Best Hong Kong listed China stocks

I run a fund and have in the past been very successful (of course not perfect, but overall we have made the right "big calls" that have done us well, both on the upside as well as avoiding losses).

I am going to be posting up some stocks we are looking at, listed in Hong with a China business focus, with the view that China has bottomed and represents great upside opportunity.

In particular we focus on identifying smaller stocks, that for a range of reasons we believe are undervalued with significant upside based on all known and reported financial data and fundamentals.

Before I do that, does anyone here have any views, picks, tips they wish to share, either at a macro level (eg has China bottomed out?) as well as at a micro level (ie specific stocks).

Cheers - HKT

First the macro reasons. Why should we be buying in China now?

We are bullish on HK listed China stocks, including those of manufacturing and exporting companies.

We have recovery/growth in the US, we have stabilization in Europe, with a HUGE amount of negativity "priced in", and continued growth in many emerging markets, including across Asia. People, and companies have been "saving cash", hoarding, tightening, not investing, and all these things lead to a "surpus" of inventory, and a slowdown in China. It can very quickly reverse the other way, which is what we believe is about to happen, perhaps in a few quarters from now, likely with fuel added to the rebound by stimulus from China in 2013.

There are a few other factors that make us think we are close to the perfect time to buy stocks HK stocks listed in China, based on historical data with a realistic chance of certain stocks doubling and tripling in 2013. Some of these reasons are below:

1 – End of this year is a major political change in China. Lead up to that produces uncertainty – after that will come renewed stability, growth and investment. So we plan on buying with a view to hold for at least a year, likely 2 years (2013-2014), and with a view to stock prices doubling.

2 – 50% of Hang Seng gains historically come between November and February of each year so if you plan in buying in, now might be a good time. We plan on buying in from November onwards and we know others who will be too.

3 – Buying in times of a perceived crisis creates a “crisis margin”, and selling in times of confidence creates a confidence margin. We are surely now we are more towards “crisis” (although moving towards "recovery") rather than “confidence” on the scale, so we belive now is a good time to buy, well before full confidence re-emerges.

4 – Capital inflow and outflow of Hong Kong means you will get more volatility, both on upside and downside – great for investors who buy when others are selling.

5 – US treasury yields are at record lows, and yield curve likely to lengthen – likely to be less that 1% for 10 years. This means super cheap borrowing and demand for higher yields (ie stocks). (Also it likely means the Govt in HK will impose high deposit ratios for property (ie less leverage), boosting stocks in terms of relative attractiveness to property (on the basis that leverage is harder to get for stocks than property). We believe that the relative attractiveness of stock vs property will result in a surge in funds flowing into Hong Kong listed stocks in 2013.

6 – If/when China has announces stimulus plans, expect China capital to be invested in HK, and in HK stocks potentially significantly boosting HK stocks. And remember also, there is also plenty of stimulus the US and Europe can provide if they wish.

7 – How long was last stock market decline from Lehman’s to bottom – that period may be a guide to next bottom after the “EU crisis”. (around 6 months, so buy Nov 2012). Lehman's shows how very quickly todays markets can move from highs to lows and also, likely from bears to bulls. We believe this recovery could be very quick once it starts

8 – Hang Seng, and China markets, now have some of the lowest PEs in the world – super cheap by historical standards and close to record historical lows (ie a record low “tide”). Again, to be a strong reason to belive the market is at rock bottom.

9 – Increased focus on Government taxing in EU and US will lead to money flowing to “low tax”, and “tax-haven” countries, which include HK and therefore HK listed stocks.

10 – People seeking to preserve asset and currency value will also move money from Europe to HK.

11 - Euro close to historical lows which would indicate to us a global bottom and therefore buy signal for China.

12. - Look for a bottom in China’s quartely GDP and export declines. (Right now GPD at a historical low, and from a historical perspective seems likely to bottom out at 7%).

13 – Look for reversal in China FDI declines (now declined for last 18 months).

KUNMING MACHINE (HK Stock code 00300) rated STRONG BUY by HKT.

