China’s Communist Party Congress concluded with little in the way of economic outlook but with Xi Jingping tightening his grip on power in an era heralded as ‘awesome China’.
With Xi likely to remain in power beyond 2022, how are fund managers positioning their portfolios to capitalise on the continuity provided by the sitting rule?
Having already embarked on huge industrial and economic projects, Harriss said the focus will shift from cheap labour and mass production towards higher value-added production. Here are the four stocks, sectors and themes set to prosper.
#1 - Smart phones
Stock example: AAC Technologies
With the move towards a higher quality products, Harriss said China-based companies are becoming increasingly important players in an assets-rich market. Here he is looking for entrenched companies with good customer relations.
‘AAC Technologies is a company already manufacturing advanced, high quality components used in major smartphone brands, and the company has been a strong performer for a while.
‘As an important supplier of acoustic and haptics components for smartphones, such as the iPhone, it is a good example of a company turning its competitive advantage into persistent returns on capital.’
#2 – Electric vehicles
Stock example: Hanon Systems
China as the world’s largest car market and plans to steer itself to the front of the queue when it comes to electric vehicles. Harris said companies such as Korean group Hanon Systems – which specialises in climate control systems – can feed into this due to their strong market position.
‘China already has the world’s largest automobile market and now policymakers are aiming to develop domestic manufacturers which will be leaders in producing electric vehicles.
‘Hanon should benefit from this drive as it is one of the few suppliers in the world who can offer a full range of products used in climate control systems. This is especially important with electric vehicles where lithium batteries are very sensitive to changes to temperature – hence the importance of climate control systems.’
#3 – Consumption changes
Stock example: China Lilang
Harriss said the manufacturing industry in China is moving to produce more higher-value added goods which will lead to wage growth acceleration, as well as middle class consumption continuing to grow. This will benefit China Lilang, most notably, which designs and produces menswear.
‘The chief designer has been hired from Armani; new product lines have been added in shoes, underwear and casual clothing; proprietary fabrics make up a bigger proportion of usage and their quality has improved; the distribution channel has shifted away from department stores to shopping malls.
‘The management has proven itself to be both dynamic and adaptable, reflecting rapidly evolving Chinese consumer patterns. Strong results at the interim stage lifted the stock into our top five performers this quarter.’
#4 – Complex needs
Stock example: Luk Fook
Tied to the consumption theme is the fact that Chinese people are using their newfound disposal income to travel more, which, Harriss, said will have a knock-on effect for neighbouring economies. He highlighted Hong Kong-based jewellery group Luk Fook as well-positioned here.
‘The company generates most of its profit in Hong Kong but has had to adapt its business model as tourist inflows from the mainland have dropped,’ he said.
‘The company has responded by closing unprofitable stores in Hong Kong and opening new stores in the mainland to better respond to the changes in the market. As a result same-store-sales are now growing in both regions and we expect the company to continue growing its presence in the mainland.'