Pick winners while low prices last
Investors looking for “theme” or “concept” stocks to buy should look no further than the Stateowned enterprises (SOEs), most of which have their H shares listed in Hong Kong.
Yes, SOE reform may sound like a tiring theme that has been brandished about for years. But this time, stock analysts and investors are expecting major changes after earnings of SOEs slumped.
Analysts at investment firm Reorient estimated that SOE profits fell to a combined 1.88 trillion yuan ($293.7 billion) in the first 10 months of 2015 — down nearly 10 percent from a year earlier — according to a media report. This would be the worst earnings plunge for SOEs in three years.
In the coming year, SOEs’ earnings potential is widely expected to be depressed by mounting financial costs arising from crippling debt and a nagging economic slowdown. The latest official figures showed that SOEs’ aggregate profit for February dived more than 20 percent from a year ago to 256 billion yuan, and the market has since been rife with rumors that a major restructuring is on the cards.
In the minds of many investors, SOE reform means asset revaluation and mega mergers to create even more gigantic behemoths that would be even more dominating in their respective industrial sectors. The idea behind such mega mergers, of course, is to achieve greater cost and operational efficiency, resulting in enhanced capability in creating shareholders’ value.
Earlier, market talk of an imminent tie-up between Air China and China Southern Airlines sent stock prices of the two carriers through the roof. Although the rumors were refuted by the authorities, stock analysts maintain that a merger makes enormous sense because it could, at least, eliminate a bruising battle between the country’s two major airlines for more lucrative international routes.
In the past few months, there have also been market rumors of a possible move to regroup the telecommunications industry by cutting down the number of carriers through mergers and acquisitions. There has also been talk of a similar overhaul in other sectors, including finance and energy. Stock analysts are generally confident of getting the direction of SOE reform right. What they are uncertain about is the timing. Some believe that something dramatic on the SOE front will happen in the first half of next year.
If you agree, it’s time to start picking the winners while market prices are still low.
Rumors of an Air China and China Southern Airlines tie-up have been refuted but stock analysts maintain that a merger makes great sense.