Investors are understandably cautious about Asian equity markets. The regulatory crackdown in China, new Covid-19 cases in Southeast Asia and supply-side bottlenecks have resulted in Asian equities trading at a 40% valuation discount to global equities.
But beneath the surface, there is a wealth of attractive investment opportunities across Asia. The region is home to many companies with strong free cash flow generation and healthy balance sheets, which gives businesses flexibility, and investors a fair degree of comfort. Negative headlines can be scary but they make the best conditions for contrarian stockpickers who care about longer-term outcomes.
The most sustainable way to make money is to buy companies for less than they are worth. The following stocks are all held in the Invesco Asia Trust. They are at different stages in their transition from contrarian to popular, illustrating how temporary anxieties can lead to significant mispricings.
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Playing the commodities boom
Pacific Basin (Hong Kong: 2343) is one of the world’s leading operators of minor bulk-cargo vessels. It is a direct beneficiary of the strong demand for commodities at a time when cargo ships are in short supply, which is leading to rising freight rates. It is currently cheaper on a price/earnings (p/e) basis than it was 12 months ago, despite a threefold increase in its share price.
Demand-and-supply imbalances may persist because society’s decarbonisation agenda disincentivises additional supply. The company also has enduring competitive advantages such as its lower-cost fleet and higher utilisation rates resulting from a broad network of customers.
China’s online car market revs up
Autohome (Hong Kong: 2518) is the leading online destination for automobile consumers in China, a huge market. It monetises its 66.5 million monthly active users by selling advertising space to car makers and by matching prospective car buyers with dealerships. The share price has been weak so far this year and valuation levels have fallen thanks to concerns about competition.
However, Autohome’s competitive advantages appear to be overlooked. Its huge clientele, numbering more than the second and third players combined, helps ensure high conversion rates, which should be sustainable given investments in value-added services that are not so easily replicable.
An opportunity in renewables
Ming Yang Smart Energy (Shanghai: 601615) is a leading wind-turbine manufacturer in China. The significant valuation gap between European and Chinese players has caught our eye; it is partly due to subsidies coming to an end in China.
However, the country has big plans to grow its supply of green energy: it wants 50% of energy to come from renewables by 2030 as it looks to reduce its carbon emissions. This should augur well for growth in renewables.
Ming Yang benefits from a high degree of vertical integration: it manufactures all the major components, such as blades, inverters, and control systems. It also build its own wind farms, an industry which has now broadly reached grid parity. As a result, subsidies are no longer needed, enabling more consistent profit growth in future.
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