Now’s the Time to Buy These Stocks

Some of the cheapest names, mainly in education providers and casinos, trade at least 40% below our fair value estimates.

Kate Lin, CAIA 12.08.2021
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Wild swings in the Chinese stock markets pushed overall valuations lower. Across our coverage of China, Hong Kong and Taiwan, stocks are trading an average of 16% lower compared to the end of 2020.

Broader in the region, the July selldown has expanded investors’ entire opportunity set of cheaper stocks. As per our analysts estimations of fair value, three out of four stocks in these markets are undervalued.

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Additionally, the gap between current stock price and fair value estimate has also widened.PFV

 

As of August 4, the cheapest stocks are from the services industry in China, providing human resources and property management services, for instance. However, these stocks have no economic moat – which represents a company's sustainable competitive advantage. A company whose competitive advantages we expect to last more than 20 years has a wide moat.

 

Furthermore, we use the moat trend to describe how a company's competitive position is changing over time. It tells if a company’s current strategy can play out for now as well as for the longer term. China’s sprawling media and gaming company Tencent (00700) was one of them, carrying a ‘Wide’ economic moat, while the rest are narrow. Here’s the list:

 

10 Cheap Moaty Greater China Stocks

Stocks

Education providers and casinos are among the cheapest names by valuation. The former suffered a meltdown caused by the regulatory concerns. The Chinese government is considering compelling all institutions with a school curriculum to register as non-profit organizations, challenging the profitability of private tutoring firms across the country.

Meanwhile, the coronavirus continues to plague casinos. The recent imported cases of COVID-19 in Macau broke the city’s record of zero cases maintained through the past 16 months. The Macanese government subsequently ordered a mass testing and announced to tighten border and social distancing curbs. As casinos were asked to suspend operations, shares in the operators were sent down and are trading a minimum 40% discount to their fair value estimates.

For investors looking for opportunities around the chip shortage trend, Taiwan’s fabless chip factory, Mediatek trades 44% below its fair value. The company, which provides reference chip designs, were upgraded by Morningstar analysts to Narrow moat rating from None to reflect its ability to maintain reliable supply of products regardless of chip shortage.

 

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About Author

Kate Lin, CAIA

Kate Lin, CAIA  is a Data Journalist for Morningstar Asia, and is based in Hong Kong

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