Current price $1.7.
Target price (12 months) $4.00

KUNMING MACHINE is engaged in the design, development, manufacture and sale of machine tools, precision measuring equipment and precision transducers.

The company suffered significantly since the 2008 economic slowdown, and the Euro crisis, but we feel the company is poised for a resurgence due to strength in the US, slabilization in Europe, ongoing growth in Asia, and a recovery and anticipated stimulus from China.

Addressing the complicated macroeconomic conditions and intensified market competition, Kunming Machine Tool experienced a "pull-back" pattern as most of peers did. Under the proper leadership of the Board and the senior management however, the business units firmly joined their efforts to secure smooth business operations of the Company as a whole. As such, the Company achieved record highs in sales and production volume and attained progresses and breakthroughs in the ares of marketing, production, technology development, quality control, and financial management.

We have strong confidence in the company management structure.

Since 2008 the company's return on equity, total return on assets, operating profit margin, net profit margin, and dividend payout, have all declined. However, after having spoken to people in the industry, we believe things have bottomed and that all these ratios will show positive improvement over the next 3 to 5 years.

The company's turnover has increased each year since 2009, and the company has made a consistent profit every year for the last 5 years.

PE is 13.4 which is typically higher that we prefer for companies we invest in, but given the resurgence we anticpate we feel the current price is nevertheless very cheap.

The company trades well below is NAV of $3.24. It is worth noting that this company is dual listed in Hong Kong and China. The company trades at a siginificant premium in China, being $6.03 per share. We belive that over time the Hong Kong listed valuation and the China listed valuation will converge.

Under "normal conditions" we believe the company should be valued at $4.00. We anticipate this value to be realized gradually over the next 12 months, and that it will hit our value price target of $4.00 by the end of 2013. We will therefore accumuluate this stock over the coming year with a $4.00 target in mind, and we will share this view with other colleagues in the investment industry focussed on China stocks.

A good article here on Chinese stocks.

Chinese equities look awfully cheap – Telegraph Blogs

A few select quotes:

My instant take on today’s half-full/half-empty data from Beijing is that China has bottomed out after suffering a full-blown "Chinese recession".

China has clearly turned the lending spigot back on. Fresh commercial bank loans – known as "total social financing" — rose to $264 billion in September from $198 billion in August.

Zhiwei Zhang from Nomura said fixed asset investment rose 20.5pc in September. Railway investment has nearly doubled. While much of the alleged $2 trillion stimulus by the regions is a fictitious wish list, some is not.

Chinese equities look awfully cheap. The Shanghai composite has dropped by two-thirds since late 2008, or by three quarters in real terms (given Chinese inflation)

This is not far short of the Wall Street crash in from 1929 to 1933 in real terms (given US deflation).

If you are a long-term China bull – as I am – this looks like a good entry point.

HSBC says a price-to-earnings ratio of 8.5 for Chinese equities are eye-wateringly cheap. "The economic rebound is not priced in," said Garry Evans, the bank’s equity strategist.

So if you still like the China story, you will probably never given a better time to buy a stake.

Another article consistent with our macro theme that China has bottomed out (and that now is the time to buy into China stocks).:

Hopes up even - as slowdown in GDP holds - The Standard

A few select quotes:

Mainland domestic output growth narrowed for the seventh quarter on the trot, but analysts believe the world's No2 economy has bottomed out - thanks to improving industrial and retail figures.
The positive outlook is expected to reduce the urgency for Beijing to introduce more stimuli to boost the economy.

Gross domestic product expanded 7.4 percent year on year in the third quarter, the National Bureau of Statistics announced.

The figure, though within expectations, is below the gains of 7.6 percent in the second quarter and 8.1 percent in the first.

Seasonally adjusted quarter- on-quarter growth hit a year's high of 2.2 percent, from a 2 percent rise in April to June.

"We see no sign from the central bank that it will change its monetary policies as the economy has bottomed out," Guotai Junan Securities chief macroeconomist Wang Jin said.

