A-shares of companies involved with railway/subway construction performed well in October and November. Although the fundamentals and activities of the companies vary widely, they are key beneficiaries of the massive, and steadily growing, investment in infrastructure in all emerging markets – and not just in China. This global trend should continue for the foreseeable future. A number of the Chinese railway/subway construction companies should enjoy good growth in revenues and/or earnings as a result.
Thanks to tighter liquidity conditions in China's financial system – and quiet direction from the regulators – China's banks have substantially increased write-offs of non-performing loans (NPLs) since the beginning of 3Q13. Particular banks may well have to seek new capital in 2014. However, ongoing disposals of NPLs, and the further development of markets for asset-backed securities (ABS) may well provide investment opportunities in the coming year.
The hugely successful initial public offering (IPO) of China Cinda Asset Management Corporation (1359:HKG) highlights two major trends that are likely to continue into 1H14. One is the revival in IPO activity on the Hong Kong Exchange, the other is the sharp rise in disposal of non-performing loans (NPLs) by banks in mainland China. China Cinda now has a treasure chest of $2.5bn in new funds, 60% of which will be used to bid for NPLs.
Chinese banks are facing a number of challenges as the authorities in Beijing seek to crack down on the various excesses of the last few years. This is clearly having an impact on the banks’ performance metrics: as a result, they are in need of capital. In turn, the Hong Kong IPO market has received a boost on the back of this.
The A-shares of listed producers of baijiu (the highly prized and highly priced white liquor) have performed very badly through 2013. Thanks in part to a scandal and in part due to the clampdown on banqueting (and graft) by senior military and government officials, sales and profits have slumped. However, managers of China’s mutual funds, and other institutional investors, have generally maintained their holdings in the listed baijiu companies. Many of the leading baijiu companies are cashed up and are paying out sizable portions of their profits in dividends to shareholders. In essence, the listed baijiu companies look much more like value stocks than growth stocks.
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