On 7 March 2022, Hong Kong’s Hang Seng Index (HSI) hit a new low of 20,826. It is now lower than the COVID-19 lows in March 2020 (21,139 points) and substantially lower than the lowest closing recorded (21,700 points).
Here are 10 HSI listed stocks that are currently trading below their COVID-19 lows, some possible reasons why this is happening and whether there are any good Chinese stocks opportunities for you to consider today:
1) Alibaba Group (9988.HK)
Alibaba led the way down as it was first impacted by the cancellation of the Ant Financial IPO.
Subsequently, Alibaba was fined US$2.8billion in a landmark antitrust case that ruled Alibaba was breaching anti-monopoly laws. It was further impacted when China ramped up its regulatory actions against the internet industry in the second half of 2021 with policies such as the removal of the walled garden. Alibaba’s share price also fell further each time it reported its results as growth slowed.
Alibaba is trading at the lowest valuation ever.
Even considering all the issues faced by the company, it does not seem logical that it is now trading at nearly 50% below the COVID-19 lows of HK$183 as the company has grown revenues by more 50% in the last 2 years.
2) Alibaba Health (241.HK)
Alibaba Health was directly impacted by its association to Alibaba and also by regulation measures for the internet healthcare industry such as a ban on online consultations for initial diagnoses and on selling prescription medicines online.
The share price had fallen by more than 60% from its COVID-19 lows despite a revenue growth of 72% when comparing 2H19’s revenue to 1H21’s revenue. The company had swung back into a loss mainly due to higher sales and marketing expenses as it strived to gain market share in a highly competitive industry.
With uncertainty due to regulations and the impact of trading on a high premium previously, it makes sense why Alihealth has fallen significantly lately.
3) Ping An Insurance (2318.HK)
Ping An was first affected indirectly from the clamp down on the internet industry as it held investments in companies such as Lufax (NYSE:LU) and OneConnect (NYSE:OCFT). Later, it received a direct impact when the online insurance sector was targeted through China’s regulatory action against improper marketing and pricing practices.
This culminated in a regulatory probe on its property portfolio exposure over concerns of further downside risks after Ping An wrote down its investments in certain property developers due to the looming China property market debt crisis then.
After concerns of economic stability were allayed when the Chinese government stepped into manage the reorganisation process of the major property developers, Ping An’s share price bottomed in October 2021 and made a nearly 35% rebound to HK$69 in February 2022.
It has since fallen to HK$56 due to the broader market sentiments. It is quite clear that Ping An’s strong rebound in February was due to a temporary relief of investors fears over a property sector crisis, thanks to the state’s support. It may not be logical for Ping An to be trading at the current levels.
4) Country Garden (2007.HK)
Country Garden, is one of the 3 big property developers of China along with Evergrande (3333.HK) and Vanke (2202.HK).
It was directly and severely impacted when Evergrande’s debt crisis spiralled out of control as it narrowly averted default several times through last minute payments on its bonds. Consumers confidence took a toll as there were uncertainty on completion of residential projects.
While Country Garden does not have an imminent repayment pressure due to its available cash on hand, it still faces pressures from losses arising from devaluation of its assets. This could lead to a domino effect if debt covenants are breached, hence it is logical for Country Garden to be trading near its all time low now.
5) Haidilao (6862.HK)
Haidilao has been in a slump as the company issued a profit warning, disclosing that it has been hit with one-off losses from impairment and asset disposals due to its decision to close more than 300 restaurants as the restaurants were underperforming with lower turnover rates and soaring costs.
Haidilao’s founder and CEO, Zhang Yong also stepped down as CEO recently and appointed a new CEO who will be responsible for improving Haidilao’s performance.
Although Haidilao is determined to turn its business around, it has not shown visible signs of turning around, hence it could be why it is trading at an all time low.
6) Hengan International (1044.HK)
Hengan International is the largest producer of sanitary napkins, baby diapers and other personal hygiene products in China. These are essential consumer staples which are required by consumers no matter what the economic situation is.
