China Builder Stocks Are Top Picks to Wanjia on Fiscal Boost

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  • Fund favors companies tied to public-private partnerships
  • Government has unveiled about $2.1 trillion of such projects

China’s infrastructure stocks are the best bet for investors eyeing a lackluster market as the government steps up spending on investment projects.

That’s according to Mo Haibo, a fund manager at Wanjia Asset Management Co. in Shanghai, who says construction-related firms now comprise the biggest proportion of his holdings. Mo’s Wanjia Selective Mixed Fund has returned about 6 percent this year, compared with a 15 percent drop by the benchmark equity gauge. He favors companies tied to public-private partnership projects, which China’s government is pushing to cushion a slowdown in the economy.

“As the size of public-private partnership projects grows bigger and bigger, it will lay a solid foundation for earnings growth for related companies,” said Mo, declining to name individual stocks. “Earnings for such companies will maintain rapid growth over the next one or two years, and there’s still big room for investment opportunities.”

China has unveiled about 14 trillion yuan ($2.1 trillion) worth of such investment projects as officials seek to help bolster economic growth by increasing private investment without straining public spending. Another 1 trillion yuan worth of additional plans are in the pipeline, people familiar with the matter said. Stocks related to public-private partnerships are becoming the newest “hot spot” for investors, according to Fortune SG Fund Management Co.

Project Orders

One such example is Beijing Orient Landscape & Ecology Co., which has won bids for partnerships worth a combined 60.7 billion yuan, or 11 times the company’s 2015 revenue, according to China Merchants Securities Co. The company’s shares have climbed 49 percent in 2016. Shanghai Safbon Water Service Co., a provider of water treatment equipment, climbed to a nine-month high last week after securing work on such projects.

Beijing Orient slipped 1.6 percent at Wednesday’s close in Shenzhen while Shanghai Safbon slid 0.3 percent. The Shanghai Composite added 0.1 percent.

Infrastructure stocks may already be overheating, according to Chen Ruiming, a strategist at Huabao Securities Co. in Shanghai.

“These companies have some fundamental support but it’s not appropriate to look at them from the perspective of growth stocks,” Chen said. “They have become the hot play recently also partly because it’s hard to find any other theme with the market barely moving.”

Speculative trades are common in mainland exchanges where individual investors account for more than 80 percent of trading. Volatility on the Shanghai Composite Index has fallen to the lowest level in almost two years as the gauge remains stuck around the 3,000 level amid speculation state-backed funds were preventing excessive swings. The measure is one of the world’s worst performers in 2016 after a boom turned to bust last year.

Still, with the government looking at ways to lure more private investment to infrastructure projects, the rally in such stocks may have a way to go, according to Alexandre Werno, Shanghai-based executive vice general manager at Fortune SG Fund Management, which oversees $24 billion. Such public-private partnerships offer returns of between 5 percent and 8 percent, he said.

This “is a very good way to attract private capital to infrastructure projects,” said Werno. The rally “will not easily be broken. This can be the next hot spot to be chased by the market.”