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Top China Stock Fund Manager Says Small-Caps Ripe for Rally

  • Ren’s fund favors technology, new energy and machinery stocks
  • ChiNext Index has rebounded 7.7% from a low in January

Ren Xiangdong, whose Chinese stock fund has beaten 97 percent of peers over the past three years, says now’s the time to buy small-cap shares with high profit growth.

Ren is adding to holdings of “new economy” companies and selling some cyclical stocks, he said in an interview on Feb. 27. The 2.7 billion yuan ($390 million) Bank of Communications Advanced Production Fund’s biggest picks were concentrated in technology, new energy and machinery stocks at the end of 2016, data compiled by Bloomberg show.

In backing China’s transition to an economy dominated by domestic consumption, services and companies that aren’t part-owned by the state, Ren is also betting that he can keep finding winners in a part of the equity market that’s underperformed. The ChiNext has risen 0.5 percent this year after a 28 percent slide in 2016, while the Shanghai Composite Index is up 4.3 percent to unwind some of last year’s 12 percent drop.

“I see better opportunities in ‘new economy’ stocks than those tied to the ‘old economy’ after their relative underperformance in the past two years,” said Ren. “Looking at whether a company’s earnings growth can justify higher valuations is key to identifying winners."

While Ren declined to specify which stocks he’s been buying recently, he said he favors companies with a market value below 30 billion yuan; annual profit growth of more than 25 percent; valuations that are appropriate given the earnings outlook; and those that are less vulnerable to economic cycles.

Mainland shares with projected profit growth that fit Ren’s criteria and a valuation of less than 30 times their forecast 2017 earnings include Leyard Optoelectronic Co., Shandong Meichen Science & Technology Co., and Unilumin Group Co., data compiled by Bloomberg show. Ren declined to comment on whether they were among his picks.

Fund Returns

The Bank of Communications Advanced Production Fund returned 32 percent a year over the past three years, data compiled by Bloomberg show. Its biggest holdings at the end of 2016 included Shanghai Taisheng Wind Power Equipment Co., All Winner Technology Co. and Xiamen King Kong Motor Group Co.

Investors such as Ren who’re betting on a small-cap rebound may have friends in high places. Chinese Premier Li Keqiang said in his work report to the annual legislative gathering in Beijing on March 5 that China will further support development of the ChiNext, and foster “emerging industries” including artificial intelligence, integrated circuitry, new materials and bio-pharmaceuticals. The equity measure is up 7.7 percent from a January low.

Ren signaled Jan. 19 in his fund’s quarterly report to investors that he doesn’t think China’s economic revival -- which has underpinned the outperformance of large-cap industrial stocks -- will last. Growth accelerated for the first time in two years last quarter, manufacturing is gathering pace and the nation saw its steepest import growth in five years in February.

“As China’s economic leading indicators reach peak levels, the growth momentum for cyclical industries’ earnings will weaken, while growth industries will regain attention from investors," Ren wrote in the report.

— With assistance by Amanda Wang, and Amy Li

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