Bargain hunting among Chinese stocks

Several headwinds in China have resulted in historically attractive equity valuations compared with developed-markets stocks, leading to promising investment opportunities, according to Fidelity's Sam Polyak.

• Several factors — stringent COVID-related lockdowns, regulatory crackdowns, a weak housing market, elevated youth unemployment, destocking of Chinese-made products in the West and geopolitical tension with the U.S. — have pushed stock valuations in China to all-time lows versus developed markets, according to Fidelity Portfolio Manager Sam Polyak.
• "There are some great deals to be had among Chinese equities," says Polyak, who manages Fidelity Advisor^® Focused Emerging Markets Fund, a diversified emerging-markets equity strategy. In helming the fund since 2019, Polyak emphasizes growth at a reasonable price and targets businesses benefiting from secular drivers.
• So, he took note in early summer 2023 when the Chinese government realized it needed to make real strides toward jump-starting the nation's struggling economy. It followed through with targeted stimulus aimed at supporting the ailing property market and consumer spending, along with abandoning its zero-COVID policy and easing its regulatory scrutiny of the country's largest technology companies, according to Polyak.
• Sure enough, he says, corporate earnings-estimate revisions in China turned positive, with management teams reporting notable improvements.
• "China is home to some of the world's most innovative social media, e-commerce, health care and automation companies," he points out. "So, it's difficult to ignore when shares of these businesses are trading at what I consider extreme bargains."
• Polyak notes that the fund's overweight in China (as of February 29) includes healthy exposure to these areas of the market, in addition to education and local consumer-driven businesses that have taken share from multinationals, thanks to the 'premiumization' of their in-house brands.
• He cites PDD Holdings, a multinational that operates a value-oriented e-commerce platform, as an example of a firm that has taken market share, partly by westernizing its website and expanding its reach by rolling it out as Temu beyond China's borders. "This has been a huge success and should double PDD's total addressable market, potentially improving already compelling earnings growth," Polyak contends.
• The portfolio also has included Haier Smart Home, the dominant home appliance company in China, which Polyak says has benefited from the country's premiumization trend and growth of its high-end Casarte brand.
• In addition, Haier's 2016 acquisition of GE's overseas appliance business has been a huge success, in Polyak's view, setting the stage for the firm to be a key beneficiary of a sustained recovery in Chinese domestic consumption.
• "I believe we may be nearing a bottom in business fundamentals for China's equity market, and when that point is reached, it should help close the unprecedented valuation gap with stocks throughout the rest of the world," Polyak concludes.