Asiamoney Brokers Poll 2019: The people who left their mark

By Rashmi Kumar

Best Economist: Hongbin Qu, HSBC 

Best Analyst for Consumer Discretionary: Peter Chu, Yuanta Securities Hong Kong

Best Analyst for Energy: Thomas Hilboldt, HSBC

Best Analyst for Semiconductor and Semiconductor Equipment: Sebastian Hou, CLSA

Best Quantitative/Technical Analyst: Laurence Balanco, CLSA 

Best Analyst for Real Estate: Michelle Kwok, HSBC

Best Analyst for Industrials: Walden Shing, Haitong International

Best Analyst for Consumer Staples: Terrance Liu, CLSA

Best Analyst for Technology Hardware and Equipment: Frank He, HSBC

Best Strategist: Christopher Wood, Jefferies

Best Analyst for Banks: Gary Lam, HSBC

This was an eventful year for Hongbin Qu, co-head of Asian economics research and chief economist for Greater China at HSBC. The ups and downs of the trade relationship between China and the US, as well as the pressure on growth, not just globally but particularly on the mainland, meant Qu had to shed the conventional way of analyzing economic trends to forecast growth as the broader picture around politics became important.

“The year brought lots of challenges and excitement, particularly for economists who have spent many years in the market,” Qu tells Asiamoney. “There have been multiple dimensions around political, economic and global issues to look at, and those have really made economic research more challenging and exciting. There is no shortcut – you have to spend more time to look at broader angles in order to figure out the market’s direction.”

Qu, who has worked at HSBC since 2002 and been an economist since 1994, has done that remarkably well.

He points to HSBC’s calls that the Chinese regulators would slash corporate tax rates and that the People’s Bank of China will keep easing gradually on the monetary front. 

Both those predictions played out well. China announced cuts in corporate taxes equivalent to as much as $298 billion early in the year, while the central bank has maintained a prudent monetary policy approach through 2019.

Qu was voted by participants in the Asiamoney Brokers Poll as the best economist in the region, in a year when business confidence was sapped by the US-China trade war, particularly after the initial breakdown in trade negotiations between the two countries in May.

But Qu, who works with a team of four others focusing on Greater China, is bullish on the medium-term and long-term prospects of the mainland. He admits growth will slow down to below 6% in 2020, adding that while policy easing will “slow the slowdown, it will not be sufficient to reverse the slowdown”.

However, over the next three to five years, he says structural concerns and worries around an aging population are “overplayed”. In contrast, Qu predicts that the quality of labour will actually improve in China, the emphasis on infrastructure development will pay off and the thrust given by private companies on innovation and upgrading their technology is positive. 

As head of Hong Kong research at Yuanta Securities Hong Kong, Peter Chu has quite a niche specialization. He covers about 20 stocks listed on the domestic stock exchange that focus on the consumer discretionary sector, including textiles and apparel, luxury goods, cosmetics, sportswear and footwear.

His reading of the market, thanks to over 10 years of experience, stood out in a year when tariff threats between the US and China created constant uncertainty among investors. This meant that Chu’s key picks in 2019 were those that were insulated from volatility.

Take Li-Ning Company as an example. The Chinese athletic and footwear company was set up in 1990 by its eponymous gymnast founder. Chu considers this Hong Kong-listed company’s stock as his best pick of 2019: the share price trebled up to late November. 

How did Chu make this call? 

“At the beginning of 2019, the valuation was quite reasonable,” he tells Asiamoney. “When I pick a stock, I compare its valuation with the rest of market, and this stock was attractively priced.”

Second, he says that Li-Ning is a pure Chinese sportswear company, meaning it focuses just on the fast-growing mainland market, which makes it attractive to investors targeting growth stories in the country. And third, Chu says, the company catered well to changing fashions in China, where people are increasingly leaning more towards casual wear.

It wasn’t just this insight that gave investors in Li-Ning some handsome returns.

“Trade tension may be more impactful on high-end products, where more money is spent,” says Chu, who has worked at Yuanta Securities Hong Kong, fully owned by Taiwan’s Yuanta Financial Holdings, since 2012. “But for apparel companies, they are not going to be impacted by the trade war. That’s why I liked Li-Ning since the beginning of the year.”

