Value Focus List: A Catalogue Of Stable Blue-Chips With Future Upside Potential

The 15 stocks on our Value focus list are all well-run large-caps with upside potential.

Our selection methodology places an emphasis on fundamentals and intrinsic value.

Notable names include DBS, Thai Beverage and Capitaland.

Stock prices do not always incorporate and reflect all relevant information – they can sometimes be overvalued or undervalued. The Value focus list is interested only in the latter group, and attempts to identify quality blue-chips that are trading at prices below their intrinsic values, much like how we often shop for goods when they go on sale at prices much lower than what they are actually worth. Make no mistake, not all cheap stocks represent good value, which is why the emphasis of our selection methodology is mainly on fundamentals and intrinsic value. The 15 stocks on our Value focus list are all good and well-run large-cap companies with the potential for future share price appreciation. The list is not exhaustive, but it'll at least get you started in value investing.

Table 1: Top Picks For Our Value Focus List

1. China Everbright International

• Revenue growth over the next few years will be driven by a robust pipeline of projects.
• An increasing number of environmental projects are expected to be made available.
• Able to leverage on its credibility and government ties to secure more projects effectively.

With billions of dollars expected to be channelled towards China's drive to clean up the country's air and water, "green" stocks like China Everbright International (HKEX.257) could be amongst the stand-out winners. Everbright secured a record-high number of new projects in 2016, and its revenue growth over the next few years will be driven by a robust pipeline of projects. With an increasing number of environmental projects are expected to be made available, Everbright is also able to leverage on its credibility and strong government ties to secure more projects effectively.

Related Article: 3 Stocks To Ride China's Green Wave

2. China Life Insurance

• High growth potential in China's insurance market.
• Rising interest rate environment bodes well for China's insurers.
• Leading life insurer in China and trading at steep discount to its embedded value per share.

Despite having the largest population in the world, China's insurance market remains underpenetrated – a fact that underscores the immense room for further market expansion. With the central bank also looking to tighten monetary conditions, a further rise in interest rates would bode well for China's insurers, whose share prices usually move in tandem with interest rates. As the leading life insurer, China Life Insurance (HKEX.2628) is certainly a blue-chip candidate to consider. It is trading at a steep discount to its embedded value per share of about HKD 29.61, with the current share price implying a more than 20% potential upside.

Related Article: Are The Tides Turning For China's Insurance Titans?

3. China Railway Construction

• China's railway network remains under-developed, with room for further investments.
• Solid pipeline of new contract wins represent future growth.
• Share price performance remains muted, with valuations undemanding relative to peers.

As China looks to expand its railway network to improve connectivity across the country, state-owned China Railway Construction (HKEX.1186) is likely to be one of the beneficiaries. China's railway infrastructure remains under-developed relative to developed nations. At 121,000 kilometres, its railway network is just slightly more than half of the US despite having a much larger population, suggesting further room for railway investment to pick up. While China Railway Construction managed to bag new contracts worth RMB 551.7 billion in 1H 2017, all of which represent future growth for the company, its share price performance remains muted, with current valuations undemanding relative to its other peers.

4. CK Hutchison Holdings

• Well-diversified portfolio of businesses aids resilience.
• High quality defensive businesses anchor recurring income.
• Healthy balance sheet and strong cash flow generation.

Founded by business tycoon Li Ka-shing, CK Hutchison (HKEX.1) is a multinational conglomerate that boasts a well-diversified portfolio of businesses across its five core operating segments. While its revenues are generated primarily from its wide network of retail outlets, the conglomerate's fortunes do not depend on any one single source, a characteristic that has enabled it to reduce overall earnings volatility. Moreover, most of CK Hutchison's businesses are defensive in nature and command strong competitive positions in their respective markets. Its healthy balance sheet and strong cash flow generation should also put the conglomerate in good stead to take advantage of any acquisition opportunities that may arise.

Related Articles: Is There Money To Be Made In This Multinational Conglomerate? and What Is The Fair Price To Pay For CK Hutchison?

5. Dairy Farm International

• Diverse portfolio of retail stores aids resilience.
• Potential margin expansion from cost management and greater fresh food offerings.
• Investment in Yonghui is bearing fruit and represents a long-term growth story.

