Foreign Investors Find Handful of Gems Among Shenzhen Stocks

(Bloomberg) -- Foreign investors are sticking with their favorite Shenzhen stocks even as the exchange they trade on has been left in the dust by the global equity rally.

Surveillance camera maker Hangzhou Hikvision Digital Technology Co. and liquor company Wuliangye Yibin Co. were among those recommended by analysts as China opened the Shenzhen Composite Index to the outside world exactly a year ago. Foreign investors piled in, helping the shares of those companies double in value in 12 months. While they’ve fallen from November’s record highs, sentiment over their longer-term outlook remains bullish. 

“Maybe in the short term they got a bit excessive, but generally a lot of them are quite good businesses,” said Anh Lu, an equities portfolio manager at T. Rowe Price Hong Kong Ltd. “A lot of them have gone up 70 or 100 percent in a year but we still own some of them. We can’t rule out that there could be a correction but on a multi-year view” they’re still attractive, she said.

After jumping 97 percent this year through Monday, Wuliangye has 22 buy recommendations, two holds and no sells among analysts tracked by Bloomberg. And the average price target suggests its shares will add another 13 percent over the next 12 months. Hikvision has soared 142 percent in Shenzhen this year and has 20 buy recommendations, three holds and one sell. Its 12-month price target of 45.65 yuan is 19 percent above Monday’s close.

It’s been a bad year for most of Shenzhen’s equity market, which is the home of many so-called new economy companies that operate in China’s fast-growing technology, consumer and healthcare sectors. About two-thirds have seen their share prices fall amid concern about the country’s deleveraging campaign. That’s left the Shenzhen Composite Index with a 12-month loss of 9.7 percent through Tuesday, while the Shanghai benchmark eked out a 3.1 percent gain and the MSCI China Index surged 43 percent offshore.

Hikvision, Wuliangye, Midea Group Co., Gree Electric Appliances Inc. and BOE Technology Group Co. are Shenzhen’s top five contributors in terms of index points since the trading connection was opened on Dec. 5, 2016. The link followed a similar arrangement with Shanghai and gave foreign investors access to the market. A net 149 billion yuan ($22.5 billion) of Shenzhen shares have been purchased via the link since its launch, compared with 52.8 billion yuan net purchasing of industrials-dominated Shanghai shares, according to Bloomberg calculations using turnover data from the Hong Kong bourse.

Goldman Sachs (Asia) LLC managing director Kinger Lau said in an interview Monday that A shares more than 5 percent-owned by foreign investors -- such as Hikvision -- typically outperform the market.

Hikvision is an example of a company well poised for multi-year growth given rising demand for security cameras from both the state and private sectors, said Marc Franklin, a fund manager at the Asian unit of Conning Holdings Ltd. He added that the Shenzhen Composite Index as a whole got off to a slow start after the trading link was introduced as valuations were more than twice as high as in Hong Kong.

The opening of the Shenzhen stock link also gave mainland investors direct access to small-cap Hong Kong stocks. Institutional investors, who are less likely to buy small caps, are still the main users of the Shenzhen southbound link because individual investors remain cautious after the 2015 stock market rout, according to Lewis Wan, chief investment officer at Pride Investments Group Ltd. in Hong Kong.

--With assistance from Cindy Wang Jessica Zhou Helen Yuan and Moxy Ying

To contact the reporter on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies, Robin Ganguly

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