Industrial production rose 9.2 percent last month, compared with a 8.9 percent gain in August, and fixed-asset investments rose to a 12-month high of 23 percent.

Retail sales also hit a six- month high of 14.2 percent gains last month on stronger demand ahead of the Golden Week break.

Exports grew 9.9 percent

CHINA ALL ACCESS (HK Stock code 00633) rated STRONG BUY by HKT.

Current price $1.33
Target price (12 months) $2.4,
Target price (24 months) $3.5

CHINA ALL ACCESS is engaged in the provision of satellite communication application solutions and services, wireless data communication application solutions and services, and call centre application solutions and services.

The Group’s wireless data communication application solutions and services segment is showing stable growth. For example its intelligent information terminal (“Jinwutong”) and intelligent surveillance system. The “Jinwutong” business has also expanded from the traffic police application to various fields including fire control, logistics, public security and others, thereby further expanding the scope of the company's market. The business of intelligent surveillance systems is now focused mainly on traffic management, city management, thermal power, fuel gas and other industries.

The company's satellite communication application solutions and services segment is also showing steady growth. The company has developed more equipment compatible with satellite communication system, such as panoramic camera and satellite integration terminal to upgrade and improve the existing systems. They company is developing users in several new industries, including prison administration, reserve duty and water supply.

The company's call centre application solutions and services segment is small, representing approximately 1% of the total business. Customers were from various industries including telecommunications, banking, broadcasting and television industry and traffic control and others. We believe there are ongoing new opportunities in different provinces and different industries for this business.

We have strong confidence in the company management structure, a factor that is important to us when we select companies to invest in. China All Access is audited by one of the "big 4" accounting firms, namely KMPG, a fact that we think adds value in terms of the reliability of the company's earnings (always important to us as we look at to find companies with China business that we believe are undervalued based on reported financials).

We love the growth, technology, and area of business of this company and think it has great opportunities ahead over the next decade. The company is poised to do well In view of the government’s policy of promoting information technology industry and the fast growing market demand for such products and services.

The companys operating profit margin and net profit margin has grown strongly since 2009. The company has also increased it dividend payout % over this time (which we generally like) although with this type of company we are also quite happy to see it retain earnings for reinvestment for future growth.

Turnover, operating profit, and net profit has increased consistently ever year since 2007. A trend we love to see as value investors.

PE is 6.3 which we feel is cheap for a company with this kind of growth potential.

The company trades around is current NAV of $1.38.

We believe that as this company continues to perform and grow it will attract investor interest as funds flow back into China stocks. We will therefore accumuluate this stock over the coming year with a $2.4 target in mind for 12 months, and a $3.5 target in mind for 24 months.

We plan to share this view with other colleagues in the investment industry focussed on China stocks.

Technology is one of the big focus areas of the Chinese Government: http://apcoworldwide.com/content/PDFs/Chinas_12th_Five-Year_Plan.pdf

In our next posting we will identify two companies that we think will grow significantly in value over the next few years in the Chinese technology sector.

Which IT companies will benefit from China's twelth five-year plan?

One of the specific areas China will focus on supporting for long term growth under is twelth five-year plan is information technology. The planning phase is nearly done, and a significant part of the implimentation of this plan will take place in 2013. And as we know, in China, if the Government decides something should happen, it will spare no resources and effort to ensure that it does happen!

The overall IT sector will be a big beneficiary of the Chinese Government's investment focus. You can be quite sure that local or Chinese-associated companies will be the biggest beneficiaries of all. There will of course be opportunities for foreign players, but China will make sure is own companies succeed the most.

Some of the larger IT companies in China are relatively well known, and will already likely be part of of the portfolio of any large China company investor. For example PC and IT manufacturer Lenovo (HK Stock Code 00992), China Mobile (HK Stock Code 00941), Varitornix (HK Stock Code 00710), and Tencent (HK Stock Code 00700), all of which we believe will perform well over the next few years. Of these companies we believe Varitronix will perform the best, with Tencent being a good company but already with a very high price, China Mobile likely to show slow and solid growth (nothing spectacular), and Lenovo continuing to gain market share against its rivals, but with very tight margins.

