M4 BARRON’S October 19, 2020
EMERGING MARKETS
C
hinese stocks rallied in parallel
with U.S. equities through the
spring. Since July they have
pulled away. TheiShares
MSCI Chinaexchange-traded fund
(ticker: MCHI), which tracks Hong
Kong–traded companies, is up 20% year
to date, compared to 8% for the S&P 500.
The value of onshore Chinese stocks just
surged to a record, above $10 trillion.
Past China bull runs in 2015 and 2017
ended badly. But the economy and mar-
ket governance may have outgrown the
vulnerabilities that drove those crashes.
“We still think there is room for the mar-
ket to move upward,” says Gaurav Mal-
lik, chief portfolio strategist at State
Street Global Advisors.
China’s 2015 debacle followed a classic
bubble, inflated by novice retail punters
buying on massive margin. Now institu-
tional investors control 70% of traded
equities, and authorities have slashed
borrowing.
“Valuations are half and leverage is
half” from five years ago, says Roderick
Snell, manager of the Baillie Gifford
Emerging Market Equities fund.
China’s 2017 surge unwound the next
year as Donald Trump escalated his
trade war. In 2020, Washington seems to
have inflicted its worst without much
affecting China’s future.
“I still think people feel confident
they’ll get the growth from Chinese com-
panies,” says Daniel Morris, chief market
strategist at BNP Paribas Asset Manage-
ment.
That doesn’t mean the next dollar in
Chinese stocks will be easy to earn. As in
the U.S., China’s gains have been driven
by a narrow wedge of tech powerhouses
while the blue chips of yesteryear lag.
Valuations for the twin market giants
Alibaba Group Holding(BABA) and
Tencent Holding(700.Hong Kong) still
seem reasonable, says Conrad Saldanha,
head of emerging markets strategies at
Neuberger Berman. But newer entrants
like food delivererMeituan Dianping
(3690. Hong Kong) and e-tailerPin-
duoduo(PDD) look stretched after more
than doubling this year.
The Chinese market’s real weakness is
a lack of value plays to rotate into,
should tech falter. That’s because alter-
native sectors like finance and telecom
are dominated by state-owned enter-
prises that investors largely shun.
“There are a lot of stocks in China you
don’t want to own because they are not
run for shareholders,” Baillie Gifford’s
Snell says.
For him, that drawback is outweighed
by opportunity in China’s onshore, or
A-share, markets, which are rich in bur-
geoning consumer or tech firms under
global investors’ radar.
“This is an inefficient, under-re-
searched market where you can make a
lot of money,” he says.
Picking winners from the 3,700-some
companies listed in Shanghai or Shen-
zhen takes patience and time, however.
Snell favorsKE Holdings(BEKE),
whose Beike Zhaofang property website
has the jump on becoming China’s Zil-
low;Li Ning(2331:Hong Kong), the do-
mestic answer to Nike in sportswear; and
Contemporary Amperex Technology,
or CATL (300750. China), an emerging
power in electric-vehicle batteries.
Neuberger’s Saldanha is bullish on
property managerA-Living Services
(3319.Hong Kong) andChina Merchants
Bank(3968. Hong Kong), the class act of
the old-school financials.
These names may flourish or fail. But
Chinese stocks writ large are graduating
from fad to core holding in the post-pan-
demic world.
“China looks to be in pole position for
future consumption, the U.S. for innova-
tion,” State Street’s Mallik says. “Inves-
tors want to make sure they have a leg in
both.”B
By Craig Mellow
EUROPEAN TRADER
Bunzl Is Thriving as a
Provider of Covid PPE
B
unzl,a London-based sourcing
and distribution company, has
had a busy year transporting
disposable gloves and masks to
companies seeking protection against
the coronavirus.
The FTSE 100 giant specializes in
sourcing products from around the world
on behalf of customers, and acts as their
outsourcing buyer and logistics partner.
It negotiates prices, stores items in ware-
houses, and distributes them when
needed to various sites, outlets, and
depots operated by clients.
Bunzl shares (ticker: BNZL.UK) have
increased nearly 48% over the past six
months, thanks to a spike in orders for
personal protective equipment, or PPE,
and sanitizers by its health-care, grocery,
and cleaning customers. And the stock
could have further to go. The stock was
solid pre-Covid-19, having risen 34.12%
over the past five years to 24.80 pounds
sterling ($32.27).
The pandemic has weakened smaller
rivals, and Bunzl has a track record of
bolstering different parts of its business
with bolt-on acquisitions. Reflecting that,
its products range from food packaging
to construction workwear to chemicals.
Bunzl is also expected to win more
contracts, thanks to the way it navigated
the pandemic, winning praise for con-
tinuing to deliver and not profiteering.
Meanwhile,the geographical dispersion
of its customers and suppliers means
that it is well insulated from future
downturns.
Bunzl shares could rise to £30, a 20%
increase from recent levels, according to
Will Kirkness, an analyst at Jefferies. In
an August note, he wrote, “Medium term,
the story is more compelling from both
an organic and an acquisition perspec-
tive, especially given almost £1 billion of
surplus capital.” Berenberg analyst
Thomas Burlton, meanwhile, rates the
stock Hold with a £26.50 target price.
Bunzl employs 19,000 workers and
has a market value of £8.1 billion. It
trades for 19 times this year’s expected
earnings and is valued in line with its
peers. In February, it posted a pretax
profit of £453.3 million for 2019, an in-
crease from £424.8 million in 2018. An-
nual revenue for 2019 was £9.3 billion.
On Wednesday, the company posted up-
beat organic revenue growth of 8% for
the third quarter.
Bunzl Chief Executive Frank van
Zanten tellsBarron’sthat the challenges
of the Covid-19 pandemic highlight “the
resilience of our business model and
consistent and proven strategy.” He cites
the company’s supply-chain team in
Asia as a key competitive advantage, and
says its strong cash position will enable
it to “continue our compounding strat-
egy of consolidating the group’s frag-
mented markets through focused acqui-
sitions.”
Modern-day Bunzl was formed in the
United Kingdom in 1940 but traces its
history back to 1854, when Moritz Bunzl
registered a haberdashery business in
Bratislava, now the capital of Slovakia.
Family members who fled to England
during World War II recreated what
they left behind, and the company listed
on the London Stock Exchange in 1957.
Demand for Bunzl’s products will
depend on how the pandemic plays out
from here. Berenberg’s Burlton writes
that the company could lose the earnings
boost it got from the surge in orders in
the first half of the year. At the same time,
Bunzl could get a boost as its retail and
leisure customers recover.
The company has resumed mergers-
and-acquisition activity by buying MCR
Safety, a U.S. maker of PPE—its fifth
acquisition this year. Bunzl isn’t the kind
of business that does transformational
deals. But it historically has offered solid,
dependable growth from a business
model that delivers.B
By Rupert Steiner
China’s Stocks Rally May
Have Legs This Time