The Chinese stock market had a challenging 2021. The Morningstar China Index ended the year with a 21.1% loss, representing the worst-performing major stock market globally. Regulatory ruffles were a part of it, as Chinese authorities rewrote industry rules for many fast-expanding sectors such as private tutorial centers and mobile gaming. For investors, the pain was real, especially compared to U.S. equities. The latter (proxied by the Morningstar U.S. Market Index) rose 25.8% in 2021, scoring double-digit gains three years in a row.
The bright side of the downturn in Chinese equity markets is that many companies now trade below our fair value estimates. The average Chinese stock in our coverage universe traded at 16% discount to its fair value as of January 10, compared to a 5% premium at the beginning of 2021.
According to Morningstar Direct, 60% of the mainland Chinese stocks we cover are considered undervalued. In China, out of the 143 covered names, 38 of them are assigned with a 5-star rating. The proportion of 5-star listings in other major markets is around mid-to-low single digit.
The cheapness of Chinese markets is even more extreme as compared to other major stock markets. Undervalued stocks represent less than 30% of Morningstar’s coverage in the US, Canada and Australia. After resetting new highs, U.S. stocks covered by Morningstar are priced at a 6% premium on average.
The Cheapest Names
Vocational training education provider China East Education Holdings Ltd (00667) is the worst’s most inexpensive stock, trading 78% lower than the fair value estimate of HK$ 21 our analysts assigned.
The education institute is closely followed by the Hong Kong listing of A-Living Smart City Services (03319), which is priced at a 77% discount to Morningstar fair value estimate. Both of them belong to sectors that endured major regulatory shake-ups, though neither is directly impacted by the new regulations, such as the ‘Three Red Lines’, which restricts their gearing levels. The remaining of the list is completed by other education providers and real estate firms, like Shimao Group (00813). A-Living Smart City Services and Shimao are on Morningstar’s Asia Large-Mid Cap best idea list.
©2021 Morningstar. All rights reserved. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided as of the date written, solely for informational purposes; and subject to change at any time without notice. This content is not an offer to buy or sell any particular security and is not warranted to be correct, complete or accurate. Past performance is not a guarantee of future results. The Morningstar name and logo are registered marks of Morningstar, Inc. This article includes proprietary materials of Morningstar; reproduction, transcription or other use, by any means, in whole or in part, without prior, written consent of Morningstar is prohibited. This article is intended for general circulation, and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Investors should consult a financial adviser regarding the suitability of any investment product, taking into account their specific investment objectives, financial situation or particular needs, before making any investment decisions. Morningstar Investment Management Asia Limited is licensed and regulated by the Hong Kong Securities and Futures Commission to provide investment research and investment advisory services to professional investors only. Morningstar Investment Adviser Singapore Pte. Limited is licensed by the Monetary Authority of Singapore to provide financial advisory services in Singapore. Either Morningstar Investment Management Asia Limited or Morningstar Investment Adviser Singapore Pte. Limited will be the entity responsible for the creation and distribution of the research services described in this article.
.jpg "Kate Lin")
