UBS picks its top investment ideas for China — including 'high quality' property plays

Published Sun, Oct 10 202111:01 PM EDT

As investors brace for more market volatility in Chinese stocks, UBS identified stocks and sectors poised to perform in the last quarter of the year — including some quality real estate names. Global markets were off to a choppy start in October as concerns around rising bond yields and embattled real estate developer Evergrande Group weigh on investor sentiment. But UBS analysts found stocks that could benefit as local economies in China reopen from Covid lockdowns. UBS: real estate picks There are rising concerns surrounding the financial stability of China's real estate sector. Heavily indebted China Evergrande Group has missed interest payments on two offshore U.S.-dollar denominated bonds in the last few weeks — that's rattled investor confidence and sent ripples across global markets. Those worries were further fueled Tuesday after another Chinese developer failed to repay a bond that matured this week , and ratings agencies downgraded a couple of smaller real estate companies. "A 'credit event' for Evergrande now seems unavoidable, with concerns over a material loss of investor confidence in the property sector and Chinese financial assets," said UBS analyst John Lam. "It's darkest before dawn, and current valuations for the high-quality China property developers have rarely been seen." "Consider adding exposure to high-quality developers with strong balance sheets," said Lam, who identified China Resources Land and Longfor as two such firms. He pointed out that the investors have been "overly concerned" about the cash flow and credit situation of Sunac , but UBS recently upgraded it to a "buy" with a price target of $25 Hong Kong dollars. Sunac shares are down nearly 48% year-to-date and closed at 14.90 Hong Kong dollars on Friday, representing an almost 68% potential upside. UBS: energy plays The "rapidly worsening" power shortage in China will help boost some power generation stocks, said the investment bank's Peter Gastreich. "According to press, power shortages have already led authorities to order production cuts in certain sectors in order to minimize the risks of residential power cuts," Gastreich said. "This has proved a boon for the power generation stocks, raised concerns for gas distributors, and will likely mean higher costs of production up and down the economy." In the current scenario, firms with higher residential market exposure — a segment expected to be relatively shielded from gas price increases — have fewer risks, he said. Those with lower earnings contribution from city gas connection are also likely to be shielded from the slowdown in property starts. UBS named two such companies: China Gas and ENN Energy . Reopening plays UBS analysts also looked at sectors that could benefit as mobility restrictions in China ease, particularly those in the services sector. It comes as Beijing presses on with its zero-Covid strategy involving strict lockdowns after the detection of just one or a handful of cases. UBS says investors should consider casino operator stocks in Macao, such as Sands China and Galaxy Entertainment Group following the recent sell-off . Their shares have tumbled amid a double whammy of policy uncertainty as well as lack of visitors from mainland China due to mobility restrictions. Another sector is the hotpot business. UBS said it remains positive on the earnings growth outlook for Xiabuxiabu and prefers the stock over competitor Haidilao , where uncertainties linger over the firm's store expansion pace and table turnover rate.

A general view shows residential buildings in Shanghai on September 22, 2021.

Hector Retamal | AFP | Getty Images

As investors brace for more market volatility in Chinese stocks, UBS identified stocks and sectors poised to perform in the last quarter of the year — including some quality real estate names.