The 200-Plus China Stocks That Are About to Join MSCI's Indexes

(Bloomberg) -- More than 200 Chinese companies will officially be inducted into MSCI Inc.’s equity indexes after the market close on Thursday, opening up the world’s second-largest equity market -- with its big swings and unique idiosyncrasies -- to global investors.

This means traders looking to track the gauges run by MSCI, the world’s biggest stock index compiler, need to buy yuan-denominated stocks for the first time. Still, don’t expect much impact at first. Only a tiny slice of the selected stocks’ market capitalization will be added, and it will join in two steps, with the next being in September. That means A shares will initially represent about 0.39 percent of the weighting on the MSCI Emerging Markets Index.

Five companies were dropped from the MSCI’s earlier list after trading suspensions, including telecoms gear giant ZTE Corp., Beijing Orient Landscape & Environment Co., and China Railway Group Ltd.

What will investors be taking on? Here’s a look at the notable inclusions on the list:

DRUGMAKERS

  • Pharma firms and other health stocks are China’s best performers by far this year, up 22 percent. Drugmakers are seen as sheltered from U.S. trade tensions because they generate the majority of sales domestically, while quicker drug launches and government support could bolster earnings. Jiangsu Hengrui Medicine Co., the nation’s biggest drugmaker by market value, antibiotics maker Sichuan Kelun Pharmaceutical Co., and cough syrup maker Zhangzhou Pientzehuang Pharmaceutical Co. are up more than 90 percent in the past year.
  • For more esoteric treatments, there’s Guangzhou Baiyunshan Pharmaceutical Holdings Co., the maker of China’s version of Viagra. Another is Dong-E-E-Jiao Co., which makes gels out of donkey skin to fight cancer and blood diseases.

PRICEY PICKS

  • Mainland Chinese stocks have long traded at a premium to those in Hong Kong, and the MSCI list includes some pricey names. Iflytek Co., develops makes voice-recognition software and products, is valued at almost 160 times reported earnings, while Jinduicheng Molybdenum Co., which mines and processes an obscure metal used to make steel, trades at 124 times reported earnings.

FOOD AND BOOZE

  • Shares of Kweichow Moutai Co. -- China’s biggest liquor maker -- got so popular among investors toward the end of last year that the government expressed concern over the pace of gains. The company, which sells high-end spirits for more than $300 a bottle, is now worth $143 billion, or about the same size as PepsiCo Inc.
  • Other distillers and vintners: Wuliangye Yibin Co., Jiangsu Yanghe Brewery Co. and Shanxi Xinghuacan Fen Wine Factory Co.
  • Food and beverage stocks in general have been hot topics. Pig breeder Muyuan Foodstuff Co. has more than doubled in the past 12 months. Seasonings maker Foshan Haitian Flavouring & Food Co. has risen over 80 percent and dairy producer Inner Mongolia Yili Industrial Group Co. has risen 45 percent.

SURVEILLANCE STATE

  • The country’s embrace of digital surveillance -- it will add 400 million security cameras through 2020, according to Morgan Stanley -- has made made Hangzhou Hikvision Digital Technology Co. a top stock for foreign investors through the Hong Kong link. Zhejiang Dahua Technology Co. is another in that field.
  • State-linked defense and public security firms meanwhile have slumped. Jihua Group Corp., which supplies weapons and uniforms to China’s military, has nearly halved in value since June, while satellite maker China Spacesat Co., a commercial unit of the nation’s major space program contractor, is down 18 percent this year.

RICH LIST

  • A handful of MSCI inductees are linked to China’s rich, but some of them haven’t been faring so well. Changjiang Securities Co., a brokerage in which multimillionaire antiques collector Liu Yiqian has a stake, and billionaire Zhao Tao’s Shandong Buchang Pharmaceuticals Co. Ltd. are both down more than 30 percent the last year.

ELECTRIC CARS

  • Investors can take a punt on who will win from China’s plan to increase new-energy car sales. Battery-component makers Zhejiang Huayou Cobalt Co. and Jiangxi Ganfeng Lithium Co. are two related stocks being added.
  • Bets on the green boom in China have also spurred big returns, with the country plowing $127 billion into renewable energy last year. The world’s second-largest maker of solar wafers, LONGi Green Energy Technology Co., is up more than 100 percent in the past 12 months.

BUILDING BOOM

  • MSCI trackers will be able to add mainland builder shares including Future Land Holdings Co. and Poly Real Estate Group Co.

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