MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from VP Capital co-founder and portfolio manager John So. 

What’s hot right now?

Name a country starting with C – For John So it’s all about China. The world’s second-largest economy has for more than two years maintained the strictest measures to contain Covid-19.

But China’s tough zero Covid policy has come at a cost with serious and continuing effects on its economy, global supply chains and sectors and companies reliant on Chinese business.

After a volatile year major global share markets in October rallied, except the Hang Seng which fell ~14%.

There are signs though that Beijing may be softening its zero Covid policy stance and working to strike a balance between containing the pandemic and focusing on recovering its economy.

There are reports President Chinese President Xi Jinping’s administration is investigating how the country will move away from its zero Covid-19 policy with the Hang Seng rallying ~9% in the past week.

“Leading the recovery are travel stocks and in Australia, we’ve noticed that oil stocks are bouncing,” So said.

“Part of that has to do with if China is reopening then the largest tourism market is opening so airlines, freight carriers, and so forth.”

So said the signals are good that now is a good time to take a position on the reopening of China.

“Obviously by the time it has happened the stocks have already predominantly reacted so you can’t really wait until it is fully open to get in because most of the gains will be had between now and the actual easing of restrictions,” he said.

So said in terms of ASX stocks investors should look at how a China reopening will benefit Australia.

“It benefits Australia in many ways including resources, tourism and students so we can pick a stock from each sector,” So said.

Top Picks

Education – IDP Education (ASX:IEL) 

Before the pandemic in 2019, the majority of overseas students in Australia came from China, accounting for 28% of international students.

“Student-wise there’s a few stocks but the most well-known one is IEL which has never been overly cheap because it’s considered one of the pre-eminent growth stocks,” So said.

“What we’ve noticed in the past 12 months even before the China reopening is student placement numbers and English language tests which this company runs have been higher than FY21 and pretty stable month on month.”

So said while IEL has benefited from India reopening, so too have parts of South America and Europe where people need to take English language tests to get placements into educational institutions or for migration purposes.

“But the biggest market is Chinese students and migrants so with China having its zero policy for more than a year, what IEL is missing in terms of the piece of the puzzle is those students coming back,” he said.

“We are going to expect to see significant pent-up demand unleashed onto the market with courses and not just English language tests.”


Tourism – Event Hospitality and Entertainment (ASX:EVT)

In a positive sign for the tourism sector, Qantas is staging a strong Covid-19 recovery, recently announcing it expects underlying profit before tax of between $1.2bn – $1.3bn in the first half of FY23.

The figure is almost as much as the market was assuming the airline would make for the full year.

EVT runs three divisions including a hotel business incorporating well-known brands like Rydges and QT, Event Cinemas and Thredbo Resort.

“I think EVT will benefit from increased people coming back from China with more consumers out there spending at cinemas and more tourists staying at hotels,” So said.

So said it was worth noting that 50% of the assets are backed by the properties they own.

“The book value of these properties make up around half the market capitalisation but book value is often at a discount to market value so this company is asset-backed almost,” he said.

“In the meantime, you’re picking up exposure to inbound tourism, student numbers, working holiday visa people, and migrants coming.

“EVT will be a stock with positive momentum.”


Resources – Sandfire Resources (ASX:SFR)

So said while the most obvious subsector of resource with exposure to China is iron ore the construction sector in the country is still weak and it has an oversupply of apartments.

So is instead bullish on copper and SFR as a way to play a resource subsector for a potential China reopening.

“Why it is tied to construction copper is not necessarily just to do with residential but also infrastructure and an important thematic in electric vehicles which again China is also pushing hard on,” he said.

“When we measure the economy of China and the world, we look at Dr Copper which is a colloquial term for the copper price reflecting the health of the economy.”

So said with the US, Europe, and now China showing intention to back clean energy transitions, there is likely to be an upside to the copper price.

“Sandfire has an Australian asset which made the company years ago which is depleting but has acquired the MATSA asset in Spain which will be a consistent revenue generator,” he said.

“What’s interesting about MATSA is while its reserves indicate a mine life of five to six years, the upside is a lot of untapped resources underground and so as Sandfire continues to put more capital towards exploration I think the market is expecting its resource base will increase.”

So said even with copper prices coming off highs and mining costs increasing, the company is still almost cash flow break-even.

“Effectively by buying Sandfire now you’re getting a free option on a copper price recovery which I think is going to happen sooner rather than later with the Chinese economy coming back,” he said.

“In the medium term, I think copper will be strong in any case because as the world normalises there will be demand for electric vehicles accelerating.”


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