2 Stocks for Investors in China’s “Common Prosperity” Era

December 8, 2021

Long-term investors in China’s stocks have had a rough 2021. That’s mainly down to the Chinese government’s crackdown on China’s Big Tech giants and the shaping of subsequent regulations.

These new rules have been really driven by President Xi Jinping’s overarching desire for “Common Prosperity”.

In effect, it means levelling the playing field for the average person in China and reducing the inequality in broader Chinese society.

While that’s a laudable aim from a social perspective, inevitably it also has implications for investors. That’s because investors into Chinese stocks have to ensure that the companies they’re buying are staying on the right side of Common Prosperity.

So, with that in mind, here are two stocks listed on the Hong Kong Stock Exchange that investors can consider buying and holding for the long term given the new era of Common Prosperity in China.

1. Li Ning

Exercise. We all need it to live healthier, and happier, lives. It’s also something that the Chinese government is keen to promote.

That’s why leading sportswear goods brand Li Ning Co Ltd (SEHK: 2331) is a perfect stock for long-term investors in China to hold.

Li Ning has traditionally been seen as the smaller competitor to Anta Sports (SEHK: 2020), which is commonly referred to as China’s Nike Inc (NYSE: NKE).

The company has been a stellar performer so far in 2021 with shares up over 70% year-to-date, outperforming Anta by a wide margin (with its shares essentially flat for the year).

That’s come down to some formidable execution by Li Ning, with revenue growth of 65% year-on-year in the first half of 2021 versus the same period in 2020.

With a strong direct-to-consumer (DTC) retail model, Li Ning has also seen a consistent expansion in its gross margin – which hit 55.9% in the first half of this year.

That was over six percentage points higher than the 49.5% gross margin it posted in the same period of 2020.

With a solid growth trajectory and a mission that speaks to “buying local” and “living healthy” – two goals the Chinese government no doubt agrees with – Li Ning shares look like they’ll continue to grow.

2. Hong Kong Exchanges and Clearing

Secondly, there’s the sole operator of the Hong Kong Stock Exchange and that is Hong Kong Exchanges and Clearing Limited (SEHK: 388), which is also known as HKEX.

The exchange operator has been a massive winner of the move away from Chinese companies listing their shares on US exchanges.

That’s because the Chinese city attracts these “homecoming” listings that have seen a spate of Chinese firms already listed in the US carry out secondary listings in Hong Kong – mainly due to the political risk of having a single listing in the US.

The numbers for HKEX speak for themselves. In its most recent third quarter, total revenue of HK$16.2 billion was up 15% year-on-year.

Meanwhile, the booming Stock Connect programmes with Shenzhen and Shanghai (which link international investors to Chinese A-shares) have provided a nice boost to both its top line and earnings per share (EPS) growth.

With more listings likely in the coming year as the heat gets turned up on US-listed Chinese stocks, HKEX seems like it will continue to be a key destination for Chinese companies wanting to raise capital.

Stay onside with the Chinese government

Investing in China in 2021 and beyond is going to require long-term investors to monitor the political picture in the world’s second-largest economy.

While many of the largest Chinese tech firms have been punished, with record sell-offs, there are still many high-quality companies in China that are thriving.

With Li Ning and HKEX, investors can be sure that both the structural and political tailwinds will support their growth in the decade ahead.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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