Morgan Stanley has identified promising opportunities for investors in the Chinese stock market, anticipating substantial earnings growth for select companies in the coming year. Among the top contenders are Espressif Systems, Zijin Mining, and SICC, each expected to exhibit robust earnings growth of at least 40% by 2025. This optimism emerges amid a challenging period for Chinese stocks, which have consistently missed earnings expectations for 13 straight quarters since late 2021.
Espressif Systems, a Shanghai-listed company, specializes in developing chipsets for home appliances. The company saw its net profit more than double in 2024, highlighting its potential for further growth. Meanwhile, Zijin Mining, listed in Hong Kong, focuses on extracting valuable metals such as copper, gold, zinc, and lithium. SICC, another Shanghai-listed entity, produces silicon carbide substrates, a crucial component in semiconductors. These companies stand out as potential leaders in their respective industries.
"Quality earnings beats becoming a proven alpha generator in the China equity space and should continue to be so," – Morgan Stanley analysts.
The recent performance of Chinese stocks offers additional reasons for optimism. Following U.S. President Donald Trump's latest comments expressing reluctance to increase tariffs, Chinese stocks closed higher on Friday. Additionally, financial regulators in China have mandated state-backed insurers to purchase more stocks, providing a boost to the mainland market.
"Regardless of what the number of the tariffs are for China, it comes back to the domestic stimulus for China and whether China can alleviate the deflation pressures," – Aaron Costello, head of Asia at Cambridge Associates.
The global market landscape presents further opportunities for Chinese companies. In 2023, total e-commerce gross merchandise value (GMV) in the U.S. reached $1.1 trillion, while the next 29 markets boasted a combined GMV of $1.5 trillion. As domestic economic growth slows, overseas revenue has become increasingly vital for Chinese companies. Bernstein analysts have highlighted the parent company of Temu, PDD, which is expected to grow earnings in the year ahead. However, only Temu receives an "outperform" rating from Bernstein analysts.
"From an investing standpoint, our sense is global (and in particular US) investors take a very US-centric view of Temu, and what it means for PDD's shares," – Bernstein analysts.
"In contrast, we'd argue that Temu's US experience in the past 12-18 months — showing a large jump in profitability once new user acquisition was de-emphasised — demonstrates the path to profitability elsewhere," – Bernstein analysts.
Aaron Costello from Cambridge Associates emphasizes the potential of Chinese equities to recover sharply, advocating a neutral stance rather than being underweight on China.
"The potential for Chinese equities to rebound sharply is there, so we don't want to be underweight China, we want to be neutral," – Aaron Costello, head of Asia at Cambridge Associates.
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