Beijing Toread Outdoor Products was one of the first to list on China's 3-year old ChiNext board. Now it is gaining alot of attention from funds.  Photo: Company

Translated by Andrew Vanburen from a Chinese-language piece in Securities Daily

NOT ALL SECTORS are singing the blues.

The secret is out.

Five industry theme stocks are the hottest for funds trolling the Chinese capital markets.

According to the latest available market statistics compiled during the recently concluded second quarter, institutional investors had their sights set – and their monies destined – on a handful of sectors.

And homeowners looking for a new and affordable place will be relieved to know the list does not include the often red hot, overly speculated real estate industry.

Analysts watching funds’ every move note that the nature of their recent accumulations suggest a more long-term strategic take on the market rather than quick pump and dump tactics.

First of all, by "institutional investors," all players are included in the current trend including traditional funds, pension funds, insurance funds, brokerages, QFIIs and others that transcend the “retail investor” tag.

And which five sectors are they most focused on these days?


Waiting on Consumers: When China's domestic consumption campaign begins in earnest, apparel makers like Xtep will kick sales up several notches. Photo: Xtep

Institutional investors focusing on A-shares listed in Shanghai and Shenzhen have boosted their holdings in textile/apparel-related stocks by 37.5% in the period under review.

These new investments involve some 30 listed enterprises in the sector which puts the shirts on our back, with Shenyin Wanguo being the most aggressive domestic investor to favor this sector of late.

In the second quarter, funds boosting their textile/apparel shareholdings by over 100,000 shares each number 19, with Zhejiang Aokang Shoes Co (SHA: 603001) attracting the most attention in the form of 32.3 million new share purchases during the period.

Aokang caught the attention of 59 funds in the April-June period.

Other makers of fabrics and apparel attracting major fund interest include Bros Eastern Co (SHA: 601339; 26.6 million shares), Jiangsu Hongdou Industry Co (SHA: 600400; 11.1 million shares), Shenzhen Textile (SZA: 000045; 5 million shares) and Shijiazhuang Changshan Textile (SZA 000158; 4.4 million shares).

The most popular textile/apparel plays in descending order by the percentage of new shareholdings by funds are: Zhejiang Aokang Shoes (49.8%), Bros Eastern (17.7%), Xingye Leather Tech Co (SZA: 002674; 2.8%), Shenzhen Textile (2.2%) and Jiangsu Hongdou (2.0%).

Analysts say there are three reasons for the intense scrutiny on the sector and the “clothes shopping” frenzy of funds these days.

First is that share prices for the entire sector – from the spinning of cotton and synthetic yarns, to the weaving of finished textile fabrics all the way down to the final output of ready-to-wear shirts and ties – have been suffering on the bourses of late, far worse than even the epically struggling benchmark Shanghai Composite Index.

Therefore, the sector is due for a major bounceback once confidence returns to the market and the technical rebound can gain traction.

Second is the fact that oversupply and overcapacity issues are being worked out naturally – if not slowly – by market forces via discounting and consolidation, and that these savvy investors see a sharp rebound in demand down the road, especially for products from upstream suppliers in the sector.

Institutional investors are betting that five sectors in particular -- textiles/apparel, light manufacturing, chemicals, home appliances and farming/fisheries -- will outperform the sluggish Chinese stock market down the road

Third is the elusive dream of “domestic demand.”

With foreign export markets drying up, China has for the past half-decade in particular been pushing hard to take their own citizens more seriously as potential consumers.

The fact that the campaign has progressed so slowly so far only encourages institutional investors of the explosive potential growth of the paradigmatic shift.

This explains why funds are not only focusing on textile plays, but also on downstream apparel brands as well, including ChiNext-listed Beijing Toread Outdoor Products (SZA: 300005), SEPTWOLVES (SZA: 002029) and Souyute (SZA: 002503).

The other four sectors rounding out the top five list for being the most popular among funds this past quarter include light manufacturing (up 26.7%), chemicals (up 23.6%), home appliances (up 22.6%) and farming/fisheries (up 21.7%).

Light manufacturing – including surprisingly strong share interest in piano makers Hailun (SZA: 300329) and Pearl River (SZA: 002678) – as well as the aggressive buying activities of funds in home appliance plays, all point once again to the long-hoped for commencement of the shift to domestic consumption.

And the funds' sudden attention given to farming sector shares in particular is in part a result of the record droughts in the world’s largest maize and soybean producing nation, the US.

China is a major importer of these two commodities to use as feed for pigs, as pork is the most commonly consumed meat in the PRC and its price is a very sensitive political issue given its primary importance in the CPI food basket.

See also:

XTEP: Overperforming In Overcrowded, Overstocked PRC Sportswear

TWO LEFT FEET: China Sneaker Play Li Ning Sees Dire Year

Houses Hike XTEP To ‘Outperform’, 'Buy'; GIORDANO Target 15% Upside

XTEP Orders Lead Sector

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