Emerging value in Q4 Asia equity markets even as volatility remains: Morningstar

TOP picks for Asian companies among 10 sectors such as basic materials and energy, communication services, e-commerce, and financial services were highlighted by Morningstar Equity Research in a report on Tuesday (Oct 12).

Lorraine Tan, Morningstar's director of equity research in Asia, said: "Value is emerging but we expect equity markets to remain volatile in the near term until there is further clarity to ease regulatory concerns."

The report highlighted that the average price to fair value for the Asia coverage declined to 0.86 times, from 0.94 times last quarter. This is a result of regulatory concerns across multiple sectors in mainland China, including credit risks in the real estate sector, fading momentum ahead of Japan's new administration, uncertainty over inflation, and the US Federal Reserve's response to tighten monetary policies.

The upstream arm of China's third state-owned oil company CNOOC, and Anhui Conch Cement, which produces more than 200 million metric tonnes of cement annually, are top picks in the basic materials and energy sector.

Commenting on CNOOC, the analysts said: "It's the most direct option for investors seeking exposure to China's energy security policy and long-term plans to increase its oil supply."

The analysts also believe that Anhui's strong balance sheet and "best in class" mining assets position it well to weather the slowing investment in China, capitalise on possible merger or acquisition opportunities, and achieve modest market share gains at the expense of over-leveraged competitors.

Meanwhile, on the communications services and interactive media front, the analysts said they continue to remain bullish on Tencent in the long term. "We are convinced that wide-moat Tencent will continue to grow nicely in the long run; its short-video accounts and mini programs have bred many opportunities for merchants to capture and retain users, and monetise these users with e-commerce mini programs."

With Chinese telecom operators leading the way in revenue and earnings recovery for Asian telecom operators in Q2 2021, Morningstar picked China Telecom, which has been consistently taking market share in China since the large industry restructuring in 2010, as well as China Unicom, owing to its recent share price declines that imply it's of good value.

Noting that e-commerce growth should improve after Covid-19 is contained, the analysts selected Alibaba, SJM Holdings, Samsonite, and Yum China as top stocks to own in the "consumer cyclical" category.

As for consumer staples, Morningstar favours Japanese chemical and cosmetics company Kao, as well as China East Education, which is China's largest vocational training education provider.

Under financial services, top picks for banks are BOC Hong Kong, China Construction Bank, and Oversea-Chinese Banking Corp, whereas for non-bank financial services, Morningstar is optimistic on Sompo Holdings, and Ping An Insurance Group.

Morningstar believes that long-term winners in the healthcare space will be innovative biotech drugmakers, as well as "Big Pharma" companies with good manufacturing capabilities and strong sales networks. But it also cautioned that investing in this space will require patience, as fears of policy tightening could continue for the foreseeable future.

Takeda Pharmaceuticals, Innovent, and I-Mab are top options in healthcare, the analysts highlighted.

In the industrials sector, ST Engineering, CK Hutchison, and Harmonic Drive Systems are seen as top picks as Morningstar noted that it sees the "greatest value in conglomerates".

Among real estate developers, Swire Properties, China Overseas Land & Investment, and Mitsubishi Estate are viewed as the best stock picks, while in real estate Reits, CapitaLand Integrated Commercial Trust, Suntec Reit, and Link Reit are top choices for the analysts.

In the technology space, Morningstar highlighted Largan Precision, TSMC and Yageo as the best picks.

"We retain our view that suppliers of semiconductors and passive components are more resilient in a downturn as they benefit from the content growth driven by 5G adoption and auto digitalization in the longer run," said the analysts.

Calling the utilities sector a "safe haven amid ongoing volatility", Morningstar views CK Infrastructure Holdings and China Gas Holdings as attractive picks.