Three solid bets on China

The case for buying China remains intact, despite recent volatility, says fund manager Dale Nicholls. Here, he tips three China-based stocks to buy now.

Each week, a professional investortells MoneyWeekwhere he'd put hismoney now.This week:Dale Nicholls,manager,Fidelity SpecialSituations China.

Investors have been spooked by recent volatility in the markets, but the fundamental case for buying China remains intact: economic growth in the country is strong by global standards, especially in the area of consumption, which is supported by long-term trends such as urbanisation. China is an immature market and there are, of course, many issues that remain to be addressed, but it still offers great opportunities for stock-pickers.

At the Fidelity Special Situations China investment trust, we focus on three types of companies those with good long-term prospects, that are cash-generative, or that have strong management teams. These factors are not often well understood by the market, so are not reflected in valuations. Our trust also has a bias towards smaller companies, as these are often less well researched and, therefore, more likely to be mispriced. That means there are bargains there for the taking. However, smaller companies also tend to be higher risk, so meeting the management is essential to understand their prospects and monitor their progress. Here are three stocks we favour.

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NetEase (Nasdaq: NTES) is an information technology company that develops online games and is increasingly providing other services such as online advertising, e-commerce and emailing. Gaming is its core business, and its strong history and promising pipeline make it the leading developer and go-to company for online games in China.

There has been positive initial feedback on its new pipeline of games, and its mobile internet initiatives are also likely to boost future earnings. There is also potential from online lottery ticket sales once the government confirms the regulatory requirements and lifts the suspension on online sales. Once this happens, that should mark the point when NetEase's earnings begin to take off the shares will follow.

Shanghai International Airport (Shanghai: 600009) operates Shanghai's Pudong Airport. Its business should see structural growth from increasing outbound tourism, a rise in peak-hour aircraft movement, an incremental increase in international flights due to congestion issues in Beijing and Shanghai Hongqiao airports, and the development of low-cost carriers. In addition, passenger volume will rise as Disney opens up a huge Disneyland theme park near the airport and the development of the Shanghai free-trade zone will drive cargo growth.

However, I also see a key driver for the stock coming from the tremendous scope to improve its underdeveloped food, beverage and retail offerings, which could help it to significantly grow revenues and margins.

Hutchison China MediTech (LSE: HCM) is a China-based pharmaceuticals company listed in London. It is made up of three divisions: pharmaceuticals in China; consumer nutritional products; and research and development (R&D) into new drugs. The first two divisions benefit from brand strength, creating steady and growing cash flow for the wider company; but it is its R&D business which I think has the greatest potential.

It is a prime contender for developing new market-leading drugs, not only in China, but globally. Its promising oncology pipeline developed through tie-ups with Eli Lilly and AstraZeneca underpins the investment case. The company trades at an attractive valuation compared to potential earnings from its drug pipeline. Its traditional businesses will support the shares while you wait.

Dale Nicholls

Dale Nicholls is manager of the Fidelity China Special Situations Trust.