Top 5 Hong Kong stocks and shares to watch in April 2020

Below are the top five Hong Kong Exchanges and Clearing-listed equities for fund managers, investors and traders to take note of for the month of April 2020, based on recommendations provided by Morningstar equity analysts and researchers.

Anta Sports Products

Share price target: HK$78 per share

Difference from current share price: +39.4%

The majority of Anta Sports Products' revenue losses took place in February, which was the lightest month for retail because of the timing of Chinese New Year. As the outbreak began to come under control in China, almost all of Anta's stores have reopened, and Morningstar posits that sales will recover to prior levels by the end of May.

Although Anta’s foreign subsidiary Amer has more exposure outside of China, the negative impact is limited by its single-digit percentage earnings contribution. Analyst Ivan Su does not expect Amer's retail store closures in the US and Europe to last more than two months.

‘We do not expect the firm to run into liquidity issues, given its solid balance sheet and expectation of steady free cash inflow in 2020. Therefore, the material drop in the stock price was unwarranted, and we encourage investors to take advantage of Anta shares on a bargain,’ he wrote.

Barring the transient impacts from the coronavirus, Anta's book of business is looking more robust than ever, Su added. Sales of Fila products are on track to deliver a 30% Compound Annual Growth Rate (CAGR) over the next three years, and the core brand should continue to provide steady growth in second- and third-tier Chinese cities. As leisure sports like climbing and hiking, which a generation ago were unheard of pastime pursuits, are becoming more popular, Amer brands are set to benefit.

He has given Anta a 12-month fair share price estimate of HK$78 per share.

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China East Education

Share price target: HK$18.80 per share

Difference from current share price: +44.6%

Equity researcher Jenny Tsai views China East Education as defensive in this climate and consider short-term weakness as an attractive buying opportunity.

She sees existing student contributions to continue given that 90% of their school programmes are longer than a year. In addition, there is likely to be a pickup in new student recruitment in the second half of 2020, given that China East is expecting to expand new schools and increase student enrolment.

The stock is currently trading at 17.3 times 2021E P/E, with a solid ROE of 18.7% over the same period. Thus, Morningstar views shares to be undervalued to its HK$18.80 fair value estimate. She also expects China East's five-year net profit CAGR to grow at 36%., driven by both an increase in student enrolment and tuition fees, which have also been steadily increasing operating cash flow in the past three years.

‘In the near term, we expect the coronavirus impact to be limited. We anticipate a few schools in Wuhan, Hubei province to remain closed until further notice, but most schools are located outside of this region and have already started their general operations, as well as preparing for future online recruitment,’ she wrote.

‘China East's management has not seen any dropouts or refunds from existing students. Even if the coronavirus situation takes slightly longer to stabilise, we view the impact to existing students to be minimal and offset by rising demand for online teaching.’

Read also: Top five Singapore stocks to watch in April 2020

China National Offshore Oil Corporation (CNOOC)

Share price target: HK$15.80 per share

Difference from current share price: +111.2%

CNOOC is the upstream arm of China's third state-owned oil company, China National Offshore Oil. As a result, it's the most direct option for investors seeking exposure to China's energy security policy and long-term plans to increase its oil supply, according to equity analyst Chok Wai Lee.

He further noted that as the company does not have downstream activities, it has also managed to avoid a large legacy labour force. None of the company's sales are subject to government price controls. CNOOC also benefits from a weaker Chinese yuan given the firm's upstream focus.

‘We think CNOCC is currently undervalued with weakness in oil prices largely priced in, while the firm's 2020 dividend yield of more than 5% is decent. Given CNOOC's cost efficiency (all-in cost of around US$30 per barrel), we believe the firm will remain profitable in the long term using our mid-cycle Brent oil price forecast of US$60 and underlies our HK$15.80 fair value estimate,’ he writes.

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Galaxy Entertainment Group

Share price target: HK$62 per share

Difference from current share price: +53.5%

Despite the high uncertainty of how long the coronavirus outbreak will last, analyst Chelsey Tam believes Galaxy Entertainment Group is well-positioned to weather the storm given its ample cash holdings, and is comfortable with giving a HK$62 fair value share price target.

She noted that Galaxy had HK$52 billion in net cash as of December 2019, and HK$15 billion capital expenditure to spend for its Galaxy Macau phase three and four in the next two to three years.

When the coronavirus outbreak subsides and the economy is back on track, Tam predicts that the VIP segment, in which Galaxy Macau has a high contribution of approximately 50%, will be the one that will come back first and strongest.

This is because only a small volume of VIP customers that are willing to bet large sums of money are needed to help increase VIP revenue growth noticeably, and these customers are more likely to hold business visas that allow them to enter Macau currently, unlike holders of the individual visit scheme visas.

Galaxy also plans to open part one of the Galaxy Macau phase three in the first half of 2021. ‘Assuming that the impact of COVID-19 on the economy will largely be over by 2021, we expect to see Galaxy to benefit more from the pent-up demand with new openings and new hotel capacity,’ Tam writes.

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Trip.com Group

Share price target: HK$37 per share

Difference from current share price: +57.7%

Chinese travel website Trip.com has been facing headwinds such as public relations scandals, weak macroeconomics, weak sentiment amid the trade war, Hong Kong protests, and China's ban on individual travel to Taiwan.

The coronavirus pandemic, writes Tam, will further delay its recovery. However, she writes that investors should not to lose sight of the company’s long-term growth potential. Recovery will come from the global containment of the coronavirus, and the de-escalation of the trade war with the phase one deal, as well as a gradually improving economy in China.

Domestically, Trip.com is dominant in outbound travel and the higher-end travel segment. Its market share in online accommodation reservations was 67.5% in the second quarter of 2019. Online accommodation reservation penetration in China was roughly 36% in 2018 versus over 50% in the United States and Europe. Only 14% of the Chinese population was estimated to have passports as of the end of 2019, versus 42% in America in 2017.

On that note, Tam estimates that Trip.com’s faster-growing higher-margin international business will raise the overall margin after COVID-19. International products have higher margins as the price is on average two times higher than domestic businesses, and the take rate for international air tickets is also two times higher than domestic.

Shares are currently trading at a significant discount to the firm’s HK$37 fair value share price estimate.

Read also: Top 3 Chinese stocks to watch amid the coronavirus pandemic