ASHR: China May Finally Be 'Investable' Again

seekingalpha04-06

Chinese stocks have been serial wealth destroyers in recent years.But there is a price for everything, and at current de-rated valuations, the risk/reward skews very favorably.Keep an eye out for more...

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Max Zolotukhin/iStock via Getty Images Having been cautious about Chinese equities pre-Lunar New Year (see ASHR: Too Early To Be A Mainland China Contrarian), more upbeat news flow out of China, particularly related to capital market stabilization and policy stimulus, has significantly altered the risk/reward. The market seems to agree, with A-shares (i.e., mainland China listings) now up year-to-date after a post-New Year rebound. Bloomberg More recently, the Chinese central bank, the PBOC (People's Bank of China), has also begun to step up its pace of monetary easing, not only with record mortgage rate cuts but also by injecting new liquidity via central government bond purchases – timely ahead of planned RMB1tn ultra-long-term special bond issuances. While not quite quantitative easing-type balance sheet expansion, the new policy should nonetheless keep risk-free yields supported and protect against any adverse supply/demand dynamics in the sovereign bond market. More broadly, it also indicates positive intent by Chinese regulators in achieving its growth (5% GDP target for 2024) and inflation targets (3% for 2024), which bodes well for stocks. There's also the historically discounted valuations to account for, which ensures safety margin against possible negative revisions down the line. All in all, owning Chinese large-caps via Xtrackers' Harvest CSI 300 China A-Shares ETF (NYSEARCA:ASHR) may not be such a bad idea. Yardeni ASHR Overview – The Go-To ETF for Mainland China Exposure The Xtrackers Harvest CSI 300 China A-Shares ETF, currently managed by DWS, continues to track China's flagship CSI 300 Index, a capitalization-weighted basket of the largest and most liquid mainland listings. Net assets remain relatively unchanged since last quarter at ~$1.7bn, along with the fund's 0.65% net expense ratio. While not the largest and most liquid China fund per se (that would be iShares' MSCI China ETF (MCHI)), within the A-share ETF niche, ASHR stands out. For context, the closest US-listed A-share ETF comparables, iShares' MSCI China A ETF (CNYA) and the KraneShares Bosera MSCI China A 50 Connect Index ETF (KBA), both manage significantly smaller asset bases. ASHR is slightly above CNYA and KBA on the expense side, though the fund's liquidity advantage (and, by extension, narrower bid/ask spread) keeps ASHR very competitive on overall cost. DWS Per the fund's latest sector breakdown, the top two exposures, Financials (unchanged at 22.3%) and Industrials (slightly higher at 16.2%), remain consistent. The key change this quarter is ASHR's higher Consumer Staples allocation at 13.9% at the expense of Information Technology (down to 13.7%). Together with Materials (higher at 9.5%), ASHR's top-five contribution remains relatively high at ~75%, so the sector concentration risk is still worth being mindful of. The other two major China A-share ETFs offer a similar composition but with higher (KBA) and lower (CNYA) % allocations in accordance with the size of their respective portfolios. DWS At a single-stock level, the makeup of the fund's narrower 287-stock portfolio remains similarly consistent at the top, with staple spirits franchise Kweichow Moutai still the largest holding at 6.0%. The rest of the top five has seen some reshuffling, with Chinese banking and insurance franchises like Ping An Insurance Group (OTCPK:PNGAY) and China Merchants Bank (OTCPK:CIHKY) ceding some share to the second-largest holding, battery manufacturer CATL. All in all, the ASHR portfolio makeup is consistent with key A-share ETF alternative CNYA and should remain that way, given their similar asset allocation criteria. KBA, on the other hand, is more concentrated and volatile; its current single-stock exposures are, for instance, now skewed to materials players like CATL, Zijin Mining, and Wanhua Chemical, all of which are benefiting from more favorable cyclical swings. Hence, investors looking for a more balanced, cycle-proof approach to A-shares should continue to find a lot to like with ASHR. DWS ASHR Performance – Emerging Recovery Signs after Consecutive Down Years After consecutive years of drawdowns, ASHR is finally turning a corner in 2024, rising +3.8% on a year-to-date basis. Through the COVID-impacted last one and three years, however, the fund has still seen its net asset value decline by -16.7% and -13.3% in annualized terms, respectively. And while the fund's overall compounding rate since its 2013 inception remains positive at +3.1% per annum, it's worth noting that much of the positive returns were generated during ASHR's early years. DWS Where the fund has excelled, though, is in maintaining a narrow tracking error (after fees) relative to its benchmark CSI 300 Index. Also notable is that ASHR has outperformed both its A-share comparables CNYA and KBA this year; though the fund trails its alternatives across near-term timelines, its relative performance over the last decade remains very solid. And finally, ASHR's distribution, up to $0.59/share for 2023, equates to a well-covered 2.1% 30-day yield (2.4% trailing twelve months) – at the upper end of its comparable group. Morningstar Last but not least, there's the valuation factor, where relative to forward earnings, Chinese equities (using MSCI China as a proxy) are now priced at a historically discounted ~9x. In contrast, consensus estimates place earnings growth at +14%/+13% in 2024/2025. Hence, even in the likely scenario that we see these earnings numbers revised lower, the de-rated multiple ensures investors have plenty of cushion. Adding to the safety margin are a range of fiscal and monetary policy support measures, many of which are growing in scale; share purchases by state funds, in particular, will be worth watching, as their focus on CSI 300 large-caps should keep ASHR (a CSI 300 tracker) well-supported. Bloomberg China May Finally be 'Investable' Again  It's been a long time coming, but data out of China has finally begun to improve; while a macro turnaround is likely not yet on the cards, the positive rate of change nevertheless bodes well for equities. Between mainland (A-share) and offshore listings (H-share and US-listed depositary receipts), the nature of policy stimulus being deployed tips the risk/reward in favor of the former, in my view, particularly for the Chinese large-caps, which have historically been direct beneficiaries of the government's market stabilization efforts. Given the divergence between policy support, a relatively high earnings growth outlook, and historic low valuations, ASHR screens quite attractively here as a play on China's recovery.  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