Anyone who has followed this series on my favorite Chinese stocks knows that all my picks so far have come from the private sector and that I’m generally not a fan of big state-owned enterprises (SOEs).
But given the huge weight that SOEs carry in China’s economy and their favored status in many key sectors, I feel obliged to recommend at least one such company in this series.
With that background in mind, my top pick among this group is Hong Kong-listed Citic Ltd. (00267.HK), one of China’s oldest conglomerates and a company often considered one of the country’s most entrepreneurial SOEs.
I particularly like Citic for its focus on financial services, which includes its private equity arm, a bank and China’s leading brokerage, all of which are more commercially driven than many of the country’s other big financial companies.
But that said, investors should also note that Citic comes with a sizable amount of non-financial baggage, including a natural resources unit that has weighed on its performance during the current global commodities downturn.
China’s economic slowdown is actually a major factor driving that global downturn, so it’s hard to fault Citic for the poor performance in that part of its business.
Citic in its current form was formed two years ago, when the conglomerate injected many of its businesses into the Hong Kong-listed company.
The excitement the Citic name attracts was reflected by the list of big-name investors who lined up to buy into the company, including insurance giant AIA Group Ltd. (001299.HK), Singaporean sovereign wealth fund Temasek and Japan’s Mizuho Bank.
The company’s shares soared briefly after that rejig but traded in a relatively narrow range after that, before plunging at the start of this year in tandem with a major stock market sell-off in China.
Since then, the shares have bounced back somewhat, though at their current price-to-earnings multiple of 7 they still look relatively cheap.
By comparison, Hong Kong-listed shares of leading state-run lender Industrial and Commercial Bank of China Ltd. (01398.HK; 601398.CN) trade at a multiple of less than 5, and leading bad-asset manager China Cinda Asset Management Co. Ltd. (01359.HK) trades at about 5.5.
Those numbers reflect the reality that all Chinese financial plays are looking at turbulent times ahead, though Citic’s multiple above those of the pack also shows it’s preferred by investors.
Profit in finance
All that said, let’s take a closer look at some of Citic’s latest financials, led by its annual report, which showed revenue grew by a lackluster 3.7 percent last year to HK$416 billion (US$53 billion), while profit grew at a slightly faster 5 percent to HK$41.8 billion.
That looked a bit better than most of China’s big state-run banks, which were barely able to post any profit growth in their latest reports.
But a bigger difference was that Citic’s financial services division actually did quite well, notching 28 percent profit growth to HK$52.7 billion.
By comparison, the company’s resources and energy division posted a HK$17.3 billion loss, leading to the overall anemic net profit growth.
That included a charge related to the company’s iron ore division, following a global slump in steel prices.
Of course it’s important to note that anyone who buys into Citic is getting more than just a financial services company, which is the conglomerate’s biggest strength.
In addition to finance and resources, the group’s other assets come from the engineering, real estate and manufacturing sectors.
But its financial services division accounts for about half of its total revenue and is easily its most profitable division.
At the same time, the global commodities slump that created a drag on the company’s performance last year is almost certain to ease this year and next, meaning that that part of the business should also improve.
Accordingly, it’s quite possible we could see some nice overall profit acceleration for Citic in the year ahead when the global commodities market starts to stabilize.
The big risk is China’s domestic financial markets, which are showing growing signs of moving into a major downturn because of a growing bad-debt crisis.
But even there, Citic should have fewer problems, because of the stronger commercial focus in its lending and investment activities, compared with the more policy-driven lending practiced by other major SOEs.
– Contact us at [email protected]