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Mizuho's Asia Fund Buying China's Consumer Staples on Growth, Ejiri Says

Mizuho Asset Management Co.’s Asia equities fund is investing in China’s consumer and health-care stocks as the nation boosts domestic demand and improves quality control, said Masahiko Ejiri, who helps manage the fund.

The MHAM Growing Asia Equity Fund is buying Hong Kong- listed shares of companies including China Yurun Food Group Ltd., a meat supplier, and Sinopharm Group Co., China’s biggest drug distributor, said Ejiri, a senior fund manager at Mizuho Asset Management Co., which oversees about $24.6 billion in Tokyo. China’s efforts to spur domestic demand will benefit consumer staples, while the nation’s focus on stricter quality regulation will give large companies an advantage over small ones, he said.

“It’s very clear that the government is moving away from exports to a consumer-driven economy,” said Ejiri. That means the government will support low-income groups, and “benefit would be skewed to staples such as supermarkets, food and beverages, not luxury brands,” Ejiri said.

China’s domestic demand will grow even after the nation unexpectedly raised its benchmark lending and deposit rates on Oct. 19 for the first time since 2007, Ejiri said today. Consumer prices jumped 3.6 percent in September from a year earlier, the statistics bureau said in Beijing today. That matched the median forecast.

“It’s quite usual that when an economy is booming, the central government would want to do some tightening,” Ejiri said, adding that the measure may be beneficial in the long term. “If inflationary pressure goes out of control, domestic consumption might be subdued.”

Consumer Prices

China’s economy grew 9.6 percent in the third quarter, according to the bureau, exceeding the 9.5 percent median estimate of economists in a Bloomberg News survey.

As of yesterday, China Yurun has surged 28 percent this year and trades at 21.7 times estimated earnings, compared with an average of 15 times for the benchmark Hang Seng Index, which has gained 7.7 percent this year. Sinopharm has surged 12 percent for the year and trades at 41.8 times estimated earnings. Shandong Weigao Group Medical Polymer Co., a Chinese medical device manufacturer, which Ejiri is also buying for the fund, has soared 62 percent.

China Yurun’s PEG, or price-earnings ratio compared with next year’s profit growth estimate, is 1.33 and Sinopharm’s PEG is also 1.33, according to data compiled by Bloomberg. The Hang Seng China Enterprises Index of so-called H shares of Chinese companies has a PEG ratio of 0.86.

‘Attractive Premium’

“Valuations look expensive but their growth is very high,” Ejiri said. “It’s an attractive premium.”

A lower PEG ratio, which compares a stock’s price-to- earnings ratio with projected profit growth, indicates a company may be cheap relative to its growth prospects.

The MHAM Growing Asia Equity Fund, which has about 3.1 billion yen ($38 million) in assets, has posted a 0.9 percent return in the six months through September compared with a 1.3 percent return by against its benchmark, according to the fund’s monthly statement. Its benchmark is an average of the MSCI China Index that tracks mainly Hong Kong-traded Chinese shares, the MSCI India Index, and the MSCI AC South East Asia Index, according to the statement.

China’s Premier Wen Jiabao said in an interview with CNN last month the global financial crisis has shown the need for China to focus on “structural problems” in its economy, including taking steps to boost domestic demand.

Encouraging Demand

Separately, China will continue to encourage domestic demand to ensure stable and rapid economic development, Xinhua News Agency reported on Oct. 18, citing the communique released by the Central Committee of the Communist Party of China.

“It’s very bad for China to have a reputation that it produces cheap but bad quality products compared with other major exporters,” Ejiri said.

China’s stricter stance on quality control, applied to consumer and health-care companies, would give an advantage to larger companies because of their financial capability to build brands, Ejiri said. Larger companies are also better able to comply with control requirements, he said.

“I tend to focus on good quality, good brand names,” said Ejiri. “They tend to be larger companies.”

Revised Standards

China’s State Council last month urged national and local authorities to take further steps to improve the safety of milk products. All dairy companies must meet revised standards to take effect by the end of October, and any producer failing to do so may lose its operating license, it said.

The move comes after melamine, used to make plastics and tan leather, was found in infant milk powder and other products two years ago. At least six babies died and about 300,000 other people fell ill as a result of contamination.

“Standards are getting higher because Chinese people are becoming wealthier, and realizing they can buy higher-quality products if they pay more,” Ejiri said. “If companies can’t provide that, people will start buying foreign products, and that could destroy them.”

To contact the reporter on this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net.

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