Modern China thrives on rapid change. It’s a land where today’s rice paddy may be paved tomorrow for a new industrial park.
It’s also an investment environment where last year’s stock market sensation can quickly lose steam to become this year’s laggard.
Traders of Chinese stocks can take advantage of these winds of change by avoiding steady-the-course, same-old-thing investment strategies that span more than a year. Blue chips have their place, of course. But it’s unwise to sit still in a country where companies are blown around by unpredictable export markets, a dynamic consumer market and a communist government with a unique agenda.
A better strategy for Chinese stocks is to bet on companies with strong business plans for the near future but whose shares recently underperformed other companies in the same market sector. Putting it conversely, look at who’s done really well in a given sector over the previous six to 12 months, and then check out the other guy.
The new year is a good time to scan the landscape for companies that were not necessarily stars in their respective sectors in 2014, but that are poised to do well in 2015.
Here are three standouts in Chinese stocks worth noting, and the sector leaders they can beat in the coming year:
Tencent Holdings ADR (TCEHY) Over Baidu, Alibaba
In the online consumer services sector, Tencent Holdings ADR (TCEHY) is in a good position to outperform two companies that did extremely well in 2014 — the e-commerce giant Alibaba Group Holding Ltd (BABA) and search engine Baidu Inc (ADR) (BIDU).
All the noise over Alibaba’s blowout IPO in New York last September and new Baidu ventures such as online consumer financing may have distracted investors from Tencent’s growth in a variety of businesses, but especially its increasingly popular WeChat and QQ messaging services.
Tencent’s ADR stock has fallen about 5% over the past six months, while Baidu has risen 22% over the same period and Alibaba has jumped 17% since its launch.
Tencent’s most recent financial report for January-June 2014 highlights a 48% increase in gross profits to $6.2 billion on a 37% increase in revenues from the same period in 2013.
Tencent last year grew its online advertising, gaming and app businesses, launched a private bank and started cooperating with online retailer JD.com Inc (ADR) (JD). It also has stakes in navigation app and software companies.
But the company’s real strengths are in its QQ and WeChat (also called Weixin) messaging services, which consumers are picking over Weibo Corp (ADR)’s (WB) Twitter-like service and China Mobile Ltd. (ADR)’s (CHL) text messaging and voice services.
QQ and Wechat are platforms for other Tencent businesses, such as online banking. The company counted 431 million monthly WeChat users in the second quarter, up 57% year-on-year, and about 830 million QQ users. Those numbers are sure to head higher 2015.
China Construction Bank (CCIHY) and Industrial and Commercial Bank of China (IDCBY) Over Bank of Communications
Big changes are in store for Chinese state banks as the nation’s economy slows, business lending wavers and individual savers continue to shift more of money into wealth products and money market funds. The government is working on a deposit insurance scheme and letting more online, non-bank companies compete for financial services.
Still, the government and its state-run companies are still loyal friends of the biggest institutions. Two of the big boys — China Construction Bank (CICHY) and Industrial and Commercial Bank of China (IDCBY) — look like smart stock picks for the coming year.
Over the past six months, these banks have underperformed their partners in largesse such as Bank of Communications (BCMXY), whose stock trading over-the-counter jumped 33% to more than $24 as of late December. For no clear reason, CCB and ICBC shares have climbed just 16% over the same period, to $16 and $14, respectively, and have every reason to top Bank of Communications’ value.
All of China’s big banks are likely to be major beneficiaries of widely expected monetary loosening by China’s central bank in coming months, according to China Merchants Securities analyst Donger Wang. But BOC shares are likely to have less room for growth than CCB and ICBC. Overall, Wang said he’s overweight on China banks and CCB is his favorite.
As of this writing, Eric Johnson did not hold a position in any of the aforementioned securities.