China Strategy:Year of the Eagle

China’s best spread their wings

We expect China’s “eagles” – corporates expanding overseas – to leave behindthe “monkeys” – who are stuck in the oversupplied domestic economy – duringthe Year of the Monkey. China’s private sector leaders are the best positioned tosucceed in building multinational businesses, in our view. Size, dynamism,innovation and funding are core attributes that support China’s corporateinternationalisation. Weak domestic economic growth and rising tradeprotectionism are also prompting China’s best companies to spread their wings.Inexperience, cultural awareness and state interference are the main obstaclesthey face.

Flight of the Eagles

We have identified 43 leading China corporates which we believe have thepotential to build significant global businesses. These “Eagles” represent thebest Growth-Value combinations across the market because most are in “oldeconomy” sectors and therefore trade on attractive valuations with no visiblepremium for their overseas potential. Thirty stocks in our selection trade below12x forward earnings, with 17 of those on single-digit multiples. Eleven stocksoffer dividend yields above 4%. Investors receive a free option on the overseaspotential of these companies.

Capital goods and auto parts companies make up half of our selection and areleading the move towards a ‘Borderless China’. Private enterprises and mid-capsdominate our selection, highlighting both the growth dynamic and growthpotential of our Eagle picks.