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China Stocks Among the World’s Most Undervalued

Under Morningstar’s coverage universe, 12 out of the 20 cheapest stocks are those of mainland Chinese companies. 

Kate Lin, CAIA 13 January, 2022 | 11:12
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The Chinese stock market had a challenging 2021. The Morningstar China Index ended the year with a 21.1% loss, representing the worst-performing major stock market globally. Regulatory ruffles were a part of it, as Chinese authorities rewrote industry rules for many fast-expanding sectors such as private tutorial centers and mobile gaming. For investors, the pain was real, especially compared to U.S. equities. The latter (proxied by the Morningstar U.S. Market Index) rose 25.8% in 2021, scoring double-digit gains three years in a row.


The bright side of the downturn in Chinese equity markets is that many companies now trade below our fair value estimates. The average Chinese stock in our coverage universe traded at 16% discount to its fair value as of January 10, compared to a 5% premium at the beginning of 2021.

According to Morningstar Direct, 60% of the mainland Chinese stocks we cover are considered undervalued. In China, out of the 143 covered names, 38 of them are assigned with a 5-star rating. The proportion of 5-star listings in other major markets is around mid-to-low single digit.

The cheapness of Chinese markets is even more extreme as compared to other major stock markets. Undervalued stocks represent less than 30% of Morningstar’s coverage in the US, Canada and Australia. After resetting new highs, U.S. stocks covered by Morningstar are priced at a 6% premium on average. 



The Cheapest Names

Vocational training education provider China East Education Holdings Ltd (00667) is the worst’s most inexpensive stock, trading 78% lower than the fair value estimate of HK$ 21 our analysts assigned.

The education institute is closely followed by the Hong Kong listing of A-Living Smart City Services (03319), which is priced at a 77% discount to Morningstar fair value estimate. Both of them belong to sectors that endured major regulatory shake-ups, though neither is directly impacted by the new regulations, such as the ‘Three Red Lines’, which restricts their gearing levels. The remaining of the list is completed by other education providers and real estate firms, like Shimao Group (00813). A-Living Smart City Services and Shimao are on Morningstar’s Asia Large-Mid Cap best idea list. 



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About Author

Kate Lin, CAIA

Kate Lin, CAIA  is a Data Journalist for Morningstar Asia, and is based in Hong Kong

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