China stocks are staggering from a punishing one-two combination. First, slipping economic growth delivered a powerful body blow early this year. Investors had generally expected that falling inflation and a surge of economic reforms from new national leaders would strongly reverse the economic weakness of 2012. But Chinese GDP unexpectedly stumbled in the first quarter this year, and experts slashed predictions for the full year.
Then the U.S. Federal Reserve Bank delivered a knock-out roundhouse punch in mid-May, signaling it would cut back its bond-buying stimulus package later in the year. Japan also pulled back on a stimulus plan, and, crucially, China began to squeeze credit.
Stocks in the China gateway market of Hong Kong tumbled, with the Hang Seng Index plunging 15.6% from May 20 to June 24. The market has recovered a bit, but poor growth and the credit squeeze weigh heavily on stocks.
There may be one group of companies that are worth a look, according to Ben Kwong, chief financial officer of KGI Asia. “Given the gradually tightened market liquidity, high-cash stocks could be treated as a safer heaven, as they might not suffer from the liquidity pressure and might even enjoy a higher interest income.”
Among “high-cash” companies are apparel retailer China Dongxiang (CDGXY), automaker Qingling (QGCHF) and Sinotrans Shipping (SSLYY), Kwong said. But his favorites are two companies with a bit less cash than some in the group – China Mobile (CHL) and Zhejiang Expressway (ZHEXY).
What these stocks have that makes them likely to outperform is “strong recurrent income (mobile fee [and] toll road fee respectively), (and) their earnings (are) less sensitive to economy cycle (especially China Mobile),” Kwong told Equities in an email, “Hence, they could continue their relatively high dividend yields…”. On July 1 China Mobile offered a 4.25% dividend yield and Zhejiang Expressway paid out 5.9%. End
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