As many readers may be aware, China is set to open up its Shanghai-listed shares to foreign investors for the first time ever on Monday, via the landmark “Hong Kong-Shanghai Stock Connect” program. But now that you can buy yuan-denominated stocks in Shanghai, what should you buy? And what should you avoid?
Five top investment banks are offering strategies on playing the Stock Connect’s grand opening, and MarketWatch has assembled their advice for your perusal. Some of the picks are among the newly available Shanghai yuan stocks — known as “A-shares” — while others are Hong Kong-listed H-shares which, although long available to non-Chinese investors, also offer a chance to invest in the Stock Connect.
(Pictured above is the bronze bull statue that stands on Shanghai’s Bund.)
Goldman Sachs
For its A-share picks, Goldman Sachs lists six criteria:
“scarcity value” (i.e., shares listed only in Shanghai),
“GDP proxies” (a high sensitivity to China’s economic growth),
“high QFII holdings” (shares that are widely owned under the existing Qualified Foreign Institutional Investor program that allows foreign institutions to buy Chinese equities, as these stocks have already been vetted by global investors)
“high yields and stable dividend growth” (as projected by Goldman analysts)
“A-share discounts” (stocks from dual-listed companies that are currently priced at a discount to their H-shares)
and companies with the “right incentives” (i.e., that have good corporate governance)
As for specific names, Goldman Sachs likes China’s top liquor producer Kweichow Moutai Co. , Agricultural Bank of China Ltd. , state-owned travel agency China International Travel Service Corp. , China’s largest listed steel maker Baoshan Iron & Steel Co. , pharmaceutical conglomerate Shanghai Fosun Pharmaceutical Group Co. , and investment bank Citic Securities Co. .
Morgan Stanley
For its part, Morgan Stanley is looking to profit on both the Shanghai and Hong Kong sides of the new Stock Connect, seeing as the program is also opening up Hong Kong shares to the mainland Chinese retail investor for the first time.
Among its trading ideas, it — like Goldman and many others — suggests seeking out dual-listed names with a sizeable price spread between their A- and H-shares, such as Sinopec Shanghai Petrochemical Co. It also sees upside for Hong Kong-listed blue chips that will attract mainland Chinese investors with “regional or global geographic diversification,” such as Sino-British banking giant HSBC Holdings PLC .
Then there are the listed broker-dealers and clearing agents, which should benefit directly from the rising trading volumes that the Stock Connect is expected to bring. A key example of such a name is Hong Kong Exchanges & Clearing Ltd. , which runs Hong Kong’s stock exchange. Also on the list are any investment products which offer exposure to the A-share market upside, as the Shanghai market tends to “play catch up” to rallies in the offshore China equity indexes, such as Hong Kong’s Hang Seng Index .
HSBC
HSBC — which is itself a Morgan Stanley stock pick — has some recommendations of its own. And while HSBC stands for “Hongkong Shanghai Banking Corporation,” a recent note from the lender focuses on just the Hong Kong side of the equation.
Specifically, HSBC — shares of which, by the way, are the heaviest weighted component on the Hang Seng Index — looked at 275 Hong Kong shares that will open to mainland investors and picked 10 that have lagged behind their peers and could be due for an upward correction.
The chosen 10 include shares both on and off the Hang Seng Index: Chinese software developer Kingsoft Corp. , dairy producer China Mengniu Dairy Co. , three Macau casino operators — SJM Holdings Ltd. , Sands China Ltd. and Galaxy Entertainment Group Ltd. — cement producer Anhui Conch Cement Ltd. , property developer Guangzhou R&F Properties Co. , solar-panel-material manufacturer GCL-Poly Energy Holdings Ltd. , natural-gas distribution company Kunlun Energy Co. , and food and beverage major Tingyi Cayman Islands Holding Corp. .
Credit Suisse
Credit Suisse looks at opportunities in both the A-share and H-share flavors. Among the mainland offerings, it names those it sees as “potential beneficiaries” of the world’s sudden access, with a number of infrastructure plays, including airport operator Shanghai International Airport Co. , coal-transport-network operator Daqin Railway Co. , and hydro-power-plant operator China Yangtze Power Co.
Also on Credit Suisse’s A-share list are auto maker SAIC Motor Corp. , home-appliance producer Qingdao Haier Co. , and software developer Yonyou Software Co. .
Over in Hong Kong, meanwhile, the Swiss bank’s Stock Connect favorites include tractor maker First Tractor Co. , regional life insurer AIA Group Ltd. , online major Tencent Holdings Ltd. , Chinese computer maker Lenovo Group Ltd. , and sportswear retailer Anta Sports Products Ltd. .
And, like Morgan Stanley and HSBC among others, it also tips Hong Kong Exchanges & Clearing as a possible winner due to rising trade volumes, as well as BOC Hong Kong Holdings Ltd. , which is the sole clearing bank for yuan transactions in Hong Kong.
Nomura
Japanese investment bank Nomura takes a sector-by-sector approach to its Stock Connect picks, with the preferred categories including auto, consumer goods, and technology.
In particular, the Japanese investment bank looks favorably on Chinese property developer Sunac China Holdings Ltd. , energy play China Oilfield Services Ltd. , paper-products maker Nine Dragons Paper Holdings Ltd. , microscope and lens maker Sunny Optical Technology Group Co. , electric-car and battery producer BYD Co. Ltd. , chip maker Semiconductor Manufacturing International Corp. , and over on the mainland, China Railway Construction Corp. and Inner Mongolia Yili Industrial Group Co.
Nomura also has a list of stocks NOT to buy. Among the issues “likely to be negatively impacted” by the Stock Connect — several of which were on other banks’ recommended lists — are milk producer China Mengniu Dairy Co. , state-owned energy giant PetroChina Co. , refiner China Petroleum & Chemical Corp. (a.k.a. Sinopec), beer maker Tsingtao Brewery Co. , property-focused conglomerate China Resources Enterprise Ltd. , and Chinese hypermarket operator Sun Art Retail Group Ltd...
Among the Shanghai shares, it warns against buying home-appliance retailer Suning Commerce Group Co. .
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