Chu adds that he will continue to focus on sportswear companies in 2020 too, given the possible windfall for the sector from the Tokyo Olympics. 

Investors looking at the energy sector for opportunities this year had a lot to contend with: first the collapse in oil prices at the end of 2018, due to fears of a glut in supply; then the entrance of China’s privately owned companies, which have been commissioning large-scale assets and refineries.

Against that backdrop, HSBC’s Thomas Hilboldt, voted Asiamoney’s best analyst for energy, found opportunities. One of them, he says, was in the China oil services industry, pointing to Hong Kong-listed China Oilfield Services as his best stock pick of 2019.

“China Oilfield benefited from China’s attempt to slow the degree of its dependence on outside energy sources as it has encouraged domestic incumbents to invest more in the sector,” Hilboldt, HSBC’s head of resources and energy equity research for Asia Pacific, tells Asiamoney.

“So CNOOC [China National Offshore Oil Corp] has significantly increased its spending in offshore China, and China Oilfield, as a service provider, benefited from that. So while it has been a difficult environment, there have been places where capital could be put to work.”

That investment has paid off for equity holders, as China Oilfield’s stock has jumped 70% in the year to late November. 

Hilboldt, a tennis-loving guitar player who was voted Asiamoney’s best regional analyst for energy in 2014 and 2016 as well, says the bank is predicting the price of Brent crude oil to be $60 a barrel in 2020 – a weaker year-on-year assumption that will add slight headwind to the sector.

Forecasts for share prices and operating performances are at more realistic levels, but the trajectory of commodity prices creates some potential risks in the year ahead, reckons Hilboldt, who has worked at HSBC since 2012 and been in Asia for more than two decades.

In addition, new supply from China and the Asean region will likely weigh on the downstream oil sector, creating a more difficult environment. 

Semiconductors have been a flashpoint in the trade war between the US and China, with officials in the US often criticizing what they view as the mainland government’s efforts to undermine the US chip industry.

Sebastian Hou, CLSA’s head of technology research since October 2019, admits that the US blacklisting of Chinese semiconductor and technology-related companies has impacted investors’ willingness to invest in these stocks. But Hou, who was the lead analyst for Greater China semiconductors since he joined CLSA Taiwan in November 2015, is still confident that the Asian industry will outperform the global and US industries in 2020.

So what’s behind Hou’s optimism, given that global semiconductor sales are heading for their biggest decline in 2019 since the tech bubble of the late 1990s?

“First, 5G deployment will accelerate in China,” Hou tells Asiamoney. “That will drive infrastructure spending in China to build the 5G network. This will stimulate the 5G smartphone launch, which will likely trigger a smartphone replacement cycle. This will be favourable for the market.”

Hou’s positivity also stems from the performance of his top stock pick this year – MediaTek, a Taiwanese fabless semiconductor company that provides chips for various industries.

MediaTek’s Taipei-listed shares have soared nearly 90% in the year to late November. 

In the middle of November, the firm announced a tie-up with US chipmaking firm Intel to supply Intel-powered personal computers with 5G modems from 2021.

Hou also points out that the semiconductor industry faced its worst troubles in the first half of 2019 since the global financial crisis. While that was difficult, he says most semiconductor stocks, globally and regionally, held up much better than expected.

The analyst’s predictions have served him well in the past too. He was ranked as the number one regional semiconductors analyst in the 2017 and 2018 Asiamoney Brokers Poll as well. But some things have still managed to take him by surprise in 2019.

“The liquidity from investors buying semiconductor and technology stocks is much higher than I thought,” he says. “Plus, investors are willing to look beyond the cyclical downturn to position for long-term changes, like the acceleration of 5G deployment. That’s what surprised me the most.”

Hou’s five-strong semiconductor team, and his 15-member technology-focused team, are big believers that 5G-related stocks will be worth following in 2020 too. They have companies such as Samsung Electronics and MediaTek in their sights. 

Change is unsettling. No one knows that better this year than bankers and analysts at CLSA, where the senior management changes included the exit of former chief executive Jonathan Slone, star strategist Christopher Wood and Australian analyst Brian Johnson, as well as the departure of about 30 CLSA bankers in the Australian equities business.

