China’s stock market has gotten off to an upbeat start in 2017, with a benchmark CSI 300 index rising by 5% so far this year. Yet slower growth lurks as the country transitions toward a consumer-led economy and copes with heavy debt, says Brock Silvers, managing director of Kaiyuan Capital in Shanghai. “I have a very cautious outlook for China in 2017,” he says.
Silvers knows of what he speaks, having invested here for more than a decade and served as an independent director at a number of power companies. The holder of a MBA from the Wharton School has worked with billionaire real estate investor Sam Zell in the U.S. and in China.
Though cautious, Silvers also sees some defensive and “atypical” opportunities. Here are some investment ideas he recently shared in an interview.
--Anbang Insurance: Look for Anbang, whose murky shareholding has drawn international headlines, to complete a long-planned IPO in 2017, Silvers says. “Having struggled for so long, a recession won't deter dealmaker extraordinaire Wu Xiaohui, but should lead to reasonable pricing. The access to debt capital conferred by an IPO will fuel major new M&A. I'm not overly worried about Anbang’s origins – this could be a buy & hold opportunity.”
--ZTE: The depreciating yuan will also benefit exporters, especially companies that sell to the U.S. as opposed to countries with declining currencies, Silvers believes. “This should be an immediate boost to a company such as ZTE Corp., which derives roughly half its revenue from exports. Of course, this is really a Trump play – will there be a trade war? If not, expect some gain.”
--Infrastructure: The tide is rising for infrastructure construction firms such as Power Construction Corp of China, Silvers believes. “Often with U.S. dollar-denominated revenues and renminbi or emerging market currency expenses, PCCC is also primed to benefit from $3 trillion in foreign investments from China’s ‘One Belt, One Road’ campaign. New bookings are more than one third foreign, and strong earnings wouldn’t surprise.”
--Tencent: The Shenzhen-headquarters business has built a world-class Chinese internet platform, including gaming, social networking and digital content subscription, and its QQ & WeChat businesses are among China's best-known and are omnipresent, Silvers says. “Shares aren’t cheap, but Tencent has room to grow in Internet commerce and finance, and should be somewhat resistant to recession.”
Potentially big losers this year:
--Banks: “China's big banks are big red flags. Their balance sheets are unintelligible, and non-performing-loans and off-balance sheet obligations should keep shareholders awake at night. Any serious recession would open a Pandora's box of previously hidden problems, and dramatically increase political intrusion into financial policy. Given 2017’s recessionary risk, I see no reason to hold shares,” Silvers says.
--Airlines: “China’s yuan is widely expected to continue weakening in 2017, which is terrible news for its airlines,” Silvers believes. “Air China, China Eastern and China Southern all have significant debt in U.S. dollars or U.S.-dollar-linked Hong Kong dollars, while their earnings are mostly denominated in renminbi. Forex losses will take a big bite from earnings even if operations remain relatively unaffected by recession. A big ‘if,’ indeed,” according to Silvers.
--Follow me on Twitter @rflannerychina
