29 January 2020
Karine Hirn, co-founder of East Capital, has strong conviction for long-term growth outlook for good Chinese companies. Photo: East Capital
Karine Hirn, co-founder of East Capital, has strong conviction for long-term growth outlook for good Chinese companies. Photo: East Capital

East Capital spies nuggets on rocky share market road

China’s stock market is set for a bumpy ride this year as the nation goes through some painful economic restructuring. But there are still some good picks in the burgeoning internet telecom, healthcare and real estate sectors, according to Swedish asset manager East Capital, which has US$5 billion under management.

The key is to think longer term.

“The Chinese equities market is pretty much momentum-driven or reform-driven, and many foreign investors don’t have the amount of reliable information as they have for those developed markets. But we have strong convictions that better companies will do better in the long term,” East Capital founding partner Karine Hirn told the Hong Kong Economic Journal’s EJ Insight.

As the global economy stabilizes, investors will start to look at fundamentals again, and the high-growth markets in many emerging economies will come back onto their radar, said Hirn, a former French trade counsellor who was based in Shanghai for three years. 

In addition, low valuations and strong earnings growth will make Chinese equities more attractive, given they are trading near the lows of the 2008 financial crisis, she said.

Benchmark onshore A shares are trading at around 8 times 12-month forward earnings, 28 percent below the long-term mean of 12 times, according to data from financial services firm Nomura.

Hirn said she’s excited about the ambitious reform package unveiled after the Communist Party’s third plenum in late 2013. “There is more evidence that they [national leaders] understand which priorities they need to address. Chinese governments have a fantastic track record of getting things done.”

The reform blueprint included commitments to overhaul the country’s state-owned enterprises, open up China’s capital markets and loosen its one-child policy.

But, there will be some pain down the road, Hirn said, particularly for sectors that rely heavily on cheap money. And state-owned enterprises might bear that brunt as the authorities move to let market forces play a bigger role in allocating resources.

So what are the good mainland prospects? Hirn said a good target should have a combination of growth potential and attractive valuation, as well as corporate governance and an ownership structure that lets investors assess risk.

As a long-term investor, the fund likes companies in consumer technology like Tencent Holdings Ltd. (00700.HK) – which accounted for 6.47 percent of the East Capital’s investment by Sept. 30 — and Lenovo Group Ltd. (00992.HK), which had 4.52 percent.

Other favorites are medical device manufacturers and distributors such as Shandong Weigao Group Medical Polymer Co., Ltd. (001066.HK) and real estate plays like China Overseas Land & Investment Ltd. (00688.HK), mainly because of its state support.

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Freelance journalist