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AA-rated Greenberg's six best ideas for a China revolution

Hermes' top performing emerging markets manager highlights the stocks he believes can thrive from the evolution in the Chinese economy.  

Gary Greenberg

'In what been a tough period for emerging market fund managers Greenberg is one of the few fund managers who has kept his fund above water over the last three years.

His Hermes Global Emerging Markets fund has returned 4.1% over this period, versus an average loss of 5.7% in the peer group. This return ranks him 18 out of the 101 fund managers with the same track record in the asset class and has earned Greenberg an AA-rating from Citywire.

In this piece he highlights six stocks he believe can prosper from the economic revolution in China.

'As the Chinese economy continues to undergo its major long-term transformation, its equity markets remain somewhat unloved by investors – especially against many regional peers,' Greenberg says.

'With China equities trading at historically low valuations, head of Hermes Emerging Markets Gary Greenberg says the market is throwing up compelling opportunities across a number of sectors – including internet, manufacturing and retailers.'

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Shenzhen International

'The core of Shenzhen International’s business has been the ownership of expressways in China. This has been a strong cash generator for the company, leading it to now re-invest in an impressive network of logistical transportation hubs.

'China has allocated a significant amount of capital in building a complex road network. However, there is a severe lack of support infrastructure to service the needs of users. These new hubs will increase the efficiency of supply chains.

'The biggest player in this industry is GPL Global. However, it is trading at 30x earnings, while Shenzhen is trading well below 10x. This is a company in the early stages of development, but it has a sensible business model and is prudently expanding its operation to service the next phase of China’s growth story.'

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Huayu

'Huayu is a leading supplier of automotive parts to domestic and international companies. It focuses on the R&D, production and marketing of automotive components.

'Huayu has recently made a number of progressive strategic moves to increase its global presence, acquiring Visteon’s China business and entering a joint venture with Rheinmetall.

'This is a very efficient company with a robust business model. It is priced at a single digital earning multiple, but offers double-digit growth.'

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Tencent

'China's largest and most used Internet service portal, Tencent’s core business is in social networking and online gaming.

'Recent strategic advances have cemented Tencent’s status as the dominant player in China’s internet market, while the company has also made significant bridgeheads into ecommerce.

'Tencent currently has an impressive community of approximately 500 million users and it is now beginning to monetise this enormous population reach.'

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Daqin Railway

'Daqin Railway might be a prosaic business, transporting coal from the mines in the Shanxi province to the port, but we see tremendous value. While China does not move a huge amount of coal, the transport of this commodity is growing.

'The company received a tariff increase last year and is expected to obtain another this year. The stock is currently yielding 8.5% and we anticipate reasonable growth in the future.'

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China Dongxiang

'It is difficult to overstate the reach of Alibaba, which is essentially China’s version of eBay and Amazon. Of the three listed companies investors can use to gain access to Alibaba before its highly anticipated upcoming listing, we have positions in two.

'The first is sportswear manufacturer China Dongxiang. This is a company with a huge capital pile, which is a very large proportion of its market cap. Depending on Dongxiang’s valuation, the group trades between a 30% and 50% discount when taking into account its stake in Alibaba.'

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Yahoo

Our other position exposed to Alibaba is Yahoo. Yahoo’s stake in Alibaba dwarfs its core business; it holds a 23% stake that represents close to 85% of the current market capitalisation of the company.

We believe the stock is trading at a 30% discount when the other assets of the group (Yahoo Japan and its core business), plus the existing cash position on its balance sheet are taken into account.

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