Today I will be covering five growth stocks with major potential that you can find on the Hong Kong Stock Exchange. Besides the location of their listings, all of these companies share two features: their main business is in China and they will benefit tremendously from the continued growth in the Chinese economy. So borrowing the official language of the Chinese government, they are growth stocks with Chinese characteristics.
1. United Lab (3933.HK)
The main businesses of United Lab are:
- Anti-bacterial medicine.
- Intermediate products. (6-APA, 7-ACA, and Tert-Octylammonium Clavulanate)
- Bulk medicine. United Lab is the market leader in Amoxicillin, domestically and globally;
The revenue breakdown is in Figure 1.
Figure 1
From Figure 1, we can also see the consistency of United Lab’s (ULIHF) growth. Even the 2008 financial crisis failed to stop it. In 2010, United Lab’s net profit grew by nearly 80% over 2009.
Moreover, the current stock price does not reflect the potentially explosive growth in its insulin business. Its new insulin product, USLIN, has obtained official approval, and it is 20%-30% cheaper than the similar imported products.
2. Boshiwa (1698.HK) and 3. Goodbady (1086.HK)
A baby boom is going on in China. It could be a relief for some policy makers since the population under the age 15 had been dropping rapidly for years. The parents of the current baby boomers belong to the baby boomers of the 1970’s. That was a huge baby booming period, since people have nothing productive to do during the Cultural Revolution but to have more children.
With the current baby boom, and more importantly to us, the babies’ parents are much richer than their grandparents. This leads to an explosive market for everything child-related, including apparel, footwear, toys, etc.
This market has not matured yet as there are no dominant players already established. But there are a couple of companies to put on your watchlist that are trying hard to grab better shares of this fast growing sector. One is Boshiwa (1698.HK), and the other is Goodbaby (1086.HK).
Both are new stocks. Boshiwa was listed September 2010, and Goodbaby made its debut last November. Yes, it burns cash to expand, but their financial results show they’re doing well. In terms of both revenue and net profit, both Boshiwa and Goodbaby more than doubled in 2010. Although we should be cautious about the results, since the companies don’t have long enough track records, some optimism is deserved given the growing market potential.
4. China Merchants Bank (3933.HK)
It is plain that banks will do well in a growing economy. If you believe that China will continue to grow, you should not miss its banking industry.
But the Chinese banking industry is highly regulated and is dominated by five big state-controlled banks. Inefficiency and lack of transparency are the key words for describing these banks. China Merchants Bank (CIHKY) is different. Over the years, CMB won many international awards for excellent corporate governance, investor relation, talent development, etc.
It is not surprising that CMB has achieved stellar growth in the past. In 2010, the net profit of CMB jumped 34.6% from 18.2 billion RMB to 25.8 billion RMB. The growth continues into 2011. In the first quarter, the net profit jumped 49.1% from the first quarter of 2010!
What I like about CMB the most is its risk control. Its bad assets are among the lowest in China. In 2009, under the state directive, almost all banks in China are indulged in a lending binge. But CMB kept its discipline.
CMB’s growth comes not only from the traditional saving/lending business, but from the fast-growing retail banking. CMB is only a fraction of ICBC (1398.HK), the biggest bank in China, in terms of total assets, but its credit card issuance is very close to the latter. And in wealth management, CMB enjoys a prestigious brand name and is the definite market leader.
5. Tencent (0700.HK)
Finally, talking about growth stock, how can we forget Tencent (TCEHY)? After a few years’ of explosive growth, Tencent is now the No. 1 internet stock in China in terms of market cap. For its investors, Tencent has brought enviable return. The IPO price of Tencent was 3.7 HKD in 2004. Now it is over 200 HKD.
I believe that Tencent’s growth will continue. The biggest asset of Tencent, now, is its integration of instant messaging (QQ), web portal, and the very profitable online gaming. In the future, it could add micro-blog and e-commerce to this list, and become a one-stop destination of Chinese web users.
Tencent is now in a close battle with Sina on micro-blog (Weibo), twitter-like platform that has a Facebook twist. Goldman-Sachs even suggested that Tencent Weibo is more likely to become the Facebook in China. Although I think it’s too early to call, I do believe GS may be right in considering the massive user base of Tencent QQ.
For further information on the Chinese markets, you may visit www.chinastockdigest.com or join us at www.globalprofitsalert.com for our daily market commentary. I will look forward to bringing my exclusive insight to you next week.