We will right more on why we like the prospects of Varitornix in a future posting, but in the posting below we will provide details of the first of a number of our strong BUY reccomendations on Chinese tech companies that we think could more than triple in value over the next 2 years, and which are not (yet) likely to be on most China investor's radar.

NANDASOFT (HK Stock code 008045) rated STRONG BUY by HKT.

Current price $.33
Target price (12 months) $.7
Target price (24 months) $.1.20

NANDASOFT is engaged in development, manufacturing and marketing of network security software, Internet application software, educational software and business application software. The Company also provides systems integration services including information technology consulting, sales of computer hardware products and trading of IT related equipment.

The company stands to benefit significantly from the focus and support China will provide on the IT industry in China over the coming 3 years.

Nandasoft is emerging as a leader in the research and development of mobile platform and cloud computing and its focus on this area will position it very well to meet future market demands and opportunities in China.

The Company won the R&D and industrialisation project of cloud computing support software (platform security software) accredited by the Ministry of Industry and Information Technology of the PRC. The objective of the project is to develop a cloud computing platform security software with its own intellectual property rights, making a breakthrough on the critical security technology of supporting system on cloud computing and establish a security system applicable to the cloud environment, through which to promote the healthy growth of cloud computing technology, further strengthens domestic information security.

Nandasoft is also focusing on IT/Healthcare which is another big priority area for China over the next 3 years. The company is working on a project which aims to integrate many health resources across China, improve the utilisation rate of medical resources, and create a new model of innovative real-time health services, which promotes the development of the elderly care and health services industry and the health services industry with new technologies.

We have strong confidence in the company management structure. One of our researchers met senior management of this company, and seemed impressed with the vision, and their strategies towards achieving that vision.

Since 2007 the company's return on equity and return on total assets has consistently risen each year. These ratios are important to us in companies we consider investing in.

Nandasoft’s net profit margin has also continued to rise consistently, each year since 2007.

We believe these trends are likely to continue, and accelerate over 20013-20015.

Nandasoft’s PE is 4.4, which indicates to us that the company is extremely cheap. If this sector “heats up” the company could easily reach a PE of 20 valuation based on its current earnings.

The company trades below its NAV of $.37.

One consideration to bear in mind is that the stock of this company is not, historically, traded in high volumes. Rather the stock is tightly held, making it hard to accumulate large positions in the stock quickly. We think stock traded volumes in this company will pick up as the China IT sector becomes more active.

We expect, conservatively, and based on our current knowledge of publicly available information, that Nandasoft will hit our value price target of $.7 by the end of 2013, and $1.15 by end of 2014. One could certainly also foresee scenarios where the stock would trade much higher. We will therefore accumulate this stock over the coming year, and we believe we are acquiring the stock a significant discount to what it will trade at as the prospects of this company become better known and more apparent.

A quick update on some of our China stock reccomendations so far:

KUNMING MACHINE (HK Stock code 00300) rated STRONG BUY by HKT.

Current price $1.7.
Target price (12 months) $4.00
Now: $1.95

CHINA ALL ACCESS (HK Stock code 00633) rated STRONG BUY by HKT.

Current price $1.33
Target price (12 months) $2.4,
Target price (24 months) $3.5
Now: 1.41

We will do occasional updates, to see how close our BUY reccomended stocks are tracking to our price targets.

Meanwhile, more signs of a China recovery are emerging. China Manufacturing PMI, reported just a few minutes ago hit a new 3 month high. This is the second month PMI has risen as the new order index rose to a six month high. We are predicting a gradual economic recovery in China, but are expecting that such a gradual recovery could like to a relatively sharp recovery in Hong Kong listed Chinese companies.

Please do take a look at the first of the Chinese tech companies we have picked as an investment target for the next 24 months, NANDASOFT (HK Stock code 008045). We will provide details of a second company we are looking at very shortly, and plan to finish our research and due diligence on that company in the next few days.

