Hong Kong and China market investors, fingers crossed!
It seems like we could be heading for another bullish run to challenge the 20,000 resistance level.
After the brief rally in mid of April, most investors, myself included, thought that the light at the end of the HK and China markets was starting to flicker. However, this was followed by another round of corrections, pulling the market back to the 16,000 level.
This latest rally may or may not signal the awakening of the next Chinese bull market after one of the longest Chinese bear market.
But good news as China is cutting rates and finally coming in to support the beleaguered property segment. This has sent HSI higher, within touching range of 19,000.
HSI YTD performance
The HSI is up 13.59% YTD as of time of writing.
Although this still underperforms compared to the S&P 500, a positive 13% as we edge closer to the year end is something unheard of from the Chinese markets in a long time.
The HSI’s performance reflects the collective strength of its constituents stocks. Think of it as a football club or team achieving success due to the performance of most of its players.
So which are the performing stocks that contributed to HSI’s potential revival? Below is a snapshot highlighting the outperformers, the performers and the laggards. The YTD outperformers include China Hongqiao Group Ltd (HKG: 1378), one of the world’s largest aluminium end-to-end value chain business, Meituan (HKG: 3690), major player in China’s food delivery and e-commerce sector, CNOOC Ltd (HKG: 0883), China’s largest offshore oil and gas producer and many more.
From this list, I want to highlight 5 stocks that specifically caught my attention for their potential upsides.
1. Meituan (HKG: 3960)
While many may know Meituan as the GrabFood or DoorDash of China, it is actually more than that.
It offers group buy on a variety of items, which include food and beverage and also hotel and travel bookings.
Its business model is in fact more sophisticated than its Western counterparts that could be just operating in the last mile delivery segment or purely food delivery.
Long plagued by tough competition and cash burning new initiatives, things took a change for the good, even in the midst of an uncertain Chinese economic climate.
Revenue for 1H’24 grew 23% from RMB 126.5 billion to RMB 155.5 billion, while operating profit and profit for the period grew by almost 100%.
New Initiatives revenue grew by 25%, while losses narrowed down from -RMB 10.2 billion to -RMB 4.2 billion. The core local commerce continues to show strong growth and improving margins, thus pulling up the company’s overall financial performance.
The unique culture of Chinese consumerism, where food delivery and group buying are popular, bodes well for Meituan, even in the face of an uncertain Chinese economic outlook.
Even during tough times, Meituan’s financials are not only resilient, but are still showing growth and potential. Things could turn even better when we eventually see a recovery for the Chinese economy.
This explains why Meituan shares are up 67% YTD.
2. Trip.com Group Ltd (HKG: 9961)
Trip.com is becoming increasingly ubiquitous. Originally built by Americans and founded in New York, the company was eventually sold to Ctrip. Post acquisition, Ctrip rebranded itself as Trip.com Group, and became the sprawling online travel agency as we know of today.
It also owns Skyscanner, which as the name implies, scans and aggregate flight prices offered by multiple airlines and booking providers.
While the surge in “revenge travel” and shopping might have slowed from its peak, Trip.com’s financials is showing no signs of abetting.
Trip.com Group continue to see growth in its Chinese site and also international, where Q2’24 top lines grew by 20% and 70% YoY respectively. 1H’24 net income attributable to shareholders grew by +203%, with earnings per share following suit, from RMB 6.14 to RMB 12.46.
This stellar set of results cause share prices of Trip.com Group to record a 41% YTD gain.
3. Xiaomi Corp (HKG: 1810)
Perhaps the company that innovated and pivoted the most during the last decade. I remember when it was primarily known as a budget phone manufacturer, but today, it has expanded to home appliances and even automobile maker.
Companies that iterate and innovate into products and services outside of their competencies tend to lose focus and product mastership, but this surprisingly does not apply to Xiaomi.
Xiaomi’s Human x Car x Home is no longer just a concept but a tangible roadmap. I’d go as far to say that Xiaomi has achieved what Apple Inc (NASDAQ: AAPL) has yet to accomplish.
From its latest results snapshot, Xiaomi has not only continued to solidify its smartphone market position, but it has also grown its AIoT platform and expanded its user base.
The EV business, although still new, will definitely synergise with its current product portfolio, whether from a hardware or software perspective.
This could explain the performance of the share price, which is up by +37% YTD.
4. Tencent Holdings Ltd (HKG: 0700)
In my opinion, the best business with one of the most diversified yet synergistic pillars. Tencent wouldn’t be trading at just a valuation of 23x, if it wasn’t a Chinese company.
This particular Tencent’s earnings slides summarises how ridiculous its moat is. The Wechat app allows communications and social networking, connecting people and even businesses and consumers.
The function and peripherals include mobile payment function, distributing of digital content and also launching games. The cloud vertical, especially the IaaS and PaaS then comes in to not only support the Tencent, but also as an offering to users too.
Even though revenue growth is not going to be in the high twenties due to Tencent’s size, the company is still experiencing margin expansions.
Latest quarter diluted EPS grown +53% YoY, and +14% QoQ.
5. Link Real Estate Investment Trust (HKG: 0823)
For those who are unaware of Link REIT, it is Asia’s largest REIT by market capitalisation. It operates car parks, malls and commercial properties mainly in Hong Kong, but also has a presence in China, Australia, UK and Singapore.
Most REITs were hammered down badly during the high interest rates period, and many had their DPU flat or reduced. Link REIT faced a double whammy due to the pessimism of the Hong Kong’s situation and its exposure in China.
Nevertheless, a look at their fundamentals shown that it is business as usual. Revenue is up +11% YoY, with distributable amount growing +6.4%. Link REIT also sports a gearing ratio that every REIT would be envious – just a mere 19.5%. DPU and NAV per unit dipped due to a higher number of outstanding shares following previous rights issues and dividend reinvestment plan.
It is also worth mentioning that Link REIT is internally managed – it does not have a sponsor like CapitaLand Integrated Commercial Trust (SGX: C38U) or Mapletree Industrial Trust (SGX: ME8U).
The growth of the REIT depends on its managers adopting a more proactive approach to expanding and enhancing the portfolio. This is vastly different from some Singapore REITs which have a Right of First Refusal (ROFR) from their sponsors.
The clout over the gloomy Hong Kong markets might be starting to disperse, as Link REIT’s prices seem to be heading back to HKD 40 per share.
My rationale
You might be wondering – of all the stocks that have seen prices moving up, why these particular five?
The metals and oil and gas companies can be cyclical. They might be up due to the stars aligning. China Hongqiao is experiencing one of its best fiscal year due to Russian sanctions, where aluminium sources are reduced while demand for the metal is high due to the proliferation of EV around the world.
Meituan and Trip.com’s performances surprised me, as their results showed growth and resilience even when there are so much news on the uncertain China economy.
Xiaomi proved its mettle in growing its product portfolio without the sacrifice of quality and consumer centricity, while Tencent and Link REIT are world class in their respective realms even on a global standard.
Simply put, even if the Hang Seng Index remains bearish for the next 2 years or more, I would be at ease holding on to them, provided there is no drastic change to their business model, prudence and resilience.
There are definitely more than five quality stocks within the HSI, but these just happen to be my top five favourites right now!
If you’re looking for more stock ideas, Alvin shares how he finds the best stocks to invest in to grow our Dr Wealth portfolio. Learn more here.