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Hong Kong Shanghai Connect, Our Top Picks And Gains
Corporate Digest | 20 November 2014
By: Louis Kent Lee
Articles (199) Profile

After much anticipation, the Hong Kong Shanghai Connect (HKSC) finally kicked off officially on 17 November. Needless to say, volume on the Hang Seng Index is now overwhelming as the world shifts its attention there.

There were 5 companies that we’ve covered in the past few weeks leading up to the commencement of the HKSC. Although majority of them have reflected gains after our coverage, our reasons for choosing the stock remains unchanged even as of now.

Three out of the five companies chosen have reflected gains within the range of 8.2% – 23.4% since our initial coverage.

    Lee’s Pharmaceutical (0950.HK)
    Closing price on 13 October: HK$10.36
    Closing price on 19 November: HK$12.78

    Gains: +23.4%

  • Lee’s Pharmaceutical is a niche drug producer that specifically focuses on cardiovascular and blood related diseases in China.
  • China’s healthcare market is severely underpenetrated, with healthcare spending clocked at only 5 percent relative to its GDP, compared to its global peers’ healthcare spending to GDP of 10 percent.
  • The three main catalysts for Lee’s Pharmaceutical are 1)Traction on newly introduced drugs and further penetration of current market share, 2) Good pipeline of drugs compared to its competitors, 3) Consistency in its numbers, superior margins, and negative net gearing.

Further analysis on Lee’s Pharmaceutical can be seen here.

    Sands China (1928.HK)
    Closing price on 13 October: HK$41.65
    Closing price on 19 November: HK$45.25

    Gains: +8.6%

  • Being the least dependent on the VIP segment since it is mainly targeting the mass market, Sands China will be the most resilient in terms of business operations amidst anti-graft measures that continues to hurt Macau casinos’ gaming revenue from the VIP segment.
  • Further, its strong free cash flow position along with a low leverage as seen by a falling debt to equity ratio (FY09: 83.5 percent, FY13: 50.1 percent), allows the company to command an annual dividend yield of 4 percent.

Further analysis on Sands China can be seen here.

    Tencent Holdings (0700.HK)
    Closing price on 13 October: HK$114.40
    Closing price on 19 November: HK$123.80

    Gains: +8.2%

  • The prowess of this company lies in the mobile platform where even Alibaba has acknowledged that the rapidly evolving mobile commerce trend is a significant risk factor in its IPO prospectus. This is because Tencent’s dominant position in the mobile platform, notably WeChat is a force to be reckoned with.
  • Between April and June this year, WeChat has a pool of 438.2 million monthly active users (MAU) mainly from China, compared to Facebook’s WhatsApp’s international base of over 600 million MAU.
  • While boasting a lower MAU, its earnings prowess is way beyond Facebook’s (US$788 million) where Tencent has reported a net profit of US$1.99 billion in 2Q14 that was mainly stemmed from WeChat’s growth.

Further analysis on Tencent Holdings can be seen here.

    Hong Kong Exchanges & Clearing (0388.HK)
    Closing price on 13 October: HK$172.10
    Closing price on 19 November: HK$168

    Loss: -2.4%

  • Now with the Shanghai-Hong Kong Stock Connect, trading volumes between the two stock exchanges would benefit as mainland Chinese investors are given an additional venue to grow and diversify their funds via investments into the 266 companies listed on the Hong Kong Stock Exchange.
  • Secondly, international investors will be able to participate in the economic growth of China for the first time in history, since the inception of the Qualified Foreign Institutional Investors II and Renminbi Qualified Foreign Institutional Investor (RQFII) programmes that only apply to financial institutions.

Further analysis on Hong Kong Exchanges & Clearing can be seen here.

    Lenovo Group (0992.HK)
    Closing price on 13 October: HK$10.92
    Closing price on 19 November: HK$10.42

    Loss: -4.6%

  • Lenovo Group became the largest personal computer (PC) maker in 2Q13 when it shipped 12.6 million computer units, besting Hewlett-Packard which came in in second place.
  • The group has rooted its success to two fundamental factors, a strong manufacturing and an extensive distribution channel that dominated the Chinese market. By housing an efficient manufacturing line, Lenovo was able to oust competition by cutting prices of PC equipment by 30 percent to a level where prices are marginally above costs.

Further analysis on Lenovo Group can be seen here.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

Please click here for more information about this author.


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