Value in mis-priced H-shares, says Henderson

The recent jitters over S-shares or China stocks listed on the Singapore Exchange due to financial irregularities may have prompted some investors to give companies operating on the mainland a wide berth or a miss altogether.

But according to Henderson Global Investors fund manager, Andrew Mattock, there is currently plenty of value in a swathe of H-shares, or China stocks listed on the Hong Kong exchange.

Unlike some of the S-share companies listed here, he pointed out most of the H-share companies tend to have a longer corporate history and stronger financial track record.

The H-share market, said Mr Mattock is still "massively undervalued" with long-term growth being mis-priced due to risk aversion rather than bona fide concerns over the actual earnings growth of the companies.

He pointed out that there are many companies that were recently valued at two to four times price-earnings. "These are companies that have solid cashflow and earnings and not going to go bust any time soon, which tells us that they have simply gotten too cheap."

Mr Mattock is the lead manager for the Henderson Horizon China Fund, which unlike most China funds here, has the ability to take on both long and short positions through instruments such as contracts for difference (CFDs) and index futures to expand the its scope for outperformance.

Unlike most China funds, which typically holds 50 to 60 stocks with each counter taking up to 2% of the portfolio, he said that the Henderson China fund invests in a concentrated portfolio of 20 to 25 red chips, accounting for an average of 4% to 5% per stock in long positions.

It also employs a bottom-up, stock-specific approach and is not biased towards any sector or investment theme, though the portfolio as of 31 March had been overweight in financials (which besides banks also include property, Chinese insurers) and selected industrial counters. Property developer, Yanlord is the only Singapore-listed share in the portfolio mix.

"It is by coincidence that most of the better valued counters are found in these sectors," said Mr Mattock, who added that the fund's primary focus is on high conviction stocks with long-term earnings prospects.

About 40% of the portfolio is currently invested in mid-cap companies due to their better upside potential, while the short positions consist of mainly defensive Hong Kong and China utilities shares.

As Mr Mattock noted, "Many of the market leaders and defensive stocks have been overbought which is why we prefer mid-caps especially property counters like New World China Land, Guangzhou R&F Properties and Yanlord rather than China Overseas Land which we see as overpriced relative to the sector."

Some of the other "highly mispriced stocks" in the Henderson Horizon China Fund include Comba Telecoms, a Guangzhou-based wireless and mobile infrastructure provider and Sichuan Expressway. The top five long holdings are China Mobile, Bank of China, Kingdee International (software company), New World China Land and Industrial & Commercial Bank Asia.

Mr Mattock is also of the view that the usual perception of China consumption stocks as an investment has often been overrated, pointing out that only 36% of China's gross domestic product (GDP) is based on consumption, which is much lower than most developed nations.

"Chinese consumers are not likely to be consuming aggressively until they have satisfied their basic needs of buying their first houses or upgrading from their current homes," he noted.

He added that the property sector which accounts for 15% of GDP has been showing signs of sustained recovery in Beijing, Shanghai and Shenzhen during the first four months of the year, with sales in some cities approaching or even surpassing previous peaks last seen in late 2007.

Which is why the fund has its biggest weighting on property firms and banks.

"General infrastructure – like new and faster railways, communications, transport and housing, all these types of fixed asset investments (FAI) will be the core drivers for the Chinese economy over the next half decade or so before consumption really picks up," said Mr Mattock.

He noted that FAI is showing signs of being boosted by the recent RMB 4 trillion stimulus package by Beijing, which has also carried out various measures to spur home purchases by scrapping controls on bank lending and aggressive cuts in interest rates – a reversal of policies previously aimed at preventing overheating and reining in inflation.

There is also evidence that the credit squeeze in the corporate sector has been easing with loan growth surging to a new record, rising 24.2% year-on-year in February to RMB1.07 trillion. On the consumption side, auto sales surged 34.8% year-on-year in February bringing a halt to six consecutive months of falling sales.

"The Chinese government has sent a clear message that it will do whatever it takes to bring growth close to 8%, and the past record shows that it has a good record of delivering its promises on the macroeconomic front," noted Mr Mattock.

It's the view of Henderson that besides property developers, the other sectors that are most likely to benefit from the stimulus in 2009 include steel producers and mining companies as China attempts to veer away from its dependence on export-oriented growth.

Despite his view that the stimulus package is taking on traction in some sectors in China, Mr Mattock pointed out that overall GDP growth might still decline due to the lag between policy implementation and the real impact on the economy. The export sector, for example, could still struggle to find its feet due to the need for external factors to improve, such as the stabilisation of the global financial sector.

In the meantime, he is recommending a 'buy and hold' strategy for selected red chips while valuations are still cheap.

"It's futile to time the market. Short-term volatility will remain a concern, so it's not a good strategy to get in and expect returns in two to three months. It's better to buy while it's still cheap and hold for the long term. You may have to sit for six to 12 months or longer, but market catalysts can crystallise over a very short period, and you may get the payment in a span of two weeks when that happens," Mr Mattock noted.

Details of Henderson Horizon Fund – China Fund




Click here to find out about how the Henderson China Fund’s long-short strategy works.

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