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Dr Doom: Trouble In Chinese Industrial Sector, Seek Consumer-Driven Stocks
Aspire, Hot Picks | 19 November 2015
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By: Lim Si Jie
Articles (169) Profile

While the PBOC remains confident that correction in the Chinese stock market is over, Marc Faber begs to differ. Marc Faber believes that heavy capital outflow from the Chinese market is a sign that locals are taking flight from the increasingly risky Chinese market.

Dr Doom: Growth Not Good Enough

Dr Doom believes that China is no longer capable of growing at the same pace as it used to, e.g. in 2000 and 2007. And it is not just growth of the Chinese economy that is worrying. Marc Faber believes that investors should pay attention to China’s “epic” debt bubble. “Investors should realize that China has a credit bubble of epic proportions,” he said in his interview.

Defaults Increasing Amongst Manufacturing Companies

According to the filings compiled by Bloomberg from Shanghai and Shenzhen stock exchanges listed firms, companies with less cash than short-term debt, net losses and contracting revenue have jumped to around 200. About half are in the commodities sector while about 20 percent are industrial companies.

Defaults are mounting as economic expansion slows. Manufacturing firms currently account for four of the five major bond failures this year. According to credit analysts at Industrial Securities Co., more defaults are expected, especially in overcapacity industries such as steel, coal and chemicals, following economic slowdown in China.

Industrial Securities, OCBC: Troubling Trend in Chinese Credit Market

In an attempt to prevent a sharper slowdown in an economy growing at its weakest pace in a quarter, authorities have been loosening rules on bond issuance. For instance, the National Development and Reform Commission will exempt issuers or bonds with AAA credit ratings from its review process.

Investors are chasing lower-rated bonds after the Chinese central bank cut interest rates six times in a year, which dragged down the extra yield on five-year AA graded corporate securities over government notes to the lowest in five years. Brokerages including Oversea-Chinese Banking Corp. and Industrial Securities have also warned of a credit bubble.

Howard Marks: Opportunities in Bond Market

However, Oaktree Capital Group LLC’s Howard Marks believes that China is “kind of friendless” at the present time as an investment proposition, a circumstance in which he sees an opportunity for investment. The distressed debt investor said that China is beginning to appeal to him as an investment proposition. He believes that the world’s second-largest economy still has its best years ahead.

Premier Li: Transit Towards Domestically Driven Economy

The Chinese economy’s reliance on traditional smokestack industries is one of the key reasons which led to the world’s biggest corporate debt loads. Moving forward, Premier Li Keqiang and the Chinese government is trying to make consumption and services bigger growth drivers of the Chinese economy, transiting into a domestic demand driven economy.

Investors Takeaway: BUY Retail REITs with Chinese Exposure

Dr Doom’s advice is for investors to take a longer term view in investing in the transiting Chinese economy. While the transition will be slow and painful, early adopters of investments in the consumer sector might benefit from the high risk-to-reward ratio in return for their patience.

CapitaLand Retail China Trust (CRCT) – BUY, TP $1.69

CRCT reported its 3Q15 results with gross revenue increasing by 7.5 percent YoY due largely to a stronger CNY against SGD. Gross revenue in CNY terms fell 0.7 percent due to continued impact on CapitaMall Minzhongleyuan (MZLY) from a road closure to facilitate the construction of a subway line and ongoing weakness at CapitaMall Wuhu.

Distribution per unit (DPU) grew 12.3 percent YoY to 2.64 S cents for 3Q15. CRCT is currently experiencing some headwind in the short run. This is an opportunity for investors to add to their portfolio while CRCT boasts a higher than average dividend yield.

Moving forward, with its portfolio focused on China, it will be a strong beneficiary of the governmental efforts to boost consumer demand within China.

Mapletree Greater China Commercial Trust (MGCCT) – BUY, TP $1.10

In its most recent quarter, MGCCT reported a strong set of 2QFY16 results. Gross revenue accelerated 25.4 percent YoY to S$84.6M. This was driven by positive rental uplifts achieved in previous quarters by Festival Walk (FW) and Gateway Plaza (GP), coupled with a full quarter of contribution from Sandhill Plaza (SP), which was acquired on 17 Jun 2015. MGCCT’s DPU jumped 12.6 percent to 1.808 S cents.

Moving forward, MGCCT will be expanding on its Chinese portfolio to capitalize on the growing consumer market in China.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

CapitaLand Retail China Trust  1.530 -0.010 -0.65%   
Business: Co is a real estate investment trust with a portfolio of retail real estate across China.

Insight: Apr-19, 1Q19 gross revenue increased 1.1% in SGD t... Read More
Mapletree North Asia Commercial Trust  1.250 +0.010 +0.81%   
Business: Real estate investment trust focused on commercial assets (comprising retail & office) in HK & China.

Insight: Apr-19, FY19 revenue rose 15.1% due to higher rent... Read More

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