24 October 2012 - CH ALL ACCESS (HK Stock Code 00633) has announced that it had won a bid for the mobile emergency platform project in Ningxia Autonomous Region with the aggregate investment surpassing RMB100 million.

At HKT we expect more positive reports form this company over the coming 24 months and reiterate our strong BUY reccomendation.

A good summary of the strong growth prospects and strong historic performance of Nandasoft here: JIANGSU NANDASOFT TECHNOLOGY (8045:Hong Kong): Financial Statements - Businessweek

CHINA STARCH (HK Stock code 03838) rated STRONG BUY by HKT.

Current price $.244
Target price (12 months) $.6
Target price (24 months) $.9

CHINA STARCH is engaged in the manufacture and sale of cornstarch L-lysine hydrochloride salt and ancillary corn-based and corn-refined products. It’s a niche area that we think has huge upside as consolidation and rationalization in this industry segment takes place in China.

The company stands to benefit significantly from the gradual global recovery and stabilization of global markets, and it is well poised to increased its turnover from cornstarch, lysine and starch-based sweetener segments. China Starch is also focused on a development strategy of developing new products by using cornstarch as raw material, which will help contribute to its margins as production and sales of such products start to grow.

The Group has achieved a breakthrough its production expansion plans. With the support of the Municipal Government of Shouguang (the “Shouguang Municipal Government”) of the PRC, the Group plans to expand its production capacity by relocating the existing production plant and facilities in Shouguang to a new production site as may be granted by the Shouguang Municipal Government. The proposed new production site is expected to remain in Shouguang, and the estimated annual production capacity of the new production site is also expected to be comparable to that of the existing one. The operation and production currently carried on at the existing production facilities will continue until the new production facilities are ready for production. We understand that the company will negotiate for the grant of further new production site and preferential policies with the Shouguang Municipal Government in the near future.

Since 2008 the company's return on equity and return on total assets has consistently risen. We expect this trend to continue over the next few years and the company obtains the benefits of economies of scale as it expands production. The company’s operation profit margins have increased year on year since 2008, and again, we expect margins to grow over the coming years.

China Starch has a strong track record, and has been profitable every year since its public listing, and its turnover has increased strongly each year since 2007. The company consistently pays a dividend.

The website of China Starch is irasia.com - China Starch Holdings Limited

The company trades below its NAV of $.349.

China Starch’s PE is 4.98, which indicates to us that the company is extremely cheap. We think valuation with PE of 10 valuation is appropriate, which accords with our outlook for this company to trade at $.6 by the end of 2013.

We plan to acquire an increased holding of China Starch over the next 12 months, as long as we continue to see this country trading below value, and we are recommending this company as a strong buy to people looking to invest in solid, fast growing Chinese companies that are trading below value.

QE3 supports Hang Seng Easy to see where the hot money flows - The Standard

Q3 2012 Earnings reported by Bank of China (HK Stock code 03988)

Bank of China (China's 4th largest bank) posted its biggest quarterly profit gain in a year, significantly beating estimates!

Net profit rose to 34.76 billion yuan (US$5.57 billion) in July-September from 29.8 billion yuan a year earlier. That compares with the average estimate of 32.7 billion yuan.

Net interest margin, which measures loan profitability, widened to 2.12 per cent at the end of September from 2.1 per cent at the end of June.

The earning report is a further confirmation China's recovery is underway.

Bank of China is the first of the so-called “Big Four” Chinese banks to report earnings for the third quarter, and its wider margins set a strong tone for its peers. We expect the stock, along with other Chinese bank stocks to rally tomorrow. We also expect a positive effect on the stock prices of insurance companies such as China Life.

Bank of China’s total loan book expanded about 9 per cent in January-September, pointing to rapid loan growth in the third quarter.

We believe the stock price of Bank of China will trend upwards and the China recovery gains speed. Our price target for Bank of China is $4.40 within 12 months.

KUNMING MACHINE (HK Stock code 00300) will report earnings on 29 October 2012. We look forward to reviewing the earnings report. Our 12 month price target for Kunming Machine is $4.00 per share. The current price, as of today, is $1.88.

