These three Chinese stocks are set to profit from strong tailwinds

Professional investor Dale Nicholls of the Fidelity China Special Situations Trust picks three of his favourite Chinese stocks.

Rising inflation and economies on the brink of recession are dominating headlines across most global markets. But it is crucial to maintain a long-term perspective during volatile times. I remain focused on companies with strong long-term prospects trading at reasonable valuations. Good risk-reward opportunities often emerge during periods of volatility.

The US and European countries have begun tightening monetary policy to counter inflation, but China has maintained an easing stance, which history shows often supports markets. This monetary policy, combined with structural tailwinds such as growing self-sufficiency, increasing disposable incomes and rising domestic consumption, provides investment opportunities in the Chinese market.

Shandong Sinocera: thriving in adversity

Shandong Sinocera (Shanghai: 300285) is a leading player in fine ceramic materials in China. It is actively taking market share from global competitors in all product segments despite ongoing supply-chain disruptions and the trend towards deglobalisation owing to rising geopolitical tension and the impact of the pandemic.

Domestic substitution is a trend we see across many markets in China. The company’s competitive advantages include a strong technology platform, a lean cost structure and better support services for customers. The group is expected to grow sales and earnings by an annual 30% in the next five years.

SKShu Paint: painting the property sector

The property sector in China has been under particular pressure since late 2021. While the stabilisation process is bumpy and slow, the related paint industry is an attractive yet often overlooked business with pricing power that is helping it deliver a high return on invested capital (ROIC), a key gauge of profitability, as well as solid cash flows.

SKShu Paint (Shanghai: 603737) is gaining market share through the consolidation of what remains a very fragmented market. Demand for repainting is picking up, meaning China’s architectural paint requirements will expand significantly, even if demand for new-build residential property remains weak.

The company fosters a culture focused on the customer and dedicates itself to making environmentally friendly products accredited by global institutions such as Greenguard. We think the earnings outlook for the second half of 2022 remains positive and that most of the market turbulence is behind us.

Lufax: a severely undervalued lender

In the hope of revitalising GDP growth, the Chinese leadership has pledged to increase its support for the economy, especially small firms hit by pandemic lockdowns. That means Lufax (NYSE: LU), a severely undervalued leader in the online lending sector, could present an opportunity as the regulatory landscape becomes clearer.

The company differentiates itself by targeting small-business owners underserved by banks. Lufax’s core strengths lie in its strong offline capability, sophisticated risk-management system and robust wealth-management platform. The management has proactively mitigated regulatory risks, and both dividends and stock buybacks show confidence in its business and cash flows.

Recommended

How to keep your dividends safe from the taxman
Personal finance

How to keep your dividends safe from the taxman

We look at ways to keep your dividends safe ahead of the decrease in tax allowances.
28 Mar 2023
Shoppers feel the pain as food inflation hits a record
Personal finance

Shoppers feel the pain as food inflation hits a record

Data from the analytics group Kantar showed food inflation hit a fresh peak in March 2023
28 Mar 2023
11 investment trusts for inflationary times
Investments

11 investment trusts for inflationary times

Inflation eats away at the value of your money, but these investment trusts can help you grow your wealth.
28 Mar 2023
Best junior stocks and shares ISA platforms
Isas

Best junior stocks and shares ISA platforms

A junior stocks and shares ISA is a great way to save for your child tax-efficiently. But it can be confusing deciding which investment platform to ch…
28 Mar 2023

Most Popular

Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Ofgem’s price cap is now predicted to fall below £2,000, based on average typical use, from July, for the first time since 2022. We have all the detai…
21 Mar 2023
Government plans could see NS&I boost interest rates
Savings

Government plans could see NS&I boost interest rates

The government-backed bank has a new funding target, which could prompt it to boost the rates on its Premium Bonds, ISAs and bonds.
16 Mar 2023
Where will house prices go in 2023?
House prices

Where will house prices go in 2023?

We explore what could happen to house prices in 2023 as the market continues to slow down.
24 Mar 2023