Falling energy prices have hurt China’s major oil producers, but there are still buying opportunities among them, according to Bin Guan of China International Capital Corp.
“We have recently downgraded most stocks we cover, including our top pick for 2014 — PetroChina [Co.],” says the Hong Kong–based analyst, who for a third straight year earns the top spot in the Energy sector on the All-China Research Team, Institutional Investor’s annual ranking of the nation’s leading sell-side equity analysts.
Higher production in the U.S. and lower demand worldwide have sent oil prices plunging more than 40 percent since June, to less than $65 a barrel of Brent crude.
“We turned less optimistic on the whole sector because of the recent oil price retreats,” Guan explains, “and a more deeply rooted problem — energy oversupply in China over the next few years.”
The impact of lower prices will be negative over the coming few quarters, he adds, as price competition intensifies among various energy products.
“On a relative performance basis, we like city gas companies, as they are more defensive due to their strong operating cash flows. They may even gain bargaining power against upstream suppliers when gas supply becomes ample or excessive on the local market,” the analyst contends. “However, this is only a relative opinion, and we suspect gas demand weakness in China may extend into 2015, a trend likely to cap city gas stocks’ upside for some time.”
Even so, he recommends long-time favorite China Gas Holdings of Hong Kong, whose shares shot up 49.1 percent in the 12 months through November.
Guan expects the sector to regain investor interest as early as the second quarter, when consumers use lower energy costs to release pent-up demand and large state-owned enterprises start to roll out upgraded versions of reform plans.
“During a cyclical downturn, we tend to look for investment opportunities from businesses with stable cash flows or asset restructuring potential,” he notes.
Analysts who cover metals and mining companies face an equally daunting outlook.
“We remain cautious on the sector given slowing demand and overcapacity issues,” reports Yanlin (Matty) Zhao. The Macquarie Capital Securities analyst, who works out of Hong Kong, rises from second place to secure her first appearance at No. 1 in Metals & Mining and also earns a runner-up spot in Basic Materials. “Sector restructuring and reform will be a long-term trend.”
Nonetheless, she believes there will be outperformers — companies that are well managed and can take advantage of raw materials price declines, as well as those that would benefit from government policy support. One example: Shanghai’s Baoshan Iron & Steel Co., whose shares gained 26 percent in the first 11 months of the year. “We see Chinese steel fundamentals gradually improving,” Zhao says.