The HK Government announced "stability measures" aimed at slowing the pace of Hong Kong's property market, including imposing additional stamp duty taxes on non-residents who purchase property in Hong Kong.

The Hong Kong property has recently been seen as very attractive to investors seeking to benefit from Hong Kong's low interest rates, which essentially are tied to the US Fed's rates. Many are also attracted to the prospect that many wealthy Chinese in mainland China desire to own property in Hong Kong.

We believe these new measures will lead to an increase of inflowing money to Hong Kong moving into equities rather than property. We feel that as "hot money" moves into HK listed equities, and as China starts to rebound, these factors are both supportive of strong growth in the Hang Seng over the coming year.

Another strong result from a Chinese bank, again providing support to the view that China is starting to experience renewed growth.

CM BANK (Hong Kong stock code 03968) announced for the third quarter ended September that its net profit rose 16.6% year-on-year to RMB11.41 billion.

Fee and commission income rose 23.49% year-on-year to RMB14.652 billion. The cost to income ratio was 33.01%, down 0.24 percentage points compared with the same period last year.

For the first three quarters, the net profit rose 22.6% to RMB34.79 billion. During the period, the operating income amounted to RMB85.18 billion yuan, of which net interest income accounted for RMB65.79 billion, a year-on-year growth of 18.28%.

We think that Chinese banks will generally see stronger growth over the next few years, and that looser lending policy will have a very positive effect on smaller Chinese companies.

HISENSE KELON (HK stock code 00921 rated VERY STRONG BUY by HKT.

Current price $2.51
Target price (12 months) $4.20
Target price (24 months) $6.50

HISENSE KELON (HK stock code 00921) reported fantastic Q3 results today. Extremly stong results and growth and beating market expectations. We have been monitoring this company closely and we feel now is the time to buy and accumulate.

Hisense Kelon announced its results for the third quarter ended 30 September 30 2012 with turnover rising 14.66% to RMB5.28 billion and net profit jumping to 405.22% to RMB215 million.

These results are very impressive. We consider HISENSE KELON a VERY STRONG BUY and will start accumulating it as we deploy our investment funds for 2013.

The current stock price of HISENSE KELON (Hong Kong stock code 00921) is $2.51. We value the company based on current financials, at $4.20, and expect this valuation to be reflected in the stock price possibly as early as mid-2013. If the business continues to grow strongly in 2013 (which is quite possible, based on both domestic consumption and export demand) we think the stock price could surpass $5.00 by the end of 2013. We have a $6.50 valuation expectation within 24 months.

NANDASOFT (HK Stock code 008045) maintained as a STRONG BUY rating by HKT. Price target raised on news Jiangsu NandaSoft Technology Company Limited plans to apply for Main Board Listing.

Current price $.33
Target price (12 months) raised to $.9
Target price (24 months) $1.4

NANDASOFT is engaged in development, manufacturing and marketing of network security software, Internet application software, educational software and business application software. The Company also provides systems integration services including information technology consulting, sales of computer hardware products and trading of IT related equipment.

We earlier valued this stock as a stong buy based on current fundamentals and positive business outlook. In terms of fundamental valuation analysis, we price in a "discount" for companies listed on the GEM index rather than the main board of the HK Stock Exchange. One reason for this is that GEM companies are often traded at much lower volumes, which deters investors who seek liquidity. There is further a perception, perhaps with some basis, that GEM companies are less stable, less regulated, more speculative, etc.

We have already identified Nandasoft as a company that we think will be a company that will benefit from the Chinese Government's focus on IT over the next 3 years as it executes on its 12th 5 year plan. This proposed move of Nandasoft to the main board and also some recent signs of a refocussing of the Nanadosoft business affirms that view.

We reiterate a strong buy reccomendation on Nandasoft, and now with the Main Board listing priced in we have revised our 1 year target price to $.9 per share and our 2 year target price to $1.4.

We will also now increase our planed accumulation allocation of Nandasoft stock in our China growth fund by several percent.