Forget about Chinese technology champions for a moment, whose stocks have plummeted 20 per cent this year amid unforgiving regulatory crackdowns. Consider Dongyue Group, which has rallied 333 per cent and emerged as an investor favourite on the Stock Connect with Shenzhen.
The chemical producer has what investors covet when building a winning portfolio: strong earnings momentum tied to the electric vehicle boom, positive fund flows and a seal of approval from the highest state authorities, which regard the firm as China’s equivalent to industry giants DuPont and BASF.
Dongyue last week raised HK$3.3 billion (US$426 million) from a stock placement to expand its capacity to make fluoropolymer, which is used in weather resistant coating materials, adhesives for lithium batteries and photovoltaic backplanes. The profit at the Shandong-based firm surged 49 per cent in its latest half-year report.
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“Most of Dongyue’s projects will start production in the second half of this year or next year,” said Huang Wentao, an analyst at CSC Financial. “That will broaden its product range, laying a solid foundation for its growth.”
While only a handful of analysts are tracking the stock, Dongyue has become a magnet for investors since the end of June, attracting at least HK$5.8 billion in net buying from mainland China based investors buying Hong Kong shares, according to the Shenzhen Stock Connect southbound trading. It has upstaged Tencent Holdings on occasion as the most active stock. Tencent, whose shares have dropped 13.5 per cent this year, suffered HK$12.7 billion in net selling over the same period.
The inflows from the Shenzhen link amounted to HK$1.74 billion last week, more than twice the net buying in Tencent stock. In July, when the technology sell-off peaked, Dongyue attracted a net buying of HK$2.9 billion while investors dumped HK$23.8 billion worth of Tencent shares.
Money managers at BlackRock, Vanguard and Dimensional Funds are among Dongyue’s foreign investors, according to data compiled by Bloomberg. At home, funds offered by Penghua Asset Management and HuaAn Asset Management are among its shareholders.
Founded in 1987, Dongyue produces polymer, refrigerants and organic silicone among its core products. Through the years, it has acquired a number of independent patents in new environmental protection and new energy sources, breaking a monopoly held by foreign technologies.
Li Keqiang, Hu Jintao, Li Yuanchao, Wen Jiabao and He Guoqiang are among party and state leaders that have visited its plant in the past. Zhang Ping, director of the powerful National Development and Reform Commission in 2009, said it was growing in the mould of global industrial chemical giants DuPont de Nemours, BASF and Bayer.
The group is also the biggest shareholder in Shandong Dongyue Future Hydrogen Energy Materials Company, the only such enterprise in China, and has few rivals worldwide when it comes to making hydrogen fuel cell membranes, electrolytic hydrogen production membranes and liquid flow energy storage battery membranes.
Shandong Dongyue, which is seeking a stock listing, is among “little giant” enterprises supported by China’s Ministry of Industry and Information Technology, as the country seeks to achieve peak emissions and carbon-neutrality goals by 2060.
It may still be a long shot for Dongyue to reach the size of DuPont or BASF. The group’s sales in 2020 amounted to 10 billion yuan (US$1.55 billion), compared with US$14 billion at DuPont and US$67.5 billion at BASF. Its market capitalisation of US$7.2 billion is at least five times smaller than its two competitors.
The stock’s 333 per cent rally in Hong Kong this year to HK$26.65, most spectacularly from the end of June, has inflated its price-earnings multiple to 34.3 times current year earnings, versus 17.2 times for DuPont and 10.2 times for BASF. Members of the Hang Seng Index trade at about 11.6 times.
It was down to chairman and CEO Zhang Jianhong to convince investors, who bought its new shares in the August 31 stock placement at HK$23 each. Horace Tse, regional head of oil and gas research at Credit Suisse in Hong Kong, lifted his price target to HK$30 on August 30 from HK$17.50 three weeks earlier, implying a 12.6 per cent upside.
A Communist Party stalwart in its home base in Shandong, Zhang owns a 12.5 per cent interest in the group he has helmed since July 2006.
“The group expects to see higher growth momentum in its results in the second half of the year,” he said in its latest interim report on August 30. “We will be in the best shape to respond to future development, thereby bringing better returns and repaying investors for their long-term support and trust in the group.”
Additional reporting by Eric Ng
This article Tencent no match for ‘China’s DuPont’ as stock’s 333 per cent gain fires up Shenzhen Stock Connect first appeared on South China Morning Post