Chinese stocks ended the week with disappointment over the size and speed of stimulus plans, reinforcing the need to look for favorable underlying businesses

November 10, 2024 | 07:48am

Three China stocks that analysts are watching for longer-term opportunities

Chinese stocks ended the week with disappointment over the size and speed of stimulus plans, reinforcing the need to look for favorable underlying businesses

Chinese stocks wrapped up a momentous week marked by a $1.4 trillion debt swap program that fell short of many investors' calls for more direct government support. For many, the reaction among investors only reinforced the need to look at longer-term opportunities in individual stocks that haven't changed. The Ministry of Finance signaled at a closely watched press conference Friday that more fiscal support could come next year , while in the near term it focused on addressing local government debt. The relatively muted measures come as China gears up for heightened trade relations with the U.S. under President-elect Donald Trump, who has threatened to impose high tariffs on imported goods. Through it all, the CSI 300 stock index in Shanghair managed to rise nearly 6.6% last week, while the Hang Seng Index in Hong Kong rallied 3.2%. Stopping further weakness On a macroeconomic level, China is trying to ensure inflation and employment don't deteriorate further, said Liqian Ren, leader of quantitative investment at WisdomTree. While Ren doesn't expect a return to rapid growth, she is watching how Chinese companies are able to build up their brands and charge a premium, maturing from models that previously competed only on price. "So I think consumer companies like Anta , I think not many people have understood outside China, but it is really becoming the world's leading sportswear company," Ren said. "I think they are also going to make a global play soon. But not many Americans know about the brand." But if Anta continues on its present path, perhaps in 10 years consumers will regard the company the same as "Adidas or other so called foreign sports brands," Ren said. "That's one thing that I am personally paying attention to." Hong Kong-listed Anta sells sportswear under its own brand while owning Fila and high-end brand Descente, among others. The company said in October that Anta-brand retail sales for the third quarter rose by the mid-single digits from a year ago, while that of Fila weakened and other brands surged by as much as 50%. Anta shares are up 18% so far in 2024. China's efforts to rival foreign brands have not diminished, regardless of the slowdown. Baidu is reportedly scheduled Tuesday to release its own artificial intelligence-connected glasses, vying with Meta's RayBans product. Xpeng expansion Electric car startup Xpeng in the past week announced its own humanoid robot , and a new $26,000 car called the P7+ that's already racked up more than 30,000 preorders for deliveries due to start this month. The products are largely only going to be available in China, at least initially. "For Chinese EVs, the door is now closed, and re-shoring is impractical," Macquarie analysts said in a Nov. 7 report. "Our top pick is XPeng, a China pure play." "XPeng has no exposure to the U.S. market and no current plans to enter the market," the analysts said. "Domestic volume has room to ramp quickly, led by new competitive models like the M03 and P7+. The successful launch of the M03 has helped to alleviate investor concerns about supply chain management and product competitiveness." "Upcoming catalysts, such as the pure-vision ADAS M03 and the launch of a hybrid system car could benefit from domestic confidence/consumption recovery and are unaffected by geopolitical events," the Macquarie analysts said. About half of Xpeng's 20,000-plus deliveries in each of the past two months have come from its lower-priced Mona M03 car. In the consumer sector, Macquarie's top pick is Yum China , which operates Pizza Hut and KFC in China. "YUMC is our top idea in the consumer sector given that it is a pure domestic market play," the analysts said. "The company's strategy shift towards franchisee stores and new store format K COFFEE as well as Pizza Hut WoW would be a secular growth driver, which can decouple from geopolitical risk." Yum China has ramped up shareholder return targets to $4.5 billion in 2026 from $3 billion in 2024, they added. Yum China on Nov. 4 reported third-quarter earnings, showing operating profit grew by 15% year-on-year to $371 million. Xpeng is due to release quarterly results on Nov. 19. In the week ahead, internet giants Tencent and Alibaba both report earnings. The central government is scheduled Friday Nov. 15 to release retail sales and industrial data for October. "You have to be very willing to suffer the negative sentiment to invest in China," Ren said. There are often "long stretch[es] of negative sentiment which really test a person's risk-taking." But she also highlighted that Chinese stocks can serve as a hedge to other equity markets. — CNBC's Michael Bloom contributed to this report.

This story originally appeared on: CNBC - Author:Evelyn Cheng