Top Chinese Fund Buys Auto Shares in Bet Economy Recovering

  • A new ‘bust-to-boom cycle’ is starting, fund manager says
  • Tianhong is China’s largest fund with $192 billion in assets

Xiao Zhigang is betting China’s automakers will be among the biggest beneficiaries of a resurgent economy.

Xiao, a top-performing money manager at Alibaba Group Holding Ltd.-backed Tianhong Asset Management Co., has been adding Great Wall Motor Co. and SAIC Motor Corp. while reducing holdings of liquor shares. His $30 million Tianhong Stable Growth Mixed Fund has returned 13 percent this year, beating 99 percent of its competitors, compared with a 15 percent drop in the benchmark Shanghai Composite Index.

“A new bust-to-boom cycle is starting and so is a stock rotation,” Xiao said. “We will raise allocation for stocks that will benefit in the early stages of the recovery cycle.”

While industries ranging from coal to steel and construction materials grapple with excess capacity, the automobile sector has been expanding on rising demand for sport utility and multipurpose vehicles. China’s passenger-vehicle sales climbed 23 percent to 1.6 million units in July, the fastest pace in 17 months. Data in coming days are projected to confirm the nation’s stabilization in growth achieved in the first half of this year continued into July.

Liquor Makers

His fund’s 10 biggest holdings at the end of June included six automakers, including Haima Automobile Group Co. and Jiangsu Yueda Investment Co., while reducing holdings of Sichuan Tuopai Shede Wine Co. and Qinghai Huzhu Barley Wine Co., a quarterly report shows. Tianhong is China’s largest fund manager with 1.28 trillion yuan ($192 billion) in assets at the end of June.

“Auto stocks potentially have more room for upside than liquor shares,” Xiao, who is based in Beijing, said in an e-mail interview last week. “Their price-to-earnings ratios are still within a level worth investing in and the auto industry is the only manufacturing sector that doesn’t have an overcapacity issue.”

Great Wall Motor and SAIC Motor are both valued at less than 11 times their projected 12-month earnings at Wednesday’s close, compared with 13 times for the Shanghai Composite. Sichuan Tuopai and Qinghai Huzhu trade at a multiple of at least 30.

Great Wall Motor added 0.1 percent at the close in Shanghai, while SAIC lost 2.5 percent. The Shanghai Composite dropped 0.2 percent.

Xiao said he’s staying clear of new-energy vehicles because of expensive valuations. BYD Co., an electric carmaker, is valued at 28 times projected earnings.

— With assistance by Amy Li, and Shidong Zhang

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