stabilisation in the Chinese property market but is not reliant on a large increase in new starts. Midea has a great link to replacement and secondary transactions when most people renovate.
-
Building on its success in air-con units, the group acquired German robotics business Kuka in 2017. The investment in industrial automation and robotics leverages its mega-scale manufacturing experience and with a little innovation it’s an opportunity to extend the duration of the company’s growth profile.
Contemporary Amperex Technology Co (SHE: 300750)
Better known as CATL, this Chinese multinational manufacturers more than a third of EV batteries globally.The company is priced at 23x this year’s earnings, with revenue forecast to grow 20% p.a. for the next 3 years - this is a conservative assumption which assumes limited sales in the US despite recent evidence they are growing in that market.
Compare this to Korea's LG Energy which has 13% share of the global EV battery market, high single digit return on capital, but is priced at 67x earnings.
What we like:
The company has maintained share despite competitive intensity because their batteries have 10% higher energy density v peers and this performance gap has widened in each of the last 3 years.
Broadest portfolio of original equipment manufacturing relationships amongst the battery makers
Ford and Tesla have both announced JV partnerships with CATL despite the Inflation Reduction Act limiting parts suppliers from China. This provides confidence around CATL’s status as a leading battery manufacturer and ability to weather geopolitical uncertainty.
- Long term opportunity in lithium iron phosphate batteries - this cheaper battery alternative is required to increase demand for mass market EVs, which policy makers need in order to increase EV penetration and meet emission goals.
Galaxy Entertainment Group (HKG: 0027)
Galaxy is the leading integrated resort operator in Macau.
The stock is priced at 13x next year's EV/EBITDA, which is lower than pre-COVID despite improving structural opportunities and a stronger growth profile driven by hotel developments.
What we like:
Gaming licences have been extended for 10 years and COVID saw the demise of junket operators, which is positive for profitability.
Supply remains constrained as no new gaming tables will be approved in Macau in the foreseeable future and only the current six concessionaires can operate in the region, with no new licences to be issued.
Significant pent-up demand versus other consumption categories, reflected in the sharp recovery in mass gaming revenue to pre-COVID levels
Market share should increase as Galaxy has the biggest development pipeline of hotels over the next three years versus few completions from the other operators over that period
More global investing insights from Antipodes
Keep up to date by following the Antipodes team on LinkedIn. You can also find more insights, videos and podcasts on the Antipodes website.
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In almost two decades of investing in equities based in Sydney and Singapore, Alison has worked through various market cycles and navigated major market events. Alison is an investment director at Antipodes and a member of the senior investment team.
Prior to joining Antipodes she worked as an investment analyst with Smith Tan Asset Management in Singapore and a deputy portfolio manager at Kingfisher Investments. From 2004 to 2015, Alison was a senior investment analyst at Platinum Asset Management.
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In almost two decades of investing in equities based in Sydney and Singapore, Alison has worked through various market cycles and navigated major market events. Alison is an investment director at Antipodes and a member of the senior investment...
Expertise
In almost two decades of investing in equities based in Sydney and Singapore, Alison has worked through various market cycles and navigated major market events. Alison is an investment director at Antipodes and a member of the senior investment...
Expertise
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