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Chinese Food Stocks Are Ripe for Profit-Taking

CNBC.com
Wednesday, 1 Dec 2010 | 9:57 PM ET

It is time to avoid small caps and take profit in food stocks within the Chinese market, advised Erwin Sanft, head of China & Hong Kong research at BNP Paribas.

"Small and mid caps have had fantastic year. The huge boom have boosted these stocks. We have been a proponent of buying small and mid caps for last five years. But in the middle of this year, we changed tune and have been taking a more cautious approach," he said on CNBC's Protect Your Wealth.

As for the mainland's consumer food groups such as Yurun, Want Want China and Hegan International, they are ripe for profit-taking following their strong run.

"Food stocks by nature grow quite slowly, unlike (those in) retail, auto and internet, (which are) more discretionary, faster consumer growth stocks," Sanft said.

Big on Chinese Large-Cap Stocks
It is time to trim exposure to China's small- to mid-cap stocks and invest in large-caps instead, advises Erwin Sanft, head of China & HK research at BNP Paribas. He explains why to CNBC's Bernard Lo, Oriel Morrison & Adam Bakhtiar.

"Slower growth companies tend to have lower valuations. But because of the stability of earnings growth exhibited in recent years, everyone loves them and where the crowd is. It is better to look elsewhere," he added.

The three counters have risen between 20-25 percent year-to-date. Looking ahead, Sanft expects the shares to come under pressure, as their earnings are likely to be disappointing in the coming 12 months.

In contrast, Sanf finds that large caps have much to offer at this juncture and counts PetroChina and China Mobile among his top picks.

"When we roll out these big, boring sorts of names, people's eyes tend to glaze over. But the whole point is that the exciting growth sectors have performed tremendously well already," he explained. "So it is better to go back to look at things like China Mobile PetroChina and the big banks," he said, referring to Bank of China, China Construction Bank and ICBC.

Staid they may be, but their valuations are very cheap and they have "priced in a hard-landing scenario which we are unlikely to see", Sanft said.

"The combined dividend yields for the big five, as we call them, is still above four percent, which in this type of zero-rate environment is great."

Comments? Questions? Send them in here.

Catch "Protect Your Wealth" on CNBC's Asia Pacific network every Tuesday on "CNBC's Cash Flow," Wednesday on "Asia Squawk Box" and Thursday on "Capital Connection."