The Daily Telegraph - Saturday - Money
The Chinese stocks to buy now
Asia’s powerhouse is benefiting from strong economic growth and is surprisingly easy to invest in, reports James Connington
Professional investors are enthusiastic about the prospective returns from Chinese firms. Funds investing in the region have amassed billions of investors’ cash, but few people realise that they can invest in individual Chinese stocks.
China is still growing rapidly compared with more developed economies such as the US and UK. According to Bank of America Merrill Lynch’s global survey of fund managers, the expectation is for its economy to grow at 6.1pc annually for the next three years.
The middle class is growing too, presenting ever-larger domestic demand for companies’ goods and services. The Economist Intelligence Unit, a research firm, predicts that the proportion of the Chinese population with at least $10,000 (£7,280) in disposable income will climb from 10pc in 2016 to 35pc in 2030. Internet firms in particular have built up huge domestic user bases, but generate less revenue per user than those such as Facebook and Google, leaving room for expansion.
Along with economic growth, company earnings are picking up, and the stock market has regained significant ground since its 40pcplus crash in 2014.
Andrew Swan, head of Asian and emerging markets at asset manager BlackRock, said: “China has done a good job of restructuring the old economic system and creating opportunities in the new economy. We are seeing very strong profits growth from Chinese companies and we expect that to continue through ugh the course of this year.”
Many Chinese firms are available able to buy via the US stock market, listed via an “American depository receipt”, ceipt”, or ADR. This gives investors an entitlement to a number of shares es in a non-US firm. These can be bought ught and sold just like regular stocks, , and trade in US dollars.
There are risks, though. The Chinese authorities could decide e to block the structures that have been een set up to allow foreign investors s to buy into telecommunications and nd internet firms, which is otherwise ise prohibited. However, this is thought to be unlikely. Telegraph Money has spoken to two professional fund managers about which Chinese stocks available via an ADR are most attractive. To invest, you will need an Isa, Sipp or dealing account with an investment shop that offers international share dealing.
Market value: $477bn, turnover: $24bn, pre-tax profit: $8.9bn Alibaba is often called the ‘Chinese Amazon’, and is not much smaller. As well as being the dominant do online retailer in Chin China, it is also the leader in cloud computing. Ewan Markso Markson-Brown, a fund manager a at Baillie Gifford, which has significant hold holdings in Alibaba, said: “Amazon “A doesn’t like mak making money, Alibaba does. I It has a much higher-marg higher-margin, is a more profitable com company, and generates a lot of cash.” He add added that the firm has benefited from th the rapid adoption of online shopping: “The population is using mobile phones more and is younger.”
China’s rapid development meant it leapfrogged straight to online shopping, never developing a full physical retail network. That has made internet firms vastly important for the domestic economy.
“It has 30pc to 40pc annual earnings growth forecast for the next four years. The scope for Alibaba in China, with the size of the domestic population, is greater than that of Amazon,” said Mr Markson-Brown.
Market value: $39bn, turnover: $8bn, pre-tax profit: $1.9bn NetEase is the largest internet game developer in China. It also provides email and advertising services.
Ian Hargreaves, manager of Invesco’s Asia Trust, in which NetEase is a top 10 holding, said: “The company has consistently grown earnings and cash flow at double-digit rates over the past decade.”
He said that when he first purchased the stock, it was a “contrarian idea”, but that is no longer the case. Market value: $67bn, turnover: $39bn, pre-tax loss: $360m JD.com is the second-largest online retailer in China. In addition to offering a marketplace, it develops its own products.
It has also been the leading investor in technology delivery systems such as drones and autonomous technology.
Mr Markson-Brown said that the market has underestimated the company’s potential, as it is still loss making. He added that there is a view that the online retail sector is “winner takes all”, and that JD.com will not be the victor.
He added: “It will probably move into profit this year.
“Our view is that there is room for two players in China, and we prefer JD.com to Alibaba in terms of the prospects in Asia more broadly. It is also much smaller, with greater growth potential.”
He said that while he thinks it is possible for Alibaba to double in five years, JD.com could beat that.
“It’s riskier as it isn’t profitable, but the company is generating lots of cash,” Mr Markson-Brown said.