Working through that turmoil was tough, but CLSA’s analysts faced it head on. Laurence Balanco, voted the best quantitative and technical analyst in the brokers poll 2019 tells Asiamoney that the bank has rebuilt and filled the empty posts; his two-person quants team and the nine-member technical team have kept about their daily business.

That focus on the task at hand was reflected in a couple of good calls from Balanco, who joined CLSA’s Asian technical research team in 2007. First was his thinking that the price of gold would go up, and the second that there would be rebound rally for risky assets in the first half of the year. Both were his “standout” predictions, he says.

“Our expectation of a correction from June to October only played out in a few markets,” adds Balanco. “From a technical side, what we had to do was deal with the changing policies from a number of central banks and tackle their commentary. That was the most challenging part of the business.”

The year also had some surprises in store for Balanco, particularly in the US market. He says the leadership of stocks in defensive sectors and consumer staples came as a surprise, and that he “can’t remember a time when defensive stocks were trading at such highs”.

Closer to home, the outperformance by the China domestic A-share market was also a surprise, he adds.

But Balanco, ranked the best regional quantitative/technical analyst by Asiamoney for 12 years in a row, is approaching 2020 with plenty of caution, saying that it will remain a very selective environment. 

“We are looking for singles, not home runs,” he says, adding that the focus will be on laggard and underperforming stocks. 

Michelle Kwok, HSBC’s regional head of real estate, describes 2019 as a busy but interesting year. The high volatility that characterized much of it in the equities market meant that whatever China-focused property market outlook Kwok and her team had published for 2019 at the end of 2018 didn’t last very long.

“We had to be more proactive in updating stock recommendations due to heightened share price volatility and as markets constantly questioned the sustainability of share prices and the underlying fundamentals,” she tells Asiamoney.

There were three main drivers of volatility. First was the fact that the market was looking for signals from the Chinese government around policy loosening. Second was more macro related, as the tit-for-tat trade tariffs between the US and China took a toll on sentiment. Third were concerns around offshore debt exposure at Chinese property developers, with investors questioning the impact on stocks given a big chunk of the firms’ borrowings came from the high-yield dollar market.

“Our investment recommendations were extremely fundamental driven,” she says. “We were very busy talking to institutional investors throughout the year, as having a solid understanding of investors’ stock holdings helped us better assess potential mis-pricing and hence identify opportunities.”

Kwok cites the example of Hong Kong-listed Shimao Property Holdings, which HSBC downgraded in February, before upgrading to a buy in August following its results. 

“Shimao had a strong comeback and is poised to further break out versus the rest of the pack,” she explains.

Agility was key for Kwok and her team, and will continue to be important in 2020 too. The changing dynamics of the market mean it is difficult to have one view now and maintain that same view for 12 months, she says. There are opportunities in China, but the market is constantly being tested.

“It’s a wintry period for China property, and this will continue amid a tightened credit environment,” she says. “Any rally will be followed by questions around the sustainability of the rally.”

Kwok, however, sees some promise in a number of small and mid-cap names with appealing valuations – but with a caveat. 

“There are opportunities, but some of the upside in our most confident conviction names can be wiped out in days,” she says. 

Staying one step ahead of market movements will be critical in 2020. 

Walden Shing, voted the best analyst for industrials in Asiamoney’s Brokers Poll 2019, had a clear focus for the year: target companies that have a diversified manufacturing base or an alternative to a manufacturing base in China. 

Why? Because if companies have their production facilities outside the mainland, they are less likely to be affected by the trade-related tariffs imposed by the US against China.

That wasn’t all. A low interest rate environment pushed Shing, who works at Haitong International as a director of research in the small and mid-cap team, to also focus on companies that tick a few boxes. These include having a clear operating cash flow, a clear dividend policy and a good balance sheet, he tells Asiamoney.

These two focus points drove Shing’s top stock pick of VTech Holdings, a supplier of electronic learning products and a maker of cordless phones. Haitong upgraded the Hong Kong-listed company in October as they met Shing’s objectives of being relatively insulated from the trade war and being a high-dividend stock.

The same was the case with shoemaker Stella International Holdings, which was covered by Shing. The firm has a strong dividend policy and has the majority of its production bases outside of China.

