Pick win­ners while low prices last

China Daily (Canada) - - HONG KONG -

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.

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