A member of the Jardine group, Dairy Farm's (SGX.D01) portfolio of stores across various retail formats and geographical markets is a plus point for investors given that its fortunes do not depend on any one single revenue source. In fact, diversification has been key to its resiliency in 1H 2017, with the poor performance in its supermarket and hypermarket segment more than offset by its other businesses. Moreover, its focus on strengthening operational efficiencies and increasing its fresh food offerings are likely to drive margin expansion. Its investment in China's Yonghui Superstores is also bearing fruit, and represents a long-term growth story.

6. Ping An Insurance

• Benefits from the high growth potential in China's insurance market and rising interest rates.
• Diversified business model contributes to resiliency.
• Internet finance a key source of future growth.

With an impressive track record of delivering growth, Ping An (HKEX.2318) is another quality insurance stock that investors should consider. Besides being the second-largest life insurer in China, Ping An also derives profits from its banking, asset management and internet finance operations. As the only major insurer to have posted a profit growth in 2016, Ping An's diversified business model has certainly contributed to its resiliency. Another interesting thing to note about Ping An is its increasing emphasis on internet finance, which it deems to be a key source of growth in the future and a point of differentiation that separates it from other traditional financial service providers.

Related Article: Are The Tides Turning For China's Insurance Titans?

7. Capitaland

• Improvement in market sentiment and future land-banking activities are potential catalysts.
• Investment appeal enhanced by recurring income base and asset recycling strategy.
• Healthy financial position, with share price still trading at significant discount to NAV.

A further improvement in Singapore's property market sentiment – especially if the government eases its property cooling measures – and future land-banking activities to restock its residential inventories will act as potential share price catalysts for Capitaland (SGX.C31), the largest property developer in Singapore by total assets. Its investment appeal is also enhanced by its stable base of recurring income that provides stability to its bottom line, as well as the continued executive of its asset recycling strategy that will drive further returns. With a healthy financial position and its share price still trading at a significant discount to its net asset value, Capitaland certainly stands out as a value pick!

8. Wilmar International

• Improved soybean crush margins to drive performance in oilseeds and grains segment.
• Tropical oils segment supported by stronger production yields and downstream margins.
• A further earnings rebound and proposed listing of China operations are potential catalysts.

While Wilmar International (SGX.F34) posted a steep quarter-on-quarter decline in its 2Q 2017 core net profit, it was still a significant improvement from the net loss seen in the same period last year, driven by its oilseeds and grains segment, whose performance is likely to remain favourable given an improvement in soybean crush margins. Its tropical oils segment will also be supported by stronger production yields and downstream margins. A further earnings rebound at Wilmar will certainly bode well for its share price, which is still down -9.8% year-to-date. The proposed listing of its China operations could also help to unlock value and act as a share price catalyst.

9. DBS Group

• Rising interest rates and loan growth recovery to boost net interest income.
• Asset quality concerns remain, but DBS remains well-capitalised.
• India expansion a future growth driver and a long-term positive for share price.

As domestic interest rates continue to tick higher, DBS (SGX.D05) could see further improvements in its net interest margins. A broad-based recovery in loan growth, especially with an improved economic outlook and property market sentiment turning positive, is also likely to boost future growth in its net interest income. While concerns remain over the quality of its loan portfolio, we note that DBS remains well-capitalised. Its plans to expand into India is also a future growth driver, and a long-term positive for its share price. At a price-to-book ratio of 1.11 that is lower than OCBC (SGX.O39) and UOB (SGX.U11), its valuations do not look demanding.

10. Thai Beverage

• Alcohol consumption slowdown in Thailand likely a temporary blip.
• Product enhancements to drive revenue gains and margin expansion.
• Well-positioned to continue its push into regional markets.

While the year-long mourning period has weighed on the bottom line of Thai Beverage (SGX.Y92), the decline in alcohol consumption is likely transitory. ThaiBev's continued product enhancements are also likely to drive revenue gains and margin expansion over the next few years. In line with its growth strategy, ThaiBev is expected to continue its push into regional markets such as the fast-growing Cambodia, Laos, Myanmar and Vietnam, all of which represent fertile ground for growth opportunities due to their favourable demographic and economic trends. Despite its solid fundamentals, however, ThaiBev currently trades at a discount to its alcohol peers, a sign that its shares could potentially be undervalued.

