JPMorgan picks China stocks to play Beijing's infrastructure boost

Published Mon, May 16 20227:17 PM EDT

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

China has announced big plans to build up more cities, and JPMorgan analysts say it's time to buy some infrastructure stocks. That's based on news earlier this month that China's top executive body, the State Council, has loosened residency rules to allow migrant workers from rural areas to settle in smaller towns. By the numbers, those so-called county towns still need more infrastructure, while China plans to increase the nationwide share of people living in cities. The JPMorgan analysts estimate per capita capital expenditure in county towns' municipal infrastructure is only about half that of cities. Chinese President Xi Jinping also announced late last month a national-level push to develop more infrastructure. "Despite Omicron-led disruptions YTD, infra [fixed-asset investment] will stay upbeat based on special bond issuance and FAI new starts at multi-year highs," JPMorgan's equity macro research team said in a May 9 report. Mainland mutual funds have increased their holdings of infrastructure contractors since the second half of last year, while new investment products for the sector during that time have helped contractors' financing and cash flows, the report said. Below are three of the stocks that made JPMorgan's top 10 list. The following names had the greatest expected upside at the time of the report's publication. The analysts rate all three companies as overweight, reflecting expectations the stocks will outperform the average total return of the team's coverage over the next six to twelve months. Jiangsu Hengli Hydraulic Shanghai-listed Jiangsu Hengli Hydraulic develops and manufactures pumps, motors and other hydraulic system parts. In addition to China, the company claims to have research and development centers in Germany, the United States and Japan. In the first quarter of this year, the company reported a 29% year-on-year drop in gross profit to 811.6 million yuan ($123 million), according to Refinitiv Eikon data. That's off a high base in the first quarter of 2021. Gross profit for last year grew by 18.2% to 4.03 billion yuan. Shares are down more than 40% for the year so far, but as of JPMorgan's May 9 report, the analysts predict a 56% upside. The analysts did not provide a specific price target for any of the stocks on their list. Nari Technology State-owned Nari Technology primarily manages electric power grids for industrial use. In the first quarter, the company posted gross profit of 1.32 billion yuan, up nearly 25% from a year ago, according to Refinitiv Eikon data. Nari Technology's Shanghai-traded shares have tumbled 20% so far this year. At the time of the May 9 report, the JPMorgan analysts forecast a 46% upside for the shares. China Railway Construction State-owned China Railway Construction builds bridges, tunnels and subways in China, and has a railway electrification business, according to its website. Gross profit in the first quarter grew by 11.3% to 18.66 billion yuan, according to Refinitiv Eikon data. China Railway Construction's Hong Kong-listed shares are up about 2% so far this year. At the time of the May 9 report, the JPMorgan analysts forecast 43% upside for the stock. — CNBC's Michael Bloom contributed to this report.

China has revealed new plans for building up cities, which JPMorgan analysts expect can boost some infrastructure stocks. Pictured here is a relatively new expressway in a rural part of southwestern China in 2021.

Costfoto | Future Publishing | Getty Images

China has announced big plans to build up more cities, and JPMorgan analysts say it's time to buy some infrastructure stocks.