Threadneedle favours Chinese banks, amid 'IPO fatigue'

As new listings continue to stutter in China and Hong Kong, there are sectors with strong growth prospects, says Gigi Chan, Asia-Pacific equity fund manager at Threadneedle Investments.

Chinese banks look like a good investment bet, as do the country's consumption and cement stocks and South Korean and Taiwanese technology companies, says Gigi Chan, Asia-Pacific equity fund manager at Threadneedle Investments. Meanwhile, risk aversion and negative sentiment continues to manifest itself in the form of underperforming IPOs.

Chinese consumption stocks -- such as Tencent and Ports Design -- are attractive, says London-based Chan, as they seem to have very robust earnings prospects. "We feel consumption growth will remain strong," she says, adding that there's a lot of scope for earnings to surprise on the upside in this sector.

Chan also likes the Chinese cement sector, since she sees the supply-demand picture improving and consolidation accelerating. "Demand growth looks very robust, while supply growth looks like it will be more constrained," she says, "so we see earnings likely to be revised upwards for cement stocks."

Threadneedle also favours Chinese banks, with good earnings growth expected to come from continued loan growth. "Loan growth will maybe not be as strong as this year, but it will still go up," says Chan. Some listed banks saw as much as 30% loan growth this year, but next year they will probably see more normalised loan growth in the low to mid-teens in percentage terms, she adds. That is substantially higher than the developed-market average.

Fee income growth for Chinese banks is also likely to be strong, as local banks develop their wealth management products and other areas such as banc assurance, says Chan. These stocks are more attractive than developed-market banks, she adds, because much of the latter group's growth this year was the result of trading profits, which may not be repeated next year.

A further factor in Asian banks' favour is that the region's consumers are underleveraged compared to those in the US, for example, so there's more scope for loan growth compared to developed markets.

Beyond China, Chan is also upbeat on other Asian markets. "China is attractive, but a lot of that has been priced in," says Chan; hence she is also looking at more cyclical markets that are more leveraged on the global recovery, such as South Korea and Taiwan, for example, and technology companies in those countries. Such markets are also coming off a very low base, she adds. 

Meanwhile, new Chinese stock listings continue to falter. "We're experiencing a large supply of new stocks, so some investors are feeling IPO fatigue," says Chan. "That's not to say that companies that don't perform well don't have value -- simply that demand has been dampened due to the large supply pipeline.

"For example, in the China property sector, there are so many new listings that investors can be looking at quite a few at the same time, so it can be difficult for them to differentiate between them," she says. How well an IPO does very much depends on prevailing conditions and sentiment in the overall market, adds Chan, not just on the particular company's relative merits.

Shanghai-based Glorious Property, for instance, fell sharply below its October 2 issue price of $HK4.40 to a trough of around HK$3.10 mid-month, but it has since rallied to around HK$3.50. Glorious was, incidentally, the fifth straight IPO to close below the offer price and one of two real estate listings on the same day. "At some point people saw value and [the price] rebounded," says Chan.

Chan manages the Threadneedle China Opportunities Fund (since March 2007), and Allied Dunbar Far East Asia ex-Japan Fund (since April 2004). Chan is also a member of the oil and gas and utilities global-sector research teams. She has country research responsibilities for China and Hong Kong. Threadneedle manages $93.75 billion in assets globally, $5.5 billion of which are in Asia.

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