For five consecutive quarters now, Morningstar analysts who cover companies in Asia have reduced their estimates of what they think the companies are worth. In this past quarter, more stocks received a reduction in their fair value estimates, than an increase.
20% of the stocks in our coverage universe received a fair value estimate increase, while 23% received a fair value estimate decrease. In terms of numbers, 50 stocks received a fair value decrease, while 44 stocks received an increase.
Morningstar’s fair value estimate is a measure of what analysts think a company's share price should be worth. The fair value is based on how much cash analysts believe a company will generate in the future. Stocks priced above their fair value estimates are seen as expensive, while those below it are considered cheap.
In Asia, the first quarter is typically when companies report earnings for the previous year and announce their full-year guidance based on the market conditions. In Q1 2023, Asian stocks started to trade on the long-awaited China reopening. However, even though more stocks received decreases in fair value estimates than increases, our analysts are more optimistic this time around.
10 stocks saw a fair value increase by 10% or more in the first quarter. The upgraded names represent 5% of our coverage, which is half of the quarterly average over the past five years. Conversely, 29 companies, or 13%, saw their fair value estimate decline by at least 10%, versus the quarterly five-year average of 8%.
China Property Leads the Cuts, Communications and Defensives Lead the Gains
In Q1 2023, the Morningstar fair value estimates across the four markets – China, Hong Kong, Taiwan, and Singapore – declined an average of 1.5% between January 1 and March 31. This trend has been continuing for six quarters now.
For the quarter, of 50 downgraded stocks, the fair value estimates of 26 companies were trimmed by more than 10%. The real estate sector posted the largest net fair value estimate cuts, led mainly by Chinese property service companies.
On the flip side, the communication services and consumer defensive sectors saw overall fair value increases. The sector’s estimates rose an average of 2.9%, after a 1.6% lift from the fourth quarter of 2022.
Sluggish Home Sales Burn Property Services Companies
The fear of China property developer defaults is still fresh in investors’ minds. With that uncertainty factored in, our analysts also believe risks could further grow in peripheral players on the mainland. Three out of six most downgraded real estate stocks in Asia are property managers spun off from their mainland developer parents.
The stock that received the deepest downgrade to the fair value estimate during the quarter was Central China Management (09982).
As signs of a potential home sales rebound in 2023 emerge, Jeff Zhang, associate equity analyst at Morningstar, is overall positive on the project management sector, which comprises of companies managing construction and running product design for real estate projects. He remains wary of Central China Management’s focus on lower-tier cities, as this may lead to a slower recovery.
Who Got the Largest Increase in Fair Value Estimates?
In the technology sector, analysts downgraded Sunny Optical Technology (02382), Semiconductor Manufacturing International Corp (00981), and GDS Holdings (09698).
Meanwhile, the largest increase was for Tencent’s music streaming platform, Tencent Music Entertainment (TME). Our analysts upgraded fair value estimates in this stock by 39% to reflect growth in long-term subscriber base and margin expansion opportunities.
Ivan Su, our senior equity analyst, expects the firm to generate higher music subscription revenue over the next five years thanks to effective paywall and subscription pricing strategies. He continues: “Tencent Music has been putting higher quality content behind a paywall to entice users to subscribe over the past few years. We expect the firm to continue to add more songs and in-app features such as ultra-high sound quality and chat-box visual effects to membership.”
Within the communication services, analysts see a brighter outlook in cloud services developed by Chinese telecom providers as China Telecom, China Unicom, and China Mobile earned a fair value upgrade of 8%, 8%, and 7%, respectively.
Consumption Is Back in Focus
After China bid farewell to COVID restrictions, both consumer cyclical and defensive groups are benefiting. Strong pent-up demand could support the real economy, and the excess savings Chinese households have amassed during the pandemic could lead to a spending spree.
The accelerated reopening is set to encourage social events benefiting beverage makers and to bring more sales to on-premises consumption, like buying drinks at bars and restaurants. This will be positive for breweries like China Resources Beer and Tsingtao Brewery, speeding up earnings recovery and enhancing the visibility of sales in 2023. Thus, in the first quarter, the fair value estimate of China Resources Beer was raised by 12% to HK$ 58 per share while Tsingtao Brewery was adjusted by 8% higher to HK$ 80 per share. After the upgrades, the two narrow-moat beer makers are fairly valued.
Increased demand for socializing has also buoyed demand for premium gifts like fiery liquors. Wuliangye Yibin, Jiangsu Yanghe Brewery, and Kweichow Moutai earned a 3-4% fair value upgrade, trading at their respective fair value as well.
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