What Analysts Say to Buy as Shenzhen-Hong Kong Link Opens

  • Scarcity value, new economy, small-caps among themes in focus
  • Link adds more than 800 stocks in Shenzhen, 100 in Hong Kong

UBS' Fang: Shenzhen Is the Story for Growth

After months of anticipation, the opening day of Shenzhen’s exchange link with Hong Kong has finally arrived.

The program will give foreign investors direct access to more than 800 stocks in China’s southern financial hub, while adding more than 100 smaller Hong Kong equities to the potential buy lists of mainland traders.

It’s all part of China’s effort to internationalize its currency, expand its citizens’ investment options and get mainland shares into MSCI Inc.’s global indexes. As trading begins, here’s a sampling of analysts’ top picks.

Scarcity Plays

Some parts of China’s economy are poorly represented by shares traded in Hong Kong and other international markets. Companies in Shenzhen that fill the gaps are likely to lure foreign money managers, according to Credit Suisse Group AG.

The Shenzhen Composite Index dropped 0.8 percent at the close on Monday, while the Hang Seng Index slipped 0.3 percent. Gree Electric Appliances Inc., which plunged by the daily 10 percent limit, Midea Group Co. and Hangzhou Hikvision Digital Technology Co. were the most popular Shenzhen shares, according to data from the Hong Kong stock exchange. BYD Co. and Chinasoft International Ltd. were among the top purchases in Hong Kong.

New Economy Bets

Shenzhen is often called China’s Nasdaq because it’s the favored destination of so-called new economy companies that tap into the country’s fast-growing technology, consumer and health-care industries.

  • Shenzhen Inovance Technology Co. has gained market share in automation products and that’s likely to continue in 2017, said HSBC. Citigroup also recommends the stock
  • Luxshare Precision Industry Co. should benefit from a new speaker-box business and the rising use of so-called Type C connectors for smartphones in China, said Macquarie analysts

Hong Kong Small-Caps

The Shenzhen connect will make it easier for mainland investors to access small-cap Hong Kong stocks with market values of at least HK$5 billion ($645 million). The Hang Seng Composite Small Cap Index has dropped 4.4 percent this year, versus a 3 percent gain for the large-cap Hang Seng Index.

  • Li Ning Co. is favored by analysts at Macquarie, UBS and Credit Suisse, the latter of which said it has the highest earnings outlook among sportswear makers
  • Yuzhou Properties Co.’s high dividend yield could appeal to mainland investors, according to analysts at Macquarie
  • Angang Steel Co. should benefit from China’s supply-side reorganization aimed at cutting redundant capacity, said Goldman Sachs

Dual-Listed Discounts

Dual-listed companies trade at different valuations in the two cities, with analysts saying the link could help close the gap (though similar hopes at the opening of the Shanghai link haven’t been fulfilled.) Among 17 stocks listed in both in Shenzhen and Hong Kong, 16 trade at a cheaper valuation in the latter.

Hong Kong’s Financials

Insurance firms, brokerages and banks in Hong Kong are seen as potential beneficiaries of the second link if the program helps spur trading. Financial services firms account for 11 percent of total market value of the Hang Seng’s small- and mid-cap indexes, the third-biggest sector behind machinery and real estate, according to HSBC. Among Citigroup’s picks are Haitong Securities Co., Bank of China Ltd. and China Life Insurance Co.

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