“Things are uncertain and there is limited visibility on a lot of things,” he says. “The only certainty is that interest rates will only go lower, or in the worst case stay at their current levels. There is a sense of panic among investors, given the uncertainty. So investors are focused on companies with a strong balance sheet, strong operating cash flow and a clear dividend policy. That’s a good start to making calls.”

Shing should know, given he has more than 13 years of equity research experience, having previously worked across a number of other sectors including China utilities, renewable energy, telecommunications and industrials. He has been with Haitong International for four years. 

Terrance Liu, who leads CLSA’s China consumer staples team, was voted the best analyst for consumer staples for Asia ex-Japan in Asiamoney’s Brokers Poll 2019 for the second year in a row.

Liu focuses mainly on the dairy sector, food and beverage, and personal care. This year, the overall China consumer staples index outperformed the MSCI China index, with the industry posting its best performance in the last five or six years, Liu tells Asiamoney.

That naturally gave him some great opportunities. One was a Shenzhen-listed company called Wuliangye Yibin, an alcoholic beverage firm that specializes in making China’s ubiquitous liquor called baijiu.

“The company has good earnings growth and reasonable valuations of 12 times price to earnings,” he says. “The market underestimated its turnaround potential as the new management had only been in place for less than one year. But we thought the new management showed stronger execution power and operational capabilities. So we picked this over Kweichow Moutai, a more popular brand.”

That choice paid off for investors, with Wuliangye Yibin’s stock rising spectacularly by about 165% in the first 11 months. 

Liu admits that there was a lot of pessimism around China’s economic growth, but he adds that it has – for now – made little impact on Chinese consumer staple companies. That could change, he reckons, predicting a delayed impact to the consumer staples market in 2020 due to an economic slowdown in the country.

“Plus these consumer staple companies set a high base this year with better earnings growth than expected, so it will be a challenge for them to achieve comparable growth next year,” he says.

There will be other opportunities, however. Liu is planning to focus more on the dairy market in 2020, especially the upstream segment. The first half of 2018 was difficult, before the market saw an upturn at the end of 2018. 

“This year, the upstream sector had strong performance, but there was cost pressure for the downstream sector,” adds Liu. “In 2020, I expect downstream players to make price adjustments to pass down inflation costs to customers. Upstream companies can benefit from inflation, as they can expand their profit margin by hiking their selling price.” 

Technology-focused companies in China have learnt very quickly how to make the best of bad situations. With their access to US suppliers of raw materials all but closed off due to US president Donald Trump’s tough stance on Chinese technology, firms on the mainland have put their focus on localization – tying up with suppliers in Japan or Korea, for instance, for sourcing raw materials.

That agility has pushed Frank He, voted the best analyst for technology hardware and equipment, to find ways to differentiate HSBC’s offerings to its clients. He joined HSBC Qianhai Securities, HSBC’s onshore joint venture, in September 2017 as head of IT hardware research, covering the semiconductor, handset supply chain, telecom equipment and auto electronics sectors.

“We do a deeper dive into the fundamentals of the major tech sector,” He tells Asiamoney. “We started to focus on 5G opportunities by launching major thought initiatives and then extended our reach to telecom equipment, smartphone supply chain and semiconductors. We are more fundamental focused in picking stocks and use a much broader approach to identify winners and losers in the supply chain.”

He also emphasizes regional collaboration within HSBC, which helps add more depth and breadth to its offerings to investors.

“This is important for the tech sector as the supply chain is diversified, and connecting dots between different regions provides value add to clients,” adds He.

Take the example of Luxshare Precision, a Shenzhen-listed firm that designs and makes cable assembly and connector system solutions for consumer, automotive, cloud and enterprise applications. He spotted signs that the company’s stock will do well – solid market-share gains in the acoustics and components industry, and the rising popularity of Apple’s AirPods Pro, made in Luxshare plants.

He and his team not only spoke to the management team at Luxshare, but also visited their manufacturing plants in Vietnam to provide the best insight on the stock and the company to investors.

That extensive due diligence is unlikely to change – the HSBC team does in-depth coverage by talking to industry experts and having a localized approach to their clients.

For 2020, He has set his sights on China’s semiconductor industry, the planned increase in penetration of 5G smartphones and companies focused on wearable devices. 

