BT: Morgan's China-play picks include Wilmar

Business Times - 11 Nov 2010

Morgan's China-play picks include Wilmar

By LYNETTE KHOO

INVESTORS hoping to get a slice of the China action should do so through multinational companies (MNCs) in the consumer, water treatment, energy resources and electronics space. These would include companies such as Apple, Pfizer, Suez, Infineon, Wilmar International and Samsung Electronics.

Morgan Stanley Hong Kong and China strategist Jerry Lou noted that these companies have long track records and offer transparency and consistent disclosure standards. They are also less vulnerable to policy and asset price cycles in China.

'If China's economy comes to represent 14 per cent of global GDP by 2020, MNCs need to think about how they can benefit strategically from China's advancement,' said Mr Lou in his presentation at the Morgan Stanley's 9th Annual Asia Pacific Summit 2010.

His top picks include Singapore-listed Wilmar International, which controls 25 per cent of the Chinese oilseed crushing market and 40 per cent of the branded cooking oil market, and which he believes will achieve mid-teens average earnings per share growth from 2011 to 2015.

Mr Lou also favours Apple, which will benefit from its brand recognition and major consumer upgrade; and Samsung Electronics, which is poised to tap China's growing LCD TV market.

He noted that consumption is becoming a compelling story in China, with the country expected to replace Japan as the largest luxury consumer market in the next few years.

'Companies that can make things cheap will not necessarily be the ultimate winners. The ultimate winners will be those that can offer a first-class consumer experience,' Mr Lou said. 'Do not underestimate Chinese consumers' appetite to upgrade, especially when the baby boomers become the mainstream consumers.'

Also among his top picks were Pfizer, the largest foreign pharmaceutical firm in China; Suez, the second largest drinking water private operator in China; and chipmaker Infineon, which is expected to benefit from car consumption and industrial capacity upgrade in China.

Qing Wang, Greater China chief economist at Morgan Stanley, noted that China's consumption growth is expected to outpace investment growth over the next 10 years.

According to him, China is at a similar stage of development as Japan 40 years ago and South Korea some 20 years ago. Mirroring the past trend of the two economies, China has seen growth deceleration and rising inflation since its inflexion point in 2007.

Morgan Stanley expects consumer price index growth to peak at 3.7-3.8 per cent year-on-year for the October to November period before falling below 3.5 per cent in December, with GDP estimated at 10.2 per cent for 2010 and to ease to 9.5 per cent in 2011.

In a bid to mop up excess liquidity following the US's second round of quantitative easing this month, China's central bank yesterday said that it was raising the required reserve ratio of its top lenders by 50 basis points from Nov 16, its fourth official increase this year. This followed an interest rate hike last month, which lifted the one-year deposit rate and one-year lending rate by 25 basis points to 2.5 per cent and 5.56 per cent respectively.

Dr Wang, however, does not expect China to embark on an interest rate hike cycle, saying that it is more likely to rely on tightening bank's reserve requirement ratios.

Given its capital and credit controls, Mr Lou said, China is unlikely to face a systemic risk arising from any sudden pull-back in liquidity.