By Clement Tan
HONG KONG, March 28 (Reuters) – China industrial stocks offer good, but selective, investment opportunities as steel mills to cement producers consolidate to reduce overcapacity, according to a fund manager at BlackRock.
“We are not bullish, but … taking somewhat of a contrarian view for industrial sectors because we see the inflection point in terms of demand and supply balance,” Jing Ning, director and portfolio manager of BlackRock’s $1.4 billion China Fund, told reporters on Wednesday.
She declined to give specific company names, but said firms with good balance sheets and a track record of controlling costs would benefit the most.
A reduction in capacity in industrial sectors could also be hastened by environmental concerns after the government said this month it will impose “special emissions restrictions” from April on major industries from steel and petrochemicals to cement, non-ferrous metals and coal-fired power. [ID:nL4N0BS1XB]
The industrial sector accounted for 11 percent of Ning’s China portfolio as of Feb. 28 this year, ranking as her third biggest sector, according to BlackRock’s latest official fact sheet. Only one industrial name, Zhuzhou CSR Times Electric figures in her top 10 holdings.
Any rerating of the China cement sector, Ning suggested, will be driven by a more disciplined supply coordination — and not driven by an increase in demand — just as it was the case in 2010-2011.
MAJOR HOLDINGS
Financials occupy the bulk of Ning’s portfolio, standing at 39 percent. All “Big Four” China banks are among her top 10 holdings for a combined 21 percent, with China Construction Bank (CCB) accounting for 9 percent of her portfolio alone.
Ning said on Wednesday she may reconsider her position on banks if they return to 1.5 or 2 times price-to-book value because the economic recovery in China will be gradual.
Bank of China is currently trading at 0.8 times its forward 12-month price-to-book value, according to Thomson Reuters StarMine. Industrial and Commercial Bank of China is at 1.2, while CCB and Agricultural Bank of China are trading at 1.1.
“When they are trading below its book value, then it’s your call on the credibility of the Chinese government to manage economic growth,” she said.
China’s top banks, led by ICBC, reported benign bad-loan ratios as brisk lending in fast-growing inland regions countered souring loans to overheated sectors on the country’s eastern coast. [ID:nL3N0CJ5VL]
Up to end-February, Ning’s fund has outshined the MSCI China index on the year to date. It performed in line in 2012, but has outperformed the benchmark by 13.3 to 12.5 percent on a cumulative three-year basis. ($1 = 6.2110 Chinese yuan)
(Editing by Miral Fahmy)