UBS expects these Chinese stocks to soar by over 30%, despite China's Covid controls

Published Sun, Apr 24 202210:28 PM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Based on China's latest Covid control measures and rising inflation, UBS strategists have shaken up their list of top stocks for investing in the country. Over the last several weeks, mainland China has battled its worst outbreak of Covid since 2020. Major cities like Shenzhen and Shanghai have imposed travel restrictions and stay-home orders lasting days or weeks. "Given elevated commodity prices and COVID restrictions in China, we have cut our earnings growth forecasts to 7% YoY (from 9% previously) in FY22," the UBS China equity strategy team said in a report earlier this month. Already, for more than 60% of MSCI China index companies reporting full-year 2021 results, those earnings have come in 4% below expectations "mainly due to higher than expected costs," the report said. China's producer price index has remained elevated, rising by 8.3% year-on-year in March and topping expectations of a 7.9% increase. The UBS strategists' most preferred China sectors are internet, food and beverage, household appliances and renewables. Their least preferred categories are auto manufacturers and retailers, property management, banks and leisure (airlines, hotel and travel). Here are some of top UBS picks among the strategists' most preferred China sectors: JD.com The only U.S.-listed stock on the UBS list is JD.com , a Chinese e-commerce and logistics giant. The company announced this month a high-profile campaign to send more than 3,000 couriers and other workers to Shanghai to help residents living under lockdown to get food and daily supplies. JD claimed the number of orders fulfilled in Shanghai surged on April 15 to account for 43% of average orders, up from 20% a week earlier. Annual active customer accounts rose by 20.7% to 569.7 million in 2021, JD said in March. However, the company reported a net loss attributable to ordinary shareholders of 3.6 billion yuan ($566.9 million), versus a net profit of 49.4 billion yuan a year earlier. UBS has a target price of $90, up by more than 70% from Friday's close. The analysts' only other pick in internet services is Tencent , which is listed in Hong Kong. Oriental Yuhong Waterproof Technology Building materials company Oriental Yuhong Waterproof Technology is one of the four stocks UBS has added to its list of top China stock picks. Beijing-based Yuhong develops and sells roofing and waterproofing products for large structures such as airports and bridges, according to its website. Major projects include the Bird's Nest stadium in the capital city, the website said. Profit attributable to shareholders in 2021 grew by about 24% to 4.21 billion yuan, the company announced earlier this month. UBS has a target price on the Shenzhen-listed stock of 62 yuan, or more than 40% upside from Friday's close. Haier Smart Home Chinese home appliances giant Haier Smart Home is the only UBS stock pick in that industry group. Qingdao, Shandong-based Haier manufactures air conditioners, freezers, refrigerators, washing machines and other home appliances that are sold worldwide, including in North America. For 2021, the company reported a 47.1% increase in net profit attributable to shareholders to 13.07 billion yuan. UBS has a target price of on the Shanghai-listed shares of 32 yuan, or 30% upside from Friday's close. — CNBC's Michael Bloom contributed to this report.

Part of China's efforts to control the latest Covid outbreak include testing truck drivers for the virus and disinfecting shipments of imported goods, as shown here on April 14, 2022, in Jiangsu province near Shanghai.

Wang Jianmin | Visual China Group | Getty Images

Based on China's latest Covid control measures and rising inflation, UBS strategists have shaken up their list of top stocks for investing in the country.