What Analysts Say to Buy as Shenzhen-HK Stock Link Opens

06-Dec-2016 Intellasia | Bloomberg | 6:00 AM Print This Post

After months of anticipation, the opening day of Shenzhen’s exchange link with Hong Kong has finally arrived.

The programme will give foreign investors direct access to more than 800 stocks in China’s southern financial hub, while adding more than 100 smaller Hong Kong equities to the potential buy lists of mainland traders.

It’s all part of China’s effort to internationalise its currency, expand its citizens’ investment options and get mainland shares into MSCI Inc.’s global indexes. As trading begins, here’s a sampling of analysts’ top picks.

Scarcity Plays

Some parts of China’s economy are poorly represented by shares traded in Hong Kong and other international markets. Companies in Shenzhen that fill the gaps are likely to lure foreign money managers, according to Credit Suisse Group AG.

The Shenzhen Composite Index dropped 0.2 percent at 10:09 a.m., while the Hang Seng Index added 0.1 percent.

Hangzhou Hikvision Digital Technology Co. gives investors exposure to China’s growing surveillance market, according to HSBC

Wangsu Science & Technology Co.’s cloud computing business is likely to beat expectations, HSBC said. Analysts at UBS, Credit Suisse and Goldman Sachs are also among those who like the stock

Wuliangye Yibin Co., a distiller, has positive recommendations at HSBC, Credit Suisse, Citigroup and Goldman Sachs

New Economy Bets

Shenzhen is often called China’s Nasdaq because it’s the favoured destination of so-called new economy companies that tap into the country’s fast-growing technology, consumer and health-care industries.

Shenzhen Inovance Technology Co. has gained market share in automation products and that’s likely to continue in 2017, said HSBC. Citigroup also recommends the stock

Luxshare Precision Industry Co. should benefit from a new speaker-box business and the rising use of so-called Type C connectors for smartphones in China, said Macquarie analysts

Hong Kong Small-Caps

The Shenzhen connect will make it easier for mainland investors to access small-cap Hong Kong stocks with market values of at least HK$5 billion ($645 million). The Hang Seng Composite Small Cap Index has dropped 4.4 percent this year, versus a 3 percent gain for the large-cap Hang Seng Index.

Li Ning Co. is favoured by analysts at Macquarie, UBS and Credit Suisse, the latter of whom said it has the highest earnings outlook among sportswear makers

Yuzhou Properties Co.’s high dividend yield could appeal to mainland investors, according to analysts at Macquarie

Angang Steel Co. should benefit from China’s supply-side reorganisation aimed at cutting redundant capacity, said Goldman Sachs

Dual-Listed Discounts

Dual-listed companies trade at different valuations in the two cities, with analysts saying the link could help close the gap (though similar hopes at the opening of the Shanghai link haven’t been fulfilled.) Among 17 stocks listed in both in Shenzhen and Hong Kong, 16 trade at a cheaper valuation in the latter.

Zhejiang Shibao Co., an automobile steering parts maker, trades at a 75 percent discount in Hong Kong, while Shandong Molong Petroleum Machinery Co. is 73 percent cheaper

Weichai Power Co., valued at a 5 percent premium in Hong Kong, is the sole exception

Hong Kong’s Financials

Insurance firms, brokerages and banks in Hong Kong are seen as potential beneficiaries of the second link if the programme helps spur trading. Financial services firms account for 11 percent of total market value of the Hang Seng’s small- and mid-cap indexes, the third-biggest sector behind machinery and real estate, according to HSBC. Among Citigroup’s picks are Haitong Securities Co., Bank of China Ltd and China Life Insurance Co.



Category: Hong Kong

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