Unfortunately Hengan reported a decline in revenue and net profits in the latest 1H21 results. Revenue decreased due to intensified market competition and fragmentation of sales channel despite an increase in premium and upgraded product mix. Margins were impacted by higher costs of raw materials and increased promotion expenses.
Interim dividend per share also dropped by 20% from RMB1.20 to RMB1.00. Nevertheless, the stock is still trading at >6% dividend yield and a P/E ratio of below 10x which may indicate that it is undervalued at this point in time.
7) Sands China (1928.HK)
Macau’s gambling revenue took a hit due to movement restrictions during the COVID-19 pandemic. The decline was extended due to the crack down on the gambling sector (where the Head of the biggest junket operator was arrested) and uncertainty over renewals of casinos’ expiring licenses:
It’s little wonder why Macau casino stocks are underperforming, given the series of issues they had to deal with.
With no certainty and resolution over the matters mentioned above, it is only logical that Sands China is trading lower than its COVID-19 lows in March 2020.
8) Sun Art Retail (6808.HK)
Sun Art was one of the first hypermarket to build a significant presence online. Alibaba took an initial stake in 2017 and raised its equity stake to take a controlling stake of more than 70% in the company in October 2020 when the stock was trading at ~HK$8.
Despite tailwinds from growth in total retail sales and online sales, Sun Art’s revenue and profits declined surprisingly in 1H21. Sun Art has also not seen meaningful revenue growth in the past 6 years due to this increased competition. Instead, their profits fell significantly, thus explaining why the share price has fallen drastically.
Nevertheless, at the current share price of HK$2.62, there could be a chance of buyout by Alibaba.
9) Vitasoy (345.HK)
Vitasoy saw its revenue shrink by nearly 20% YoY in 1H21 which led profits to decline by nearly 95%. The company also did not declare a dividend for this interim period. This was mainly due to a boycott in Mainland China which led to products being removed from shelves after a controversy. Revenue growth in its other geographic regions were not able to make up for the revenue decline in Mainland China.
Sales are forecast to improve over time as product presence was restored at the end of September and the company resumed advertising. Such reputational damage tends to take some time to remediate, as such the stock may continue to trade at lows until we see a recovery in the company’s brand and revenue.
10) Fu Shou Yuan (1448.HK)
For the uninitiated, Fu Shou Yuan is one of China’s largest and most well known death care service provider. It seems illogical for Fu Shou Yuan to be trading at a share price lower than the COVID-19 lows as it provides an essential service. It also enjoys numerous demographic tailwinds such as increased median income and aging population supporting its industry.
Revenues and profits have outperformed pre-COVID levels and have increased 55% and 48% respectively when compared to 1H20.
One of the possible reasons for its price drop could be Fu Shou Yuan’s focus on premium services. Investors might be worried that it would be affected by China’s move to regulate the industry over concerns that over-liberalisation and premiumisation were affecting the needs of the average population.
This move could creating a more fair and transparent industry with greater room for growth. Should Fu Shou Yuan continue its revenue and profit growth trajectory, it would not be logical for the company to continue trading at such valuations.
Finding gems in a sea of red
One would have hoped that the second meeting between Russia and Ukraine would alleviate the conflict as the meeting led to the formation of a humanitarian corridor to allow civilians to safely evacuate. However, as uncertainty over the humanitarian corridor lingers, there seems to be no end to the stock market decline.
The HSI has dropped below new post-covid lows and many companies including Alibaba have continued to decline with no immediate signs of a turnaround.
Amidst the fearful markets, opportunities may arise.
We see companies such as Fu Shou Yuan trading at low valuations even though the company is still doing well. There are stocks like Ping An Insurance which have seen the worst behind them and Vitasoy which have been impacted by one off incidents. Investors could keep a look out for a potential turnarounds.
However, being undervalued may not imply that a China stock is a good investment. There are companies such as Country Garden and Haidilao that continue to underperform with no sight of the light at the end of the tunnel.
Alvin’ll be sharing how he valuates and find highly discounted China stocks in today’s markets using his 3C framework this week, you can join him live to learn more.