That said, some fund managers argue that not all of these cyclical companies are created equal. “Consumers staples are still attractive but they are expensive,” says Henderson Global Investors China Opportunities fund manager Charlie Awdry. “For example, if you look at a popular noodle company such as Tingyi, it is trading at 35 times 2012 earnings and 28 times next year. If however, you move into unfashionable industries such as financial or construction related stocks, you find some interesting growth companies.” The same holds true for the natural gas segment which has been a long time favourite of the China Opportunities fund. This is mainly because of the government’s recent pricing reforms in an attempt to lessen its reliance on coal, which still accounts for a hefty 75% to 80% of its energy needs. Over the past year, the fund has increased its weightings in PetroChina Company ‘H’, which has huge reserves and rotated out of Kunlun energy into Beijing Enterprises which together with ENN energy has grown its earnings 20% year-on-year.
Awdry though has not totally ignored the coal industry completely and has invested in Daqin Railway, a rail transit company. “It is in an underappreciated sector but the company generates strong cash flows, has a 6% yield and it is trading on a seven times 2012 P/E ratio – the lowest level since 2006.”
A taste for the good life
Companies involved in water transport are also in the spotlight as investments being pumped in have risen by 13% this year. Research from Macquarie shows that ports and waterways are slated to deliver the strongest fixed-asset investment growth between 2012 and 2015 – at around 6% annually.
As for other industries, internet, telecommunication and consumer discretionary still hold sway although some overseas brand name companies may have to jostle for shelf space with home grown versions. According to Mercer principal Debbie Clarke, Western labels are still in vogue but Chinese companies are also developing their own products. There is plenty of room for both if the recent study by the World Luxury Association WLA) published in China by KPMG is anything to go by. The market has ballooned with annual luxury sales jumping more than twofold from $3.5bn in 2002 to $12.6bn in 2011, accounting for a 28% share of the annual sales of the global luxury market. Traditional industries such as spirits, tea, porcelain, silk and clothing are also expected to make their mark.
Their customers though, like investors, have become much more discerning and companies will have to substantially up their game if they want to attract the right clientele.
Comments