Following the first part of our three-part series, we continue to highlight another three stocks that UOBKH thinks you should add to your China portfolio.
4. China Construction Bank – Overweight Banking Sector
China Construction Bank (CCB) is the second-largest commercial bank in China in terms of total assets. Since 1H16, CCB overtook ICBC as the largest retail bank in China. It is now ranked number one in both the residential mortgage and credit card segments. Based on UOBKH’s estimates, CCB’s market share for mortgages and credit cards is almost 20 percent of the Chinese market.
Unrivalled Scale And Cost Efficiency
Apart from its sheer size, CCB also possesses the scale and cost efficiency that none of its competitors have. CCB has an industry-leading cost-to-income ratio of 27.9 percent. Its net interest margin (NIM) is also the highest among the big-4 state-owned enterprise (SOE) banks due to its low cost of deposits at 1.34 percent. Its tier 1 common equity capital adequacy ratio is at about 12.8 percent, the highest among the big-4 SOE banks.
Top Class Asset Quality And Lean Cost Structure
UOBKH chose CCB as its preferred banking pick due to its pristine asset quality and lean cost structure. With a strong deposit franchise, CCB is less affected by the deleveraging across the Chinese economy. UOBKH also notes that the management also adopts a conservative practice of classifying non-performing loans (NPLs). Loans that are overdue for more than 60 days will be classified as NPLs. CCB is currently trading at 0.8 times price-to-book value and offers a dividend yield of 5.1 percent for forecast FY18. Given its strong fundamentals, such yield should be viewed as attractive.
5. China Mengniu – Overweight Consumer Staples
China Mengniu has been riding on a structural recovery in China’s dairy industry. The Chinese dairy industry underwent consumer upgrade trend and easing of industry competition. The industry also managed to further penetrate lower tiered cities. As such, UOBKH foresees China Mengniu’s sales growth to accelerate in 3Q17.
Building Its Star Products
Mengniu has been adopting product premiumisation strategy and focusing on the development of its star products to drive higher ASPs and higher gross profit margin. Sales of Milk Deluxe, Just Yogurt and Zhen Guo Li grew 10 percent, 35 percent and 25 percent year-on-year respectively in 1H17. Moving forward, UOBKH expects sales growth momentum to continue in 2H17.
HOLD, TP HK$25.00
6. China TCM – Overweigh Healthcare Sector
China TCM recently acquired three TCM processed-herb related companies from China National Pharmaceutical Group in its bid to further expand its processed herb business. It has also been gaining access to manufacturing sites and local sales teams for TCM processed herbs in Shanghai, Guizhou, Heilongjiang, Beijing and Sichuan. UOBKH is forecasting robust above-peers’ performance from China TCM in 2018 given its abundant extraction and manufacturing capacity, nationwide sales network and SOE background which gives it an edge in negotiations with hospital clients.
BUY, TP HK$5.91