Related Article: ThaiBev: Value Stock With A Compelling Growth Story

11. Sembcorp Industries

• Diversified portfolio with defensive utilities and strong urban development businesses.
• O&M segment poised for recovery, new orders could come from non-drilling solutions.
• Recent share price weakness offers good buying opportunity.

Sembcorp Industries (SGX.U96) has a diversified portfolio of businesses that includes offshore and marine (O&M), utilities and urban development. While the O&M segment continues to grapple with challenging operating conditions, its defensive utilities and urban development businesses have helped to pick up the slack. That said, we believe the O&M segment is poised for a recovery, with oil companies seemingly able to adapt profitably to low oil prices. Moreover, new orders could potentially come from its non-drilling solutions, which the management said has been receiving encouraging enquiries. Its recent share price weakness also offers a good buying opportunity.

12. Tencent Holdings

• Dominance in China's online social networking puts it in good position to monetise user base.
• Online games business and advertisement sales likely to continue growth momentum.
• Investments in payments, cloud and financial services represent future growth engines.

As the dominant player in China's online social networking, Tencent Holdings (HKEX.700) remains in a good position to monetise its large user base through a broad range of product offerings. Its online games business remains the key growth driver, supported by a solid pipeline of new titles, high growth in user base and potential expansion in average revenue per user. Its advertisement sales are also likely to pick up, with Tencent looking to deepen user engagement with video content and targeted advertising. In the long-term, Tencent's investments in payment solutions, cloud computing and financial services will help the company diversify its revenue streams and reduce its reliance on online games.

13. Hongkong Land

• Investment portfolio should continue to provide stable rental income.
• Healthy pipeline of new development projects, with substantial unrecognised sales.
• Trading at a steep discount to its NAV.

Hongkong Land's (SGX.H78) investment assets should continue to provide stable rental income, given the low vacancy and positive rental reversions in its Hong Kong portfolio, while its Singapore office assets are close to fully-leased. The completion of a number of rental properties over the next few years will further strengthen its income base. Hongkong Land also has a substantial USD 2.4 billion of unrecognised development sales that provide earnings visibility, and a healthy pipeline of development projects to sustain future growth. The good news? It's currently trading at a steep discount to its NAV.

14. China Merchant Port Holdings

• Recovery in container throughput to drive earnings rebound at China Merchant Port.
• Newly-acquired Dalian Port and Shantou Port Group to expand domestic port network.
• Overseas expansion, especially in countries along OBOR route, to drive future growth.

An improvement in global trade volumes is likely to drive a recovery in container throughput, and consequently, an earnings rebound at China Merchant Port Holdings (HKEX.144). The company has been expanding its domestic port network, with the acquisition of stakes in Dalian Port (HKEX.2880) and Shantou Port Group, both of which will contribute to its future bottom line. It is also looking for potential overseas acquisitions, especially in countries located along the "One Belt, One Road" route. While it maintains a high financial leverage, China Merchant Port is likely to receive support from the government and its state-owned parent, given its strategic importance to China's port industry.

15. SATS Ltd

• Pricing pressures mitigated by increased passenger, aircraft and cargo traffic.
• A potential beneficiary of Qantas transit hub shift from Dubai to Singapore.
• Future openings of Changi Terminals 4 and 5 are tailwinds that could drive future earnings.

SATS Ltd (SGX.S58) is likely to face pricing pressures for its inflight catering business, given that airlines continue to grapple with low passenger yields, although it is mitigated by healthy growth across passenger, aircraft and cargo traffic. The roll-out of cost control initiatives is also likely to improve its margins. As Qantas shifts its transit hub from Dubai to Singapore, SATS could emerge as the preferred inflight caterer and ground handling service provider. The future openings of Changi Terminals 4 and 5 are also tailwinds that could drive its future earnings. Its healthy balance sheet and strong cash flows also add to its investment appeal. While the consensus target price represents only a potential 5.9% upside, we believe SATS has the potential to outperform, given its future growth prospects and the presence of near-term catalysts.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report has positions in Capitaland and DBS.

The Research Team is part of iFAST Financial Pte Ltd.