After working at CLSA for around two decades, Christopher Wood jumped to Jefferies in May 2019 to become its global head of equity strategy.

Wood, who has been ranked the top equity strategist in almost all broker polls in Asia for the last 20 years, is the author of the much-loved weekly report Greed & Fear, which has been published almost without interruption since July 1996 when it was launched.

So what has been top of Wood’s mind? He tells Asiamoney that his base case was that the China market would bottom out at the end of last year. He also adds that the Federal Reserve’s change in tack from raising interest rates and shrinking its balance sheet to lowering rates and resuming its balance sheet expansion is a big positive for Asian markets.

But some things in 2019 were unexpected. 

“The big surprise was the sharp slowdown in growth in India,” he says. “And in Hong Kong, I frankly didn’t expect the extradition bill situation to blow up to the extent it did.”

On the movement of the dollar, Wood reckons the currency has peaked, and says that he hopes it stays that way. But he adds that one of his main concerns for 2020 will be another dollar rally.

Speaking to Asiamoney at the end of November, Wood also points to two other worries: the uncertainty around a trade deal between the US and China, and the liquidity squeeze among non-banking financial companies (NBFCs) in India, which have struggled since a high-profile default at the end of 2018.

“I hope it gets resolved sooner rather than later,” he says of the NBFC troubles.

At Jefferies, Wood’s research focus has not changed much, he says. The difference, however, in working at Jefferies versus at CLSA is the fact that the US firm has partnerships with various local research houses. For instance, in Indonesia, Mandiri Sekuritas provides equity research on companies in Indonesia that Jefferies distributes on a co-branded basis to the firm’s global client base. Jefferies has similar tie-ups with firms in other countries too, including South Korea, the Philippines and Malaysia. 

China’s financial system, which is going through a painful but much-needed clean up, has been hit by one problem after the other this year. First was the government bailout of Baoshang Bank in May – the first time the regulators had stepped in to help out an ailing state-owned bank in about two decades. 

Next came a liquidity boost in July for Bank of Jinzhou, a city-level commercial bank, by a handful of government-backed asset managers. In August, the People’s Bank of China stepped in to support troubled Hengfeng Bank. And then in November, news came of two rural commercial banks in China facing a liquidity crisis.

Gary Lam, HSBC’s head of Greater China banks research, had to deal with concerns among investors around the health of the mainland financial system.

“It offers complexity for investors to consider and may affect conviction of investing in the China banking sector,” he tells Asiamoney. “Each of these issues resulted in different structures of support from other entities. So investors need to comprehend this on a case-by-case basis: what will be the next approach from China when they need to rescue other banks? Markets don’t have much visibility on how the next case will be handled and who will be involved.”

That backdrop, alongside worries about growth in China and the protests in Hong Kong, weighed on banks both in the city and on the mainland.

Lam’s strategy was to focus on identifying banking stocks that were overlooked and under-researched, while offering an attractive valuation.

He points out that Chinese banks offer the highest dividend yields among the Asian banks covered by HSBC, standing among the top three in terms of returns on earnings in the region. 

But they trade low in terms of valuations compared with peers, a phenomenon he describes as a “credibility discount” put in place by investors due to concerns around transparency of balance sheets.

Those worries around transparency mean more in-depth due diligence into the quality of the recommended banking stocks is needed. 

Lam and his team focus on a number of criteria, including performance, capital levels and liquidity, and do a stringent analysis of firms’ results to minimize any subjectivity in their coverage.

As Asiamoney’s winning analyst for banks, Lam likely has his work cut out for him in 2020. He has three main worries, he says. One is the introduction of the new benchmark rate for bank loans, called the loan prime rate, in China in August. 

That means banks need to monitor how funding costs will evolve.

Secondly, he is concerned about trade tensions and the impact on export-related sectors. And third is whether China will engage in large-scale monetary stimulus to revive its slowing economy. 

“We are not seeing massive stimulation yet, but instead seeing a large number of relatively small stimuli,” says Lam.

He will focus on taking a “barbell strategy” in 2020, with a focus on small and big stocks, but an aversion to expensive names.

“We also hold the view that the A-share and H-share premium has widened, so we generally have a preference for H-shares over A